U.S. personal tax filing for Canadian expatriates working in the US
Allan Madan, CPA, CA
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.
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.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
Speaking of US filing requirements as a Canadian, do I have to be concerned about special filings as I have a RRSP and TFSAs in Canada?
Hi Alex,
Yes, the IRS has special reporting requirements for holder of investment vehicles like RRSPs and TFSAs. You must file the Forms 8891 & 3520 for the RRSP and the Form 3520A for the TFSA.
Regards,
Allan Madan and Team
I’m an IT consultant in Canada. My corporation has as a 8 month contract with a US company and I will physically be present in the US during the duration of the contract. Does my company have to file a US tax return?
Hi Hunter,
Your Canadian corporation will have to file a 1120-NR (US Corporate Tax Return) because it will be deemed to have a permanent establishment (PE) in the US. A PE exists since the contract is longer than 183 days. The profits earned from the contract will be reported on the 1120-NR.
Your corporation will also need to obtain an EIN (tax ID #) from the IRS.
Note: your corporation will receive a foreign tax credit when it reports its US earnings on its Canadian T2 Corporate Tax Return.
Best Regards,
Allan Madan and Team
As a Canadian resident temporarily working in the US will I be forced to contribute a portion of my earnings to Social Security and Medicare?
Hi Audrey,
Canada has established Social Security Agreements with the US and many other countries around the world to allow employees temporarily working in a foreign country to continue contributing to their Canada Pension Plan.
In order to be eligible for this treatment, Form CPT56 – Certificate of Coverage – http://www.cra-arc.gc.ca/E/pbg/tf/cpt56/cpt56-13b.pdf – must be completed by the employee and employer prior to departing from Canada.
Best Regards,
Allan Madan and Team
The CRA recently asked me to support the non-business foreign tax credits I claimed for US tax paid on the US-sourced. What should I do?
Hi Bogdan,
You should provide the CRA with slips you received from the company you worked for in the US. You should also send your US personal tax return, with supporting schedules and forms. The CRA essentially wants to see that the foreign tax credits you claimed are representative of tax you actually paid, so the US slips and returns should reflect the taxes paid. In addition, also send along the calculation of the foreign tax credit and proof for the exchange rate used.
The CRA recently asked me to support the non-business foreign tax credits I claimed for US tax paid on the US-sourced. What should I do?
You should provide the CRA with slips you received from the company you worked for in the US. You should also send your US personal tax return, with supporting schedules and forms. The CRA essentially wants to see that the foreign tax credits you claimed are representative of tax you actually paid, so the US slips and returns should reflect the taxes paid. In addition, also send along the calculation of the foreign tax credit and proof for the exchange rate used.
Best Regards,
Allan Madan and Team
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