Streamlined Filing: The Real Cost for a Canadian, and What Drives It

A streamlined submission is three years of US returns, six FBARs, and a certification, and the fee is a function of what those three returns contain. A US citizen in Canada with a salary, an RRSP, and a chequing account has three simple returns: the foreign tax credit, a Form 8938, the RRSP position, Schedule B, and six FBARs. Add a TFSA and each return gains Forms 3520 and 3520-A. Add Canadian mutual funds and each return gains a Form 8621 per fund with a computation that looks back to purchase. Add a Canadian corporation and each return gains a Form 5471 with schedules built from the corporation's financial statements. The submission for the second taxpayer is several times the work of the first. Fairlight publishes its cross-border pricing; this article explains what moves a submission from one range to another, and what the tax and interest, and the domestic track's 5% penalty, look like alongside it.

Key takeaways

• The base: three 1040s (worldwide income, foreign tax credit, Form 8938, Schedule B, the RRSP position), six FBARs, Form 14653, and the narrative. For a salaried taxpayer with ordinary accounts, this is the whole submission.
• What adds cost, per year: a TFSA (Forms 3520 and 3520-A); each Canadian mutual fund or ETF outside an RRSP (Form 8621 with the section 1291 or mark-to-market computation); a Canadian corporation (Form 5471 with schedules, the Subpart F and GILTI analysis, the section 962 election); an RESP (3520/3520-A); crypto (Form 8949 reconstruction); self-employment (Schedule C and the totalization statement); rental property (Schedule E); a state return where applicable.
• What adds cost, once: the certification narrative (drafted with the client and reconciled to the returns); the RRSP basis reconstruction for a retiree; an ITIN or SSN application; the day count for the residency test.
• Tax and interest: usually small for employment income (the credit covers it); real for TFSA earnings, PFIC income, and investment income beyond the credit; interest from each year's due date.
• The 5% penalty (SDOP only): on the highest aggregate year-end value of the unreported foreign assets; for a domestic-track filer this is often the largest number in the submission.
• What is not in the cost: penalties for the covered years (waived), and the years before the covered period (not filed).

The base submission

Three returns for a salaried US person in Canada: Canadian T4 income converted; Form 1116 with the general-basket credit (Canadian tax exceeds US tax; no US tax on the salary; a carryforward); Canadian interest and dividends on Schedule B with a passive-basket credit; Form 8938 listing the accounts; the RRSP deferred under the treaty (Form 8833 optional); Schedule B's foreign account question "Yes." Six FBARs listing the chequing, savings, RRSP, and any joint accounts at maximum values. Form 14653 with a narrative of a page or two. Payment of any small tax and interest. This is the least expensive streamlined submission, and it is a common one.

The multipliers

TFSA. Each covered year: the TFSA's earnings computed from statements and converted; Form 3520 (the owner's report) and Form 3520-A (the trust's return, prepared as a substitute); the account on the FBAR and 8938. If the TFSA holds Canadian funds, Forms 8621 for each. A TFSA adds two trust forms and possibly several PFIC forms to each of three returns.

Canadian mutual funds and ETFs. Each fund held in a taxable account (or a TFSA or RESP) in a covered year requires Form 8621 for that year, with the distribution history back to purchase for the section 1291 computation or a mark-to-market election on the earliest year. Ten funds is thirty forms. This is the largest multiplier in most Canadian submissions.

Canadian corporation. Each covered year: Form 5471 with Schedules C, F, G, H, I, J, M, P, Q, and R, built from the corporation's T2 and financial statements; the Subpart F computation on passive income; the GILTI (tested income) computation with the section 962 election and the indirect credit; the shareholder's salary and dividends. A corporate file is a project in itself.

RESP. As the TFSA, plus the grant as income.

Crypto. The disposition reconstruction for the covered years from full transaction histories; Form 8949; staking income; the Form 8938 position.

Self-employment. Schedule C from the T2125 with US expense rules; the totalization statement.

Rental property. Schedule E with mandatory depreciation; the foreign tax credit.

State. Amended state returns for any covered year the taxpayer was a state resident (Canadians who moved to the US).

The one-time items

The certification narrative is drafted with the client, revised, and reconciled to every account and date in the returns; it is the document the IRS reads. A retiree's RRSP basis is reconstructed from contribution receipts and CRA records back to the first contribution. A taxpayer without an SSN or ITIN applies (a US citizen for an SSN through the Social Security Administration; others for an ITIN on Form W-7). The residency test is confirmed with a day count for the three years.

Tax, interest, and the penalty

Tax on the three returns: near zero on employment and pension income after the credit; real on the TFSA's earnings (ordinary income), PFIC income (ordinary, with the 1291 interest charge), Canadian dividends and gains where Canadian tax is below US tax, and the NIIT where applicable. Interest runs from each year's original due date to payment. For a foreign-track filer, that is the whole cost beyond the fee. For a domestic-track filer, the 5% miscellaneous offshore penalty on the highest aggregate year-end value of the unreported assets is added, and it can exceed the tax, interest, and fee combined.

What the submission avoids

The penalties it waives for the covered years: failure to file and pay (up to 25% of tax plus 0.5% a month), the accuracy penalty (20%), Form 8938 ($10,000 a year), Form 3520 (up to 25% of the TFSA's value), Form 5471 ($10,000 a year), and the FBAR penalty (up to about $16,000 a year). For a taxpayer with a TFSA and a corporation, the waived penalties for three years exceed any conceivable fee.

Worked example

Two US citizens in Toronto, each with three unfiled years:

• A. Salary, chequing, savings, RRSP. Three base returns, six FBARs, certification. Tax near zero; interest negligible. Base range.
• B. Salary, chequing, savings, RRSP, a $90,000 TFSA holding three Canadian funds, a $200,000 taxable account holding six Canadian funds, and a 60%-owned consulting corporation. Three returns each with Forms 3520 and 3520-A, nine Forms 8621 (twenty-seven in total), Form 5471 with schedules and the 962 election; six FBARs including the corporation's accounts; a longer certification. Tax on the TFSA and the PFICs; interest; no penalties. Several multiples of A. The waived penalties for B's three years exceed $100,000.
• B, after the submission. Closes the TFSA, sells the funds, winds up the corporation; the following year's return is A's.

Official sources

The IRS states that a US citizen or lawful permanent resident meets the non-residency requirement where, "in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed," the individual "did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days." Eligible taxpayers "will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties." — Internal Revenue Service, U.S. Taxpayers Residing Outside the United States, https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-outside-the-united-states

The IRS states that eligible taxpayers must "have previously filed a U.S. tax return (if required) for each of the most recent 3 years" and pay a Title 26 miscellaneous offshore penalty equal to "5 percent of the highest aggregate balance/value of the taxpayer's foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period." — Internal Revenue Service, U.S. Taxpayers Residing in the United States, https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-in-the-united-states

Practitioner note

The fee tracks the forms, and the forms track the accounts. We show the client the submission's cost against the penalties it waives before we begin, and we plan the year after so the second year is the base file rather than the multiplied one. For a domestic-track filer we compute the 5% penalty first, because it is usually the number that decides whether the client wants to hear the rest.

See also: New to catching up? Start with what the Streamlined Foreign Offshore Procedure is and whether you qualify, and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the streamlined submission scoped to the client's accounts, with pricing published on the pricing page, and the post-submission plan that simplifies the following years. See cross-border pricing or book a call.