If you’re a Canadian or U.S. citizen living abroad, working abroad, or with investments or real estate in a country other than your own, our team of specialized tax accountants can answer your questions about your expatriate, cross-border or non-resident income tax filing obligations.

Citizen Abroad Tax Advisors has been providing expert guidance and advice to American expatriates for more than 40 years. In that time we’ve come to know the most common cross-border and non-resident income tax questions U.S. citizens have when they’re working or living in Canada or overseas. ​

Find your tax question among the categories below: 

Frequently Asked Tax Questions for US Taxpayers

Tax forms for U.S. citizens living in Canada 

What are the common tax forms a U.S. citizen living in Canada should file each year with the IRS? 


The typical U.S. tax forms to be filed by American citizens living in Canada are:


Form 1040, U.S. Individual Income Tax Return, and its related schedules.

Form 2555, Foreign Earned Income Exclusion.

Form 1116, Foreign Tax Credit.

Form 8938, Specified Foreign Financial Assets.

Form 8621, Passive Foreign Investment Corporations (reports interest in Canadian mutual funds).

Form 8833, Treaty Based Position Disclosure (for various Canada–U.S. Income Tax Treaty elections that may be required in your U.S tax return).


The following forms may also be required for certain persons:


Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations (for Americans with an ownership interest in private non-U.S. corporations).

Form 3520-A and Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Foreign Gifts (for U.S. owners or beneficiaries of Canadian trusts).

FinCen Report 114, Report of Foreign Bank and Financial Accounts (previously Form TDF 90-22.1).


Failure to file these forms could result in minimum penalties of $10,000 for non-willful infractions.



Delinquent U.S. income tax filers

I am a U.S. citizen and have lived in Canada for most of my adult life. I pay taxes on my worldwide income on my Canadian tax return. I just realized that I should have been filing U.S. tax returns for this entire period and haven’t been doing so. What is the best action I can take here? Why would I start filing these now?


While it’s not a great feeling to discover you’re delinquent in your U.S. tax filing obligations, the IRS has introduced a programs that encourages U.S. citizens to come forward and correct this issue.


The first is the Streamlined Disclosure Program, which requires you to back-file your delinquent U.S. tax returns for the past three years and your Report of Foreign Bank and Financial Accounts (FBAR) statements for the past six years, and to respond to some questions regarding your non-filing. Being accepted under this program could save you tens of thousands of dollars in potential penalties for failure to file certain forms. There are several tests you must meet to qualify for this program and we encourage you to contact us on this matter.


We understand a person’s resistance to filing tax returns and potentially paying tax or penalties to a country to which they have limited or no ties (with the exception of citizenship or a Green Card), especially if they have never lived in the United States. But it’s no longer in your favor to take a ‘head down’ approach and ignore the issue. Since 2008, the IRS has increased its focus on U.S. citizens living abroad or U.S. residents holding (but not disclosing) assets outside of the United States. The U.S. Foreign Account Tax Compliance Act (FATCA) requires most non-U.S. institutions around the world to identify, report and possibly withhold on any U.S. citizen or U.S. taxpayer accounts held at those institutions—which means ‘doing nothing’ is not an option for U.S. citizens who are not compliant on their tax and reporting obligations. Voluntary disclosure is always the preferred option—and one that allows for greater leniency on penalty application than being ‘caught’ by the IRS.



U.S. residents working in Canada 

My U.S.-based employer is sending me to Canada for five months. I live in the United States and my family will remain there while I’m away. My compensation during this time will be more than $20,000 USD. Are there any Canadian personal tax consequences I need to know about? 


This question needs to be looked at from two angles: your personal obligations and your employer’s obligations.


Your personal tax obligations:

As you will be in Canada for only five months, you will likely not be considered a tax resident of Canada, which means you may not be subject to a final tax in Canada on your Canadian source income (i.e., the employment income related to the services performed in Canada). You will, however, be required to file a Canadian T1 income tax return no later than April 30 to report your Canadian source employment income, regardless of the ultimate tax liability.


If you are, in fact, subject to Canadian tax on your earnings, you will be eligible to claim a foreign tax credit (for Canadian tax paid) on your U.S. federal tax return, which will offset some (or all) of the U.S. tax otherwise payable on the same income (thereby reducing the risk of double taxation). Depending on the state in which you live and pay tax, there may be a similar foreign tax credit mechanism that will allow for a reduction of your state income tax.


If you were issued a work permit to enter Canada, you will likely need to apply for a Canadian Social Insurance Number (SIN), which is a requirement of everyone who is working in Canada.


Your employer’s payroll tax obligations:

If you are working in Canada, your employer (Canadian or non-Canadian) has payroll withholding obligations in Canada. Whether you remain on the U.S. payroll or not, your employer will have a requirement to withhold Canadian income tax, Canada Pension Plan (CPP) and other payroll taxes (such as the Ontario Employer Health Tax) and remit these to the Canada Revenue Agency (CRA) on a periodic basis, just as would be done for employees resident in Canada. Your employer may also subject to penalties for failing to withhold, remit and report on your employment income.


Even if you are not subject to tax in Canada, your employer still has a responsibility to withhold and remit unless a tax waiver is obtained from CRA. Employers are also required to withhold and remit (CPP) premiums unless exempted under Social Security ‘totalization agreements’ with your country of residence. Regardless of whether or not a waiver is obtained, your employer would be required to issue to you Form T4, Statement of Remuneration Paid (the equivalent of a W2,), no later than February 28 the following calendar year.


Citizen Abroad can assist you and your employer in meeting these requirements.



