U.S. taxation for Canadian expats
If you are a Canadian who works in the U.S., you would probably like to know more about your tax responsibilities in Canada.
The first thing to establish is whether you are still a Canadian resident for income tax purposes. Your residency status in Canada is determined based on your residential ties to Canada. There are a number of facts to consider, so consult Revenue Canada for more information on this subject. Determining your residency status in Canada can be very complex and is not the subject of this article. If in doubt, consult a tax expert at Impôts Ici!.
If you are still a Canadian resident for income tax purposes:
This is generally the case when you leave to work temporarily in the U.S. and plan to return to Canada afterwards. However, you should check your status with a professional. If it turns out that you are in fact still a Canadian resident for income tax purposes, you will be taxed in the U.S. on only your U.S. income.
The income indicated on your W2 will be taxed at the U.S. federal level (Form 1040NR), the state level (if the state imposes income taxes), and sometimes even at the city level – as is the case with New York City, for example. The U.S., like Canada, uses a system based on progressive tax brackets.
But be careful: the U.S. government may try to consider you a U.S. resident for income tax purposes. There are two ways to avoid this, but you need to fill out the proper forms and attach them to your 1040NR.
Finally, because you are still a Canadian resident for income tax purposes, this income will be taxable in Canada. But don’t worry, you will not be taxed twice: Canada will let you credit the income tax you paid in the U.S. against that in Canada. In simplest terms, you will only have to pay the difference between the U.S. taxes (generally lower) and Canadian taxes.
If you stop being a Canadian resident for income tax purposes:
The income that you earn in the U.S. will not be taxed in Canada if you are no longer considered a Canadian resident for income tax purposes. It will, however, be taxed in the U.S. at the federal, state and municipal levels, as applicable. The U.S., like Canada, uses a system based on progressive tax brackets.
Determining tax residency in the U.S. is done differently than it is here in Canada. It uses what is known as the Substantial Presence Test, which is based on number of days spent in the U.S. during the current and preceding 2 years.
If you are indeed considered to be a U.S. resident for income tax purposes, there are a number of different U.S. tax forms that you may be required to fill out in addition to the 1040, especially if you have assets in Canada (RRSPs, real estate, bank accounts, etc.). These include the 8865, 3520, 3520-A, 5471 and the infamous FBAR, among others. Your advisor at Impôts Ici! can help you find your way through the maze of paperwork.
Please note that this article has covered only a few aspects of this issue and must not be considered tax advice. To receive tax advice adapted to your particular situation, we recommend that you consult a specialist who thoroughly understands both American taxation and Canadian taxation, as results in one system impact the other.
Nicolas Godbout, Tax master and Financial Planner