What are the Canadian Taxes for Expatriates?

This article surrounding tax breaks for US expatriates is about foreign earned income exclusion, and if you are a US expat or are planning on moving abroad this will definitely help.

Relief through Foreign Earned Income Exclusion:

US citizens and green card holders are liable for US income tax. In fact they have to pay US income taxes on their worldwide income. Worldwide income includes income from foreign sources, like from a job overseas. Fortunately, the IRS does provide some tax relief through the foreign earned income exclusion. This means that the first $95,100 of foreign earnings is excluded from your US taxable income. In this article we will go over taxes for expats

If you are married and both you and your spouse live overseas then each of you will receive this foreign earned income exclusion. Couple of points to note: if you do not use the entire foreign earned income exclusion in a year the unused portion cannot be carried forward. Point two; the unused portion cannot be transferred to a spouse. So you either use it or lose it.

You have to meet one of the two tests in order to receive the foreign earned income exclusion, it’s not automatic. The two tests are the physical presence test and the bona fide residence test.

The Physical Presence Test:

In order to meet this test you must reside in a foreign country for 330 days or more in any twelve month period. In other words, you can’t stay in the US in a twelve month period for 35 days or longer.

Let’s take an example of a teacher who gets a job in China to teach English. She leaves and arrives in China on 1st August 2012 and her contract is for a single year. If the teacher does not spend more than 35 days in the US from August 1st 2012 to July 31st 2013 then he/she will qualify for the physical presence test and receive the foreign earned income exclusion. Let’s say the teacher meets the test and doesn’t really visit the US much in the twelve month period, in that case the teacher will get the foreign earned income exclusion for the five month period August 1st to December 31st 2012.

The Bona Fide Residence Test:

This is the second way in which you can qualify for the foreign earned income exclusion. To meet the bona fide residence test you have to satisfy a few conditions.

1. You are a US citizen or a green card holder.
2. You have a home in a foreign country.
3. You live in a foreign country uninterrupted for an entire calendar year.
4. You plan on staying in a foreign country for an extended period of time or indefinitely.

Let’s look at some practical examples on how the bona fide residence test works.

Example One:

You have a contract in a foreign country, let’s say Canada, for two years. At the end of two years you plan on coming back to the US once your contract is over. Intuitively, you would think that you would satisfy or meet the bona fide residence test, but you won’t because you do not plan on staying abroad indefinitely, you are coming back home to the US after two years.

Example Two:

A single person moves to Switzerland and still maintains a US home. Even if that person gets a home in Switzerland they will still not qualify for the bona fide residence test because it is the IRS’s viewpoint that by maintaining a home in the US they intend to return back.

Example Three:

An expat and his entire family move abroad to Japan. Let’s say you are that expat and you and your immediate family moves to Japan for a contract that starts on July 1st 2011. You buy a home in Japan. You visit your extended family in the US during 2012 only for Thanksgiving and Christmas holidays. You plan to stay in Japan indefinitely. In fact, as of 2012 you are still in Japan with your family.

In this case you will clearly meet the bona fide residence test because, number one, you stayed out of the US for an uninterrupted calendar year. Number two you maintained a home in Japan, and number three, you have demonstrated by your actions that you intend to live in Japan indefinitely.

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.

Related Resources