Ownership of Canadian mutual funds by US residents or US citizens

I have heard that owning Canadian mutual funds can result in unintended negative tax implications and requires additional reporting in my tax return. What are the additional reporting requirements and what are the tax implications?


Under U.S. tax law, most Canadian (or non-U.S. listed) mutual funds and exchange-traded funds (ETFs) are considered to be passive foreign investment corporations (PFICs). Because a Mutual Fund or ETF has interests in US Securities or is a "US Indexed" fund, does not make it a US Corporation and exempt from PFIC reporting. If you own these funds, you may be required to file Form 8621 with your annual U.S. tax return. In addition, your interest in these funds should be disclosed on the annual Report of Foreign Bank and Financial Accounts (FBAR) form.


A non-U.S. corporation is a PFIC if it meets one of two criteria (applies not only to Foreign Mutual Funds and ETFS and any other Foreign Corporation):


1. At least 75 percent of its gross income is passive income (e.g., interest, dividends, rents)

2. At least 50 percent of its assets are passive assets (e.g., cash, non-operating assets, investments)


Any income you earn from a PFIC investment is recognized as income only when funds are distributed to U.S. shareholders. At that point, a calculation is done to determine if the distribution is considered ‘excess’—meaning taxable at the highest ordinary tax rate in effect. If not excess, PFIC distributions are taxed at ordinary U.S. tax rates (i.e., not at qualified dividend rates), even if for Canadian tax purposes the distribution is considered a dividend.


Capital gains on PFICs for U.S. purposes are prorated as earned over the holding period of the PFIC fund, and are taxed at the top rates in effect over that period (recently as high as 37 or 39.6 percent), with an interest charge on the tax on the portion of the total gain allocated to prior year.


Most tax specialists consider the additional reporting for mutual funds or ETFs held within an RRSP to be unnecessary for U.S. tax purposes (as the U.S. tax on these funds is deferred until the funds are withdrawn from the RRSP). As such, the negative tax implications would not apply.


We have counselled many individuals on the various options to exit or simplify their holdings in Canadian Mutual funds or ETFs.



Ownership of a Canadian RRSP by US residents and citizens

I am a former Canadian resident who now lives in California. I don’t have any non-U.S. bank accounts with the exception of my Canadian RRSP, which has a balance of $120,000. What do I need to report on my U.S. tax return?


You will likely need to complete the following forms with your 1040 tax return:


Form 8938, Statement of Specified Foreign Financial Assets (this form is required because the value of the asset is more than $100,000 on the last day of the year).

FinCen Report 114, Report of Foreign Bank and Financial Accounts (previously Form TDF 90-22.1, this form is required because the balance is greater than $10,000 in the year).


Additionally, as California does not recognize the Canada–U.S. Income Tax Treaty, you will need to disclose and pay tax on all income and gains earned within the RRSP annually on your California tax return.



Canadian tax residency 

I have recently moved to Canada but I am not yet a permanent resident or a Canadian citizen. What are my tax obligations? 


Residency status determines how individuals are taxed in Canada. ‘Tax residents’ of Canada are subject to Canadian income tax on their worldwide income regardless of where it is earned, paid or credited. Non-residents (for tax purposes) are subject to Canadian income tax on Canadian source income only (e.g., income from a Canadian rental property, employment income earned while physically working in Canada, dividends from Canadian companies). 


You may be deemed a tax resident of Canada if you spend more than 183 days in the country in any calendar year. However, the more common situation is ‘factual’ residency: if you have created or severed significant residential ties in Canada—regardless of the number of days spent in Canada in the calendar year—you may be considered to have changed your residency status. 

Determining Canadian tax residency 

Residency (outside of deemed residency) is not defined in the Canadian Income Tax Act. The Canada Revenue Agency (CRA) relies on standards created by court cases, tax treaties and CRA communications to assist in residency determinations. In general, residency is determined by looking at one’s primary and secondary ties to a country or countries. 

Primary ties include: 

Location of home (rented or owned, as long as it is available for your use). 

Location of spouse and dependents. 

Location of employment or business interests.

Secondary ties include: 

Location of bank and investment accounts.

Location of memberships and associations.

Location of vehicle registration.

Voting registration location. 

What jurisdiction issued the driver’s license.

Location of health care. 

If it appears an individual could be resident in two countries (because the ties are split), the terms outlined in tax treaties are used as a ‘tiebreaker’ to determine residency. 

Residency can affect all of your tax filings and exposure to compliance risk. We encourage you to contact us to discuss your specific situation.  

Citizen Abroad Tax Advisors has been providing expert guidance and advice to Canadian expatriates for more than 40 years. In that time we’ve come to know the most common cross-border and non-resident income tax questions Canadians have when they’re working or living in the United States or overseas.

Frequently Asked Tax Questions for Canadian Taxpayers

Canadians working in the United States 

I have been working in the U.S. for my Canadian employer and continue to get paid on Canadian payroll. I’ve been told I won’t have to pay income tax in the United States because I am in the U.S. for fewer than 183 days in a calendar year. Do I need to file a U.S. tax return? 


Yes, you still need to file a U.S. income tax return. Under U.S. tax law, your earnings are taxable while you are working in the United States regardless of who employs you. However, assuming your salary is not being charged to a U.S. affiliated or related company of your employer through an intercompany agreement, you may not owe any tax at the U.S. federal level according to Article XV of the Canada–U.S. Income Tax Treaty. You must file a U.S. income tax return, however, to claim this treaty exemption. Also, depending on the U.S. state in which you work, the state may not allow for a similar exemption and you may still be required to file a state tax return.


Keep