Cutting through the confusion for cross-border clients

With tax season kicking into gear, financial professionals across the country are going through the annual ritual of helping clients navigate the tax filing process. And at Shiraz Ahmed’s practice, which is focused on cross-border clients, there are additional layers to the confusion.

“One major pain point that we see for folks, especially Americans living abroad, is that the United States is one of the three countries on the planet that have a global reporting requirement for its citizens,” says Ahmed, financial advisor at Sartorial Wealth of Raymond James, Ltd.

He says many Americans who’ve lived in the U.S. their whole lives aren’t aware that residency or not, they have a filing obligation to the land of the free. Under a long-standing U.S.-Canada tax treaty, those with dual citizenship between the two countries may end up not actually owing Uncle Sam, but they’ll still need to report to both countries to avoid dual taxation.

“It can be very onerous … sometimes I have to be the bearer of bad news in letting them know that this is something that’s going to be required of them as they move,” he says.

Because Canada is among the large majority of countries that only tax based on residency, Ahmed says the average Canadian CPA is not equipped to prepare the forms needed to satisfy the global tax filing requirement of the U.S. For clients who do not already have one, he typically suggests that they bring in a qualified cross-border CPA to help them with their complex tax preparations.

Deadlines are another potential sticking point. According to Ahmed, Canadian tax filing deadlines typically fall at the end of April, while the U.S. Internal Revenue Service expects tax filings by April 18.

However, clients may be able to extend their filings to the U.S. tax service several times throughout the year. The Canadian Revenue Agency, meanwhile, is less forgiving: those who fail to pay their taxes by the end of April will incur penalties and interest.

“There are also some types of investment accounts that Americans living abroad will want to be wary of,” Ahmed says. With respect to non-retirement accounts, he encourages his cross-border clients to exercise caution when investing in Canadian structured investments, like mutual funds or ETFs.

Such investments are typically counted as passive foreign investment companies. Gains and distributions from those so-called PFICs are treated as ordinary income, which means they are taxable and must be declared to the IRS.

“If an American abroad is trying to be tax-smart with their wealth management, it’s one of those situations they’d want to avoid wherever possible,” he says. “It’s not that they can’t own them. But like I tell everybody, you have to think about whether the juice is worth the squeeze.”

Unfortunately, Ahmed says clients frequently aren’t aware of “the PFIC issue.” Many of them own multiple mutual funds in their non-retirement accounts – bought upon the recommendation of people they know or the bank branch they deal with – only to be surprised by the tax obligations that come with them later on.

While Ahmed is familiar with many tax issues confronting Americans with Canadian citizenship, he is also crystal-clear about 'staying in his lane.' For such clients, he says the services of a cross-border CPA are essential for more specific tax advice.

“I would encourage anyone in our industry to recognize that the same logic shouldn’t be applied to every scenario,” Ahmed says. “I think [the people who recommend those investments are] coming from a good place, generally speaking. But if we don’t recognize that Americans may run into unintended consequences, that can become problematic.”