Unlike the US whose taxation is based either on residency (Substantial Presence Test), green card holder and citizenship. Canada’s tax laws are based solely on residency. Like the US, however, taxes are imposed on worldwide earnings. This means as a US expat, deeming your residency status in Canada is one of the first important steps. Primarily one who spends more than 183 days in any calendar year is considered to be a Canadian resident. There are other factors that weigh in on this such as frequency of visits to Canada, duration of absence, the establishment of domicile in foreign countries as well as maintenance of home and finances in Canada. If you are a resident of both the US and Canada, then both countries tax you on your worldwide income which means improper tax filing can lead to adverse taxation due to double taxation.
For US Expat Individuals in Canada
For 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. Don’t forget the US tax deadlines: April 15th for paying your tax returns and June 15th is an extension for expats to file with April 15th remaining the ideal date!
Whether you are considered employed or not in Canada is dependent on whether your primary workplace falls under the definition of “Permanent Establishment” as per the Canada-US Tax Treaty.
Preventing Double Taxation
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 Treaty provides solutions for this by providing reduced rates of taxation on things like qualifying pensions, dividends, and income interest. Learn more about US Canada Treaty. Let us look at some other aids that help prevent you from being double taxed as a US expat in Canada!
- FEIE (Foreign Earned Income Exclusion) 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.
For US expat retirees in Canada, there are programs such as Canada Pension Plan (CPP) and Old Age Security (OAS) that provide retirement relief. The relief can be accessed usually after the age of 65 and based on your circumstances may be subject to certain income limits.
Get more information if you are a Canadian working in US or working for US company from Canada. Canadian Employed in the US by Canadian Company. Canadian residents providing self-employed personal services in the US. Independent Canadian contractors and Canadian corporations providing personal services in the US.