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Reading Time: 3 minutes Who does this apply to? If you are a Canadian resident who derives an income effectively connected* to any business or trade in the US
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…or any US resident or citizen living anywhere else in the world, income tax returns need to be filed in the US using the customary Form 1040. This can be filed either separately or jointly (if married).
If you are employed by a US company in Canada, then you fall under the Canada US Income Tax Convention. This means that your employment income is exempt from taxation by Canada unless it is above $10,000 per year. If higher than $10,000, your income is exempt if:
The individual resided in Canada for less than 183 days in any Calendar year
The exemption is not borne by a Canadian citizen or a Canadian resident employer with a fixed base in Canada
If you are self employed US citizen/resident in Canada, aside from filing Form 1040 and Schedule C in the US to declare your worldwide earnings there are other things involved. Based on your current residence, you are required to either pay the US’s self-employment tax (15.3% for incomes up to $118,500) or Canadian Pension Plan (CPP) premiums to cover your social security taxes.
Whether you are considered employed or not in Canada is dependent on whether your primary work place falls under the definition of “Permanent Establishment” as per the Canada-US Tax Treaty.
As a proven resident of both countries, you are at risk for double taxation on your worldwide earnings if you are not careful. The Canada US Income Tax Convention provides solutions for this.
As a U.S citizen or resident alien having a tax home in a foreign country (i.e., place of business/employment permanently or indefinitely based in a foreign country) and meeting the criteria of either the Bona Fide Residence Test or Physical presence Test, you can elect “Foreign Earned Income Exclusion”.
Foreign housing cost is also excludable for payments made by an employer either on your behalf or as a reimbursement for incurred housing cost. This amount is taxable foreign earned income. (Availing this may in some cases offset your earned income exclusion).
Foreign Tax Credits (FTC): If you are a US citizen or expat paying foreign income taxes, the same foreign income will become a US tax liability. To alleviate that burden of 2-country double taxation, you are provided with appropriate tax credits on your US tax liability.