If you're a resident of one country, and you have income from a source in the other country, then the answer is ... it depends.
Like so many things in life, the answer depends on your specific facts - who you are, what your tax profile is, and what you did in the other country to earn the income.
The ultimate outcome is to avoid paying the dreaded "double tax" - tax on the same income to two or more governments, at a total rate higher than what would be paid to one government.
That sounds awful and unnecessary. You don't want to do that.
You probably also don't want to pay 30% total tax on your income, but on that you have no choice; it's the law. However, you may be indifferent on paying the entire 30% tax to Canada or the US, or paying say 15% of that to Canada and 15% of it to the United States.
It's important to remember that most countries around the world don't like it when non-residents of that country earn income in that country, and don't pay tax to the government of that country. Most countries around the world have also acknowledged that it is unfair to require citizens of their countries to pay tax on income that has already been taxed in another country. These objectives are often in direct contradiction to one another. As a result, extremely complex taxation systems have arisen around the world, each of them different, each of them focused on encouraging specific behaviors and discouraging others.
It is really important for you and your advisor to understand how these tax systems operate domestically, and internationally with one other, to make sure that all the paperwork (even the digital stuff) is completed properly and on a timely basis, so that you aren't paying double tax.
Let's look at some common scenarios - maybe you're dealing with something similar right now?
(1) A resident of Detroit purchases a house in Windsor, and rents it out to University students. Canadian withholding taxes are withheld from the GROSS rent payments. In that case, the US resident can file a Canadian tax return, calculate how much Canadian tax is due on the NET rental income, and then claim a refund for the difference! Then, the US resident can claim a foreign tax credit on their US return for the amount of Canadian tax paid. Problem solved.
(2) A resident of Canada purchases a vacation property in Florida. Or really, any kind of real estate in the US, even as a passive investor in a limited partnership; the beach house example just sounds better. At some point, the Canadian sells the beach house. The purchaser is obligated to withhold 15% of the GROSS purchase price and remit it directly to the IRS. The Canadian doesn't even see that money. That's a very large number, and generally much higher than the ultimate tax due on the gain. There are filings and tax returns the Canadian seller can prepare to recover the excess of that 15% over their ultimate US tax liability, but they require the seller to be organized and to have a US taxpayer identification number. Finally, claim whatever tax was paid to the US as a credit against their Canadian tax due on the sale of the beach house. And, problem solved, again.
(3) A resident of Canada is an investor in a partnership that earns business income in the US. This is quite common for private ventures and publicly-traded partnerships. The US withholding tax on income distributions can be as high as 37% in some cases! Again, the Canadian investor can file paperwork and tax returns to recover the excess tax, and claim the residual on their Canadian tax return, but it takes time and preparation. You know what comes next ... problem solved!
In many cases, unfortunately, people don't even know that this is possible. Or they don't even know that taxes have been withheld. They just see a dollar amount hit their bank account or brokerage statement and assume that's all they're entitled to, and they end up paying double tax.
If you're facing something like this, talk to us. Talk to us as soon as possible. We can handle any and all aspects of cross-border situations with you - from complete registrations and all tax returns, to handling parts of it and working with your other advisors on the other parts.
Be aware though that these things take time to organize and execute. You'll be waiting to hear back from the IRS or the CRA to get your taxpayer identification number BEFORE you can file anything to request a refund or claim a foreign tax credit. Sometimes, that process alone can take weeks, depending on how busy the tax authorities are.
In the end though, it is always worth it. There can be tens of thousands of dollars at stake.
We will make sure that you get the refunds that you're entitled to, and don't pay double tax.
Book a free consult here.
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