What Drives the Cost of a Cross-Border Tax Return, and Why Two Files With the Same Income Can Differ by Multiples

A cross-border tax return costs more than a domestic one because it is not one return. It is two returns that have to agree, plus the forms that each country requires for the other country's accounts, plus, in the year of a move, the planning that has to happen before the move. Two clients with identical salaries can have files that differ by a factor of five in preparation time, and the difference is almost never the income. It is the accounts, the corporation, the property, and the year. Fairlight publishes its cross-border pricing; this article explains what moves a file from one range to another.

Key takeaways

• The base is two returns: the Canadian T1 (three for Quebec, with the TP-1) and the US 1040 or 1040-NR, plus a state return where the state has an income tax.
• Each foreign account or entity adds a form, and some forms are expensive: Form 8621 for every PFIC, Forms 3520 and 3520-A for every foreign trust (TFSA, RESP), Form 5471 with schedules for a Canadian corporation, Form 8938 and the FBAR for the accounts as a whole.
• The departure or arrival year is the most expensive year: residency dates, the deemed disposition schedules, the corporate wind-up, the equity sourcing, the treaty elections.
• Catch-up files (streamlined filings) are three years of returns and six of FBARs, plus a certification, and cost accordingly.
• The cheapest cross-border file is a salaried employee with an RRSP and nothing else; the most expensive is a business owner with a corporation, PFICs, a TFSA, a rental, and three years of unfiled returns.

The base: two returns that agree

The Canadian return and the US return each report worldwide income (for residents) or source-country income (for non-residents), and each claims a credit for the other's tax. The credit on one cannot be finalized until the other is done, so the returns are prepared in sequence and reconciled. A US state return adds a third layer with its own rules on the RRSP, the foreign tax credit (most states give none), and residency. Quebec adds a fourth. The base file for a salaried employee living in one country with income from the other is two or three returns and a few hours of coordination.

What each account adds

• RRSP or RRIF. Minimal: the treaty deferral is automatic federally, the account goes on the FBAR and Form 8938, and withdrawals are reported with the NR4. A state that does not follow the treaty (California) adds an annual computation.
• TFSA. Significant: the account is taxable in the US annually, and the conservative position is that it is a foreign trust requiring Form 3520 and Form 3520-A each year. Closing it before crossing eliminates the cost.
• RESP. Same as the TFSA, plus the grant is taxable to the US subscriber.
• Canadian mutual funds or Canadian-listed ETFs in a taxable account. Each fund is a PFIC requiring its own Form 8621 annually, with the fund's annual information statement if a QEF election is made. Ten funds is ten forms. Replacing them with US-listed ETFs eliminates the cost.
• Canadian corporation. Form 5471 with its schedules (income statement, balance sheet, earnings and profits, Subpart F and tested income, related-party transactions) annually, plus the Canadian T2. Winding it up before departure eliminates the US side.
• Canadian rental property (US resident). NR6 and Section 216 return annually in Canada; Schedule E and Form 1116 in the US.
• US rental property (Canadian resident). 1040-NR with the section 871(d) election annually; T776 and T1135 in Canada.
• Joint accounts with a non-US spouse. Add reporting complexity on the FBAR and Form 8938.

The move year

The departure or arrival year is the year the planning happens, and it is billed as planning, not preparation: residency date analysis in both countries; the deemed disposition schedules (T1243, T1161, T1244); the corporate decision and, if applicable, the wind-up; the RRSP and TFSA decisions; the equity sourcing schedule for RSUs and deferred compensation; the dual-status or elected first-year US return; the Article XIII(7) basis election; the first FBAR and Form 8938; and the destination state's rules. A move year for a salaried employee with an RRSP and a house is a modest premium over the base; a move year for a business owner with a corporation, founder equity, and a portfolio is a project.

Catch-up files

A client who has not filed in one country for years (a US citizen in Canada who never filed a 1040; a Canadian in Florida who never filed a 1040-NR for the condo) is a catch-up file. The IRS Streamlined Foreign Offshore Procedures require three years of returns and six years of FBARs with a non-willfulness certification; each year is a full return with all the forms above. The CRA's Voluntary Disclosures Program is similar on the Canadian side. Catch-up files cost several times an annual file, and they cost far less than the penalties they prevent.

What to ask a preparer

Ask what is included in the quoted fee: which returns, which forms, and whether the departure-year planning is separate. Ask what triggers additional charges: a PFIC, a Form 3520, a Form 5471, a state return, a CRA or IRS letter. Ask whether the preparer handles both countries or coordinates with someone who does, and whether the coordination is included. A quote that covers "the return" without listing the forms is a quote for the base and an invoice for the rest.

Worked example

Two Toronto professionals, each earning $200,000, move to Florida in the same year.

• File A. Salaried; an RRSP; a TFSA closed before departure; a house sold before departure; US-listed ETFs in a taxable account. Two returns in the departure year plus the departure schedules, the XIII(7) election, the FBAR, and Form 8938. Base range with a move-year premium.
• File B. A professional corporation kept alive; a TFSA kept open; six Canadian mutual funds in a taxable account; the house rented. Two returns plus the departure schedules, Form 5471 with schedules, Forms 3520 and 3520-A, six Forms 8621, NR6 and Section 216, Schedule E, Form 1116, the FBAR, and Form 8938, every year. Several multiples of File A, indefinitely.

File B's owner could have been File A with three decisions made before the departure date.

Official sources

"A U.S. person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, must file an FBAR to report: a financial interest in or signature or other authority over at least one financial account located outside the United States if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported." — Internal Revenue Service, Report of Foreign Bank and Financial Accounts (FBAR), https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar

Practitioner note

The most expensive cross-border file is the one where the client kept everything: the corporation, the TFSA, the mutual funds, the house. Each one is a form every year. The cheapest is the one where the client closed or replaced them before crossing, which costs nothing and takes an afternoon. We show the client both versions of their file before the departure date, priced.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the departure-year planning, the annual cross-border returns, and the catch-up filings where needed, with pricing published on the pricing page. See cross-border pricing or book a call.