Given the challenges of the current U.S. administration, President Biden has been unable to effectively achieve the U.S. income, gift, and estate tax changes that he was hoping to impose. With the likely outcome of the U.S. mid-term elections this November, there is little reason to expect any significant tax changes this year for Americans in Canada or snowbirds who own or sell property in the U.S.
However, one area we often see which affects U.S. taxpayers in Canada, or those Canadians that might have a U.S. tax filing obligation through the sale or renting of U.S. real property, or through the receipt of U.S. source pensions or retirement distributions, are the administrative challenges imposed by the IRS and CRA.
Summary and Takeaways
Those who file cross-border tax returns often face complex challenges when they report income from property sales or pension and retirement fund distributions. A Canadian taxpayer may have to provide the CRA with specific kinds of documentation, which can be hard to acquire.
Key Takeaways
- The CRA currently requires a copy of an IRS Tax Account Transcript.
- For a foreign tax credit, a Review Letter may be needed as proof of IRS taxes paid.
- The CRA may also ask for business, medical, and donation receipts.
- Regardless of whether U.S. tax returns are electronically or manually filed, the IRS is significantly backlogged and notoriously slow in processing returns.
- But until your U.S. tax return is processed, you won’t have the CRA-required IRS Tax Account Transcript.
- You can also expect long delays in getting communications with the IRS answered.
- If you cannot provide the CRA with necessary documentation, your return will be reassessed and additional tax may be owed.
- Considering all the obstacles, assistance from qualified cross-border tax experts is recommended.
If a Canadian taxpayer has a U.S. tax filing obligation and is required to report the same source of income on both countries’ tax returns where U.S. tax is paid or withheld at source, it is not uncommon for the CRA to come back and require documentation to prove the tax was indeed paid. The CRA wants verifiable proof to support the claim by the taxpayer to take a foreign tax credit for any net U.S. tax paid on their Canadian return. This is requested through what is often referred to as a Review Letter. These always come after CRA has issued a Notice of Assessment (NOA).
The Review Letter can come in a variety of forms. It is not unusual for the CRA to want proof of donation receipts, medical receipts, business receipts, etc. In a cross-border context, for those Canadian taxpayers who are entitled to receive U.S. Social Security Benefits (SSA), we often see CRA requesting additional support for the 15% deduction that is available on line 25600 of your Canadian T1 Return for U.S. SSA benefits paid, including U.S. Medicare premiums. This is provided for under Article XVIII (2) of the Canada/U.S. Tax Treaty. However, the CRA Letter which can cause more aggravation than any other letter from CRA, is the dreaded Review Letter to support foreign tax credits on your T1 from net U.S. taxes paid or withheld.
Several years ago, if a CRA Review Letter was sent to a taxpayer, the taxpayer could simply provide a copy of the taxpayer’s filed U.S. return, the related U.S. tax slip(s) showing the tax withholding, and other documentation to support the foreign tax credit. However, that is no longer enough. The CRA currently requires a copy of an IRS Tax Account Transcript as well.
Now, here is where it gets exceedingly difficult. In the cases where U.S. tax returns are paper- or e-filed, the IRS is so behind in the processing of these returns that a Tax Account Transcript is not yet available to submit to the CRA. According to an article in the Wall Street Journal (WSJ), Good News, Tax Evaders! The IRS Can’t Keep Up (Feb. 15, 2022), the IRS had a backlog of 35 million tax returns that had yet to be processed, including e-filed returns. Further, there were 5 million pieces of unprocessed paper correspondence that had yet to be reviewed by the IRS.
Therefore, if the taxpayer’s U.S. tax return is not processed, an IRS Tax Account Transcript is not available to provide to the CRA as documentation for the Review Letter response. Consequently, in many cases, it is quite difficult to get a copy of the IRS Transcript.
There are generally three ways to get a copy of your transcript:
- Provide authorization to your Tax Professional to obtain
- Request a copy of it online
- Contact the IRS and request a copy by phone
Under Option 1, if you are having your returns prepared by a professional cross-border tax planning preparer or firm, if authorized, they might be able to obtain this information for you directly from the IRS. This might be the easiest option for you. Of course, this also assumes, the Transcript for the U.S. tax return which the CRA is requesting, has already been processed.
Under Option 2, taxpayers can go to an IRS site – Ways to Get Transcripts Transcript Types and Ways to Order Them | Internal Revenue Service (irs.gov) and then select Get Transcript Online Get Transcript | Internal Revenue Service (irs.gov). However, a major challenge exists with this option. The taxpayer must create an Online Account, provide information to the IRS, and answer specific and unique security questions. Unfortunately, we found many taxpayers who are Americans in Canada, have had little success going this route. In fact, the system the IRS is using to create your online account – ID.me – is apparently going to be shut down in the future, as it is fraught with challenges. So, if you have had no success under Options 1 and 2, then let’s see how you can fare under Option 3.
Under Option 3 you can contact the IRS by phone and request they mail you a copy of the Transcript. The phone number is 800-908-9946. And guess what? The number does not work from Canada. So that will not be much help.
Lastly, some taxpayers might try to contact IRS’ non-toll-free International Services number at 267-941-1000. However, if you attempt to contact the IRS by phone, your luck might be better playing Lotto 649 in Canada or the Pick in the U.S. According to the WSJ article referred to earlier, last tax season, the IRS was getting 1500 calls a second. Over 150 million calls were made last season to the IRS with only 7% answered. Specific U.S. tax professionals that are registered with the IRS (Enrolled Agents, CPAs) have access to a special phone number referred to as the Practitioner Priority Service line. However, it is extremely difficult to get through to the IRS even on that separate phone line. According to an article in Kiplinger’s Tax Letter in November of 2021 “Delays on IRS’s Practitioner Priority Service are frustrating tax pros … Practitioners calling this number have long wait times, if they can even get through.” The article further mentioned, preparers are using a private company line-cutting service to try to minimize IRS hold times. The IRS is claiming this has made it much harder for anyone to get through to them.
If the taxpayer has difficulty obtaining their IRS Tax Transcript, we find the CRA timelines are not very reasonable for the taxpayer. If you are able to contact the CRA, it is suggested you request an extension of time to respond to their Review Letter given the IRS delays. However, we have seen instances, where even with the extension or the review not yet completed, the taxpayer’s file ends up with CRA Collections. If you cannot provide the necessary documentation the CRA is looking for, the return will be reassessed, and additional tax will be owed. The CRA Review and CRA Collections are on separate systems. If the file goes to Collections, they may not be aware the file is also still in Review. We have had success with providing documentation to CRA Collections to show a concerted effort is being, or has been made, to request the documentation the CRA Review needs, and an extension may be provided. However, this assumes the Collections Agent is reasonable as well. This situation has become quite the challenge for U.S. taxpayers in Canada, who are trying to satisfy the CRA’s review requirements.
Finally, even though taxpayers may believe this is a “one-off” issue and will not occur again, do not be surprised if this continues to be an annual or consistent part of your future cross-border tax filing requirements.