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Understanding what happens when both the US and Canada want to tax you
Understanding how the country of your residence, your citizenship, and where you work want to tax you can be very tricky!
This is especially true for people who cross the border frequently, or work in both countries, or are a resident or citizen of one but work in the other. Let’s make sure you are doing things correctly and understand the risks!
Each country has different tax laws and regulations. In this article, we will help you make some basic sense of the rules and regulations that you may need to consider.
Residency Status
Canada and the United States both tax their residents/citizens a bit differently. United States citizens and residents are taxed on their worldwide income, no matter where they live or work. In Canada, only residents are taxed on their worldwide income.
Since the US focuses on citizens as well as residents, citizens need to file a US tax return no matter where they live, even if they left the US many years ago!
Double Taxation
Now you may be wondering what would happen if an American citizen residing in Canada earns Canadian income. Normally, this would result in the American citizen paying income taxes in Canada as a Canadian resident, and as well as paying American income taxes for being an American citizen. However, to avoid this situation of double taxation, Canada and the United States have a tax treaty that tell you what to do and who to pay the tax to.
US-Canada Tax Treaty
Among many other things, the US-Canada Tax Treaty is designed to prevent this type of double taxation, and it provides guidelines for how to resolve these issues.
This treaty covers various types of income like employment, pensions, capital gains, and more, providing rules on which country gets the primary right to tax.
The main benefit is that this treaty typically saves US citizens from being taxed by the US on income earned in Canada – but only if the Canadian tax is higher than the US tax. If the US tax rate is higher, then the US citizen may pay the difference between the higher US tax and the lower Canadian tax to the US government!
Filing Requirements
If you have individual tax filing obligations in the US, these are some of the forms you may be required to file:
Form 1040: US citizens and residents must file an annual tax return reporting worldwide income
FBAR: Required for U.S. persons with foreign bank accounts that exceed $10,000 at any time.
Form 8938: Required for specific foreign financial assets exceeding certain thresholds.
If you are a Canadian resident, including a US citizen deemed to be a Canadian resident for tax purposes, you may be required to file:
T1 General Income and Tax Benefit Return: Required for Canadian residents to report worldwide income.
T1135: Foreign investment property valued at more than $100,000.
Foreign Tax Credits
As an additional measure to prevent double taxation, Canada and the US have both implemented foreign tax credits to offset taxes payable.
This also includes specific rules for social security benefits and other retirement income, often allowing the country of residence to tax these benefits while preventing the source country from taxing them.
State Taxes
It is important to understand the state-specific rules, as some of them do not recognise the federal U.S. treaty.
Examples
Here are a few different cases—do any of these apply to you?
A Canadian, living in Canada, who works remotely for a US company.
- As a Canadian, you are required to report any income on your tax return. Therefore, once you receive a W-2 form from your employer, you must convert the currency to CAD for reporting on your T1.
- Since you are not a U.S. citizen, have not spent any wworkdaysin the US, and are residing in Canada, you are exempt from U.S.income taxes.
A Canadian, living in the US for more than 183 days, working in the US.
- The CRA may consider you to be a non-resident for Canadian tax purposes.
- In such a case, you may not have to pay Canadian income tax, and may not have a Canadian filing obligation.
- If all your income comes from sources that are not within Canada, you may not need to fill out a Canadian tax return.
- This conclusion is very fact-specific.
A Canadian, living and working in the US for less than 183 days.
- The CRA likely considers you a resident for Canadian tax purposes, meaning you must pay Canadian income tax on worldwide income.
- You likely also had US income taxes withheld from pay.
- This may lead to double ttaxation—by both the US and Canada.
- Using the Federal Foreign Tax Credit, you may be able to obtain credits in Canada for taxes collected and remitted to the IRS, which should alleviate or solve the double ttax issue./li>
A US citizen residing and working in Canada for more than 183 days.
- You are likely considered a Canadian resident, and required to pay Canadian income tax and file a Canadian income tax return, reporting your worldwide income.
- You are a US citizen, so you are also subject to US income tax.
- This leads to double taxation.
- However, you may qualify for a foreign earnings threshold exemption, which in 2024, the amount is $126,500, or foreign tax credits beyond that for Canadian income tax paid.
A Canadian citizen hit a jackpot at a casino in Las Vegas!
- Congratulations! But the US will tax your winnings like regular income, paying you an amount net of withholding taxes.
- Since Canada does not tax lottery or casino winnings, you can get a refund of some or all of these taxes back! Ask us how!
Are you a US Citizen and a Canadian tax resident, or do any of these scenarios apply to you?
Book a free consult.