Taxes for U.S. Expatriates in Canada

This article about taxes for US expatriates is aimed at helping anyone looking for information regarding tax consequences for Americans working overseas.

For those of you who don’t know, a US expatriate or expat is a person who works and lives overseas. This article is going to cover two fundamental questions in regards to tax implications for US expats. Number one, as a US expat what are my tax filing obligations; and number two, as a US expat how is my income tax calculated?

US citizens and green card holders are liable for US taxes. In fact, they have to pay taxes on their worldwide income and worldwide income includes all income earned overseas.

How You Get Paid Affects Taxes for US Expatriates:

We know that there are two ways in which US expats can be paid. Number one, they can be paid directly by their US employer. In that case the employer will withhold income taxes and social security taxes from the US expat’s paycheque. The US expat will receive a W2 slip or employment income slip.

The second way in which a US expat can be paid is directly by the foreign employer. In this case the US expat is liable for US income taxes over and above the foreign earned income exclusion and the foreign housing exclusion. These are two very important points that I will discuss separately.

The Foreign Housing Exclusion:

The foreign housing exclusion means that reasonable housing costs paid by your employer are excluded from your US taxable income.

The Foreign Earned Income Exclusion:

The foreign earned income exclusion means that your foreign earnings up to $95,100 (as of 2012) will be excluded from your US taxable income. If you are earning more than $95,100 you will receive a foreign tax credit on your US personal income tax return. The foreign tax credit will give you partial relief for the income taxes paid on the foreign income over and above $95,100.

Filing Deadlines for US Tax Returns:

You must file your US income tax return if you are an expat by June 15th. However, you receive an automatic extension to October 15th. If taxes for US expatriates are filed after that date they are subject to penalties by the IRS.

Foreign Reporting:

You must disclose all foreign financial accounts and bank accounts as a US expat. More specifically, for each country where your foreign financial accounts and foreign bank accounts are in excess of $10,000, they must be reported for that particular country.

Filing Foreign Tax Returns in the Foreign Country, Canada:

Now that we have talked tax implications for US expats in the US, what do you do about income tax in the foreign jurisdiction? Each country’s laws are different; you may be liable for income tax, source deductions, and be required to file income tax returns in those countries. Tax consequences for Americans working overseas vary from place to place; for instance, if you are a US expat working and living in Canada you will be required to file a T1 general tax return.

This is same as the 1040 US personal tax return. In addition, your Canadian employer will issue a T4 slip to you. The T4 slip is a slip of employment earnings like the W2 slip. Additionally, your Canadian employer will withhold income taxes and social security taxes from your paycheques. Finally, in Canada you have to file a tax return by April 30th.

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.

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