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Thursday, April 16, 2015

U.S. Citizens working in Canada - Everything You Need to Know

Question: I'm a U.S. Citizen, I am looking at a job in the oil field in Alberta. I would like to know as much as possible about income taxes as I would have close to $300,000.00 T4 income as an employee for the year. Please help!

Answer: Congratulations on the prospective job in Canada. First thing you will want to do is determine what your residency will be as far as Canada goes.

Do you have significant residential ties to Canada?

  • A house in Canada
  • Spouse or common law partner living in Canada
  • Dependents/children in Canada
This is the most important thing that the Canada Revenue Agency will look at to determine your residency in Canada.

 Do you have secondary ties to Canada?

  • Personal property such as a car registered in Canada, a rented room furnished with your belongings
  • Social ties to Canada such as memberships of Canadian groups, religious or recreational organizations.
  • Canadian bank accounts, credit cards, economic ties
  • A Canadian drivers license
  • A Canadian passport
  • Health coverage through a Canadian province or territory

  Do you maintain your ties to the U.S.?

  • A home in the U.S.
  • Immediate family staying in the U.S.
  • Any secondary ties to the U.S. (same as listed above)
That is what the Canadian government will look at in order to determine your residency status while in Canada. 

U.S./Canada Tax Treaty Implications

Normally you would be considered a resident of Canada if you stayed in the country for more than 183 days in a given year, but because of the U.S/Canadian Tax Treaty, you are able to stay over 183 days in Canada and still be a non-resident.

"If you have ties in a country that Canada has a tax treaty with and you are considered to be a resident of that country, but you are also a factual resident of Canada because you established significant residential ties with Canada, you may be considered a deemed non-resident of Canada."

You will always be a resident of U.S., because in the eyes of the IRS, you are a resident of the United States based on your U.S. Citizenship. You would have to rescind your U.S. citizenship to get out of filing taxes on world-wide income with form 1040 every year to the IRS.

Many people do not know about the tax treaty. Many U.S. Citizens think that they are considered Canadian residents just because they work in Canada for more than 183 days and file a return.

If you are considered a Canadian resident, you are taxed on your world-wide income. You also have to report foreign assets if you have more than $100,000 CDN worth of property outside of Canada. Just like the FBARs in the U.S., the penalties for failing to report are huge. There are a few exceptions, but this should scare you.

Supposing you get this job in Canada, first thing you should do is fill out a form NR74 - Determination of Residency to the CRA. If you need help, we can do that for you.

CPP & EI: Will You Have to Pay?

CPP (Canadian Pension Plan) and EI (employment insurance) withholding are mandatory in Canada even on non-residents. The CRA collects them; CPP and EI determine who is eligible to receive benefits. You can deduct these as "Taxes paid in a foreign country" on your 1116 or Schedule A itemized deductions ... as long as you do not receive benefits from them.

 What about Non-Resident Tax & OAS Recovery Tax?

Under the U.S./Canadian tax treaty you will not have additional non-resident tax or OAS recovery tax. Some non-residents from other countries would have to pay such taxes.

Filing Canadian Income Tax Return

Many Americans working in Canada are not sure what to do as far as filing a Canadian income tax return. I've heard and read many accountants saying that, yes you need to file. Once you've sent form NR74, you may or may not receive a request to file a return. If no such request is received, you do not have an obligation to file if there is no tax owed to the CRA.

You must file a Canadian Income Tax return if:
  • You have a tax liability owed
  • You want to apply for a refund

Ok, part II.. Filing U.S. Taxes on foreign income... I hope you are still reading and I haven't lost you yet.

Foreign Income Exclusion 2555

The Foreign Income Exclusion (2555) allows you to exclude up to a maximum of $99,200 (2014) of your foreign income. You can also exclude up to 16% of the credit taken on housing costs, but there are limitations. 

In order to file form 2555 Foreign Earned Income Exclusion, you must

  1. Have foreign income
  2. Have a tax home in a foreign country
  3. Meet the Bona-fide Residence Test OR meet the Physical Presence Test
Let's have a look at the given situation.  If the total time spent in Canada is under 1 year, the employment is seen as temporary employment and you would not be able to claim the foreign earned income exclusion, although you should be able to write off away-from-home expenses such as meals, travel, hotels, etc.

If the job ends up lasting more than a year, the employment is seen as definite and Canada becomes your tax home.

To meet the Bona-fide Residence Test, you  must be a U.S. citizen or greencard holder and a Bona-fide resident of Canada for an uninterrupted period that includes the entire tax year (Jan 1st - Dec 31st).

To determine Bona-fide Residence, the IRS will look ask:
  • Did you buy, rent, have employer provided housing, hotel stay in Canada?
  • Were your immediate family members living with you in Canada or back in the U.S.?
  • Were you paying taxes in Canada?
  • What were your employment terms?
  • What type of Canadian Visa were you on and for how long?
  • Did you maintain a home in the U.S. while in Canada?

Physical Presence Test

Assuming that you were not a Bona-fide resident of Canada for the entire tax year, we would then move on to the physical presence test. You must be in a foreign country outside the U.S. for 330 full 24 hour days to meet the physical presence test (the clock starts at midnight).

This is pretty cut and dry, either you meet it or you don't. Make sure you only come back to USA for a maximum of 35 days per calendar year if you want to play it safe so that you can meet the physical presence test each year.

Form 1116 Foreign Income Tax Credit

The taxes you accrue in Canada can be credited against the taxes owed in the United States. There is some fine print that you should be aware of here. You are only allowed to write off the minimum amount of foreign tax possible, meaning if your employer gives you a T2200 statement of un-reimbursed employee expenses, you will need to file a Canadian income tax return T1 general with a T777 statement of employee expenses attached. You will be refunded for the tax deducted on the money spent on expenses from CRA. On your U.S. return, you then would have to deduct that from the taxes paid to a foreign country as an expense definitely related to foreign income.