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Unlike the US whose taxation is based either on residency or 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, 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 the Canada, then both countries tax you on your worldwide income which means improper tax filing can lead to adverse taxation due to double taxation.
As an international firm with offices in Houston and Toronto, our certified tax professionals can help you with US Tax compliance and tax consultancy for tax savings. We are here to help!
Cross-border tax is complicated and always approached on a case-by-case basis. Below is some initial information to get you started. Please contact us ASAP for help.
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.
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.
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For assistance in planning and transferring your U.S. assets to Canada, please contact our colleague Phil Hogan, CPA, CA, CPA at (250) 661-9417 or phil@philhogan.com
