As a Canadian expatriate working in the U.S, you will be subject to U.S tax on the employment earned in the US.
Are you employed by a Canadian business and working in the U.S? Are you aware that this type of cross border employment will trigger U.S. federal tax, state tax, and US filing requirements?
If you answered yes to the first question, this article is extremely relevant to you. Stay tuned as you need to understand what the tax implications are for you, as a Canadian expatriate working in America.
How is my employment income taxed in the US?
For tax purposes, employment income earned will be attributed to the country where the services are performed. If you were physically working in the U.S., you will be subject to U.S. tax on the employment income earned in the US.
The income that is subject to U.S tax is determined by allocating your total salary among the days you worked in the U.S. and Canada in the year. On top of the US federal tax you are required to pay, you may also be held liable for state income tax on the income earned.
To help you understand, let me provide you with an example:
Joe earned $50,000 in 2012 working as an IT support specialist for a Canadian IT company. In the middle of the year, Joe was sent to his company’s U.S. location to provide some consulting services to a client. In 2012, he worked 200 days in total, taking into consideration the days worked in both Canada and in the U.S. Out of the total days worked, he spent 20 days in the company’s U.S. location.
In this example, Joe’s employment income earned is subject to U.S. federal tax for 2012. As such, he would now need to file a U.S. tax return. The amount he would have to include in the tax return is shown below:
Calculations: 20 days/200 days = 10%. So, 10% of the total income earned ($50,000) is subject to U.S. tax, i.e. $5,000.
Do Canadian expatriates working in the US pay double tax?
“I heard that as a resident of Canada, I have to pay taxes on my worldwide income, is this true?” – a frequently asked question that we see all the time.
Under Canada’s tax system, your tax liability is based on whether you are resident of Canada or a non-resident of Canada. (To learn more about how does CRA determine the residency status, you can refer to Tax for Canadians employed overseas)
If, after completing the residency test, you are assessed as a resident of Canada, then, yes, you are subject to tax on your worldwide income. [You have to include your U.S income on your Canadian tax return.]
You may now wonder: does that mean I have to pay tax on my employment income twice – US & Canada?
Not exactly. To avoid unwanted double taxation, a Canadian citizen working in the US. can apply for a foreign tax credit on his/her Canadian tax return for any U.S. federal & state taxes paid. This will reduce your Canadian taxes payable.
Canada-US Tax Treaty Provides Tax Relief
In addition, there is the Canada- U.S. treaty in place to offer Canadians working in the US. some relief from the U.S. federal tax. As a Canadian resident, you are not subject to U.S. tax if either scenario applies to you:
– earned less than USD $10,000 from U.S.
– spent less than 183 days (in any 12-month period) in the US. AND you were not being paid by a Corporation resident in the US.
Even if you qualify for an exemption from tax under the treaty, you must file a U.S. income tax return (Form 1040NR) if you have U.S. income. You may also need to file a U.S. State return to report income earned in the state.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.