Payroll Taxes for Canadians Temporarily Working in the U.S.

Allan Madan, CA
 Mar 30, 2016
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Are you a Canadian planning on temporarily working in the United States and are worried about how your payroll will be taxed? Learn about a strategy that will help you prevent double taxation and save your hard earned money along the way.

Let’s look at an example:

Vanessa works for a Canadian company in Ontario. The company is sending Vanessa to temporarily work for a client in Florida. Vanessa will divide her year of work by spending 8 months working in Canada and 4 months working in the U.S.

The problem that Vanessa now faces is how her payroll obligations will be handled as a Canadian who is temporarily working in the U.S.She wants to know exactly how she will be taxed.

Does Vanessa have to pay both Canadian and U.S. taxes?

First, we have to look at the tax treaty between Canada and the U.S. The treaty states that employment services are taxable in the country where the employee physically works.

Since Vanessa physically works in both Canada and the U.S. this year, she has to comply with both her regular Canadian payroll taxes as well as the foreign U.S. taxes. This means deductions to her income will be doubled: her income will be taxed once in Canada and then again in the U.S.

Payroll deductions in Canada come from the CRA and are derived from: income tax, employment insurance, and the Canadian Pension Plan. Payroll deductions in the U.S. come from the IRS and are derived from: federal tax, state tax, social security, and Medicare.

Vanessa will get a T4 (Canadian employment income slip) reflecting 100% of her wages for the entire year. Since she makes $10,000 a month, her T4 will reflect a total of $120,000. Vanessa will also get a W2 slip (a U.S. wage statement) for the earnings she made while working in Florida. Since she worked in the U.S. for 4 months, her W2 slip will reflect a total wage of $40,000.

So let’s say Vanessa makes $10,000 per month. In the 8 months that she worked in Canada, she made $80,000. In the 4 months she worked in the U.S. she made $40,000. Therefore, her total income for the year before taxes is $120,000. After both the Canadian and US payroll deductions, Vanessa’s $10,000 monthly paycheck is reduced to $3,594 , which leaves her with a lot less money.

How can Vanessa prevent double taxation?

Vanessa decides to complete form T1213: request to reduce tax deductions at source by completing form T1213, Vanessa’s Canadian payroll taxes are reduced by approximately the same amount that her American payroll was taxed. This prevents and/or reduces the double taxation!

With the T1213 filed, Vanessa’s income is no longer being double taxed. However, she does not want to continue contributing to U.S. Social Security and Medicare, because once her 4 months in the U.S. are done and she returns to Canada, she will no longer need to take advantage of these American benefits.

Vanessa’s employer obtains a Certificate of Coverage from the CRA, so she will no longer have to pay into U.S. Social Security and Medicare. Instead, the money is contributed to the Canadian pension plan, which she can use for her retirement in Canada.

By following these steps, Vanessa is able to relieve her income from the double taxation. Now, she is left with more money in her pocket!

Tip:

By following these steps, Canadians who are temporarily working in the U.S. can avoid double taxation, giving them more access to their hard earned pay.

Disclaimer

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.

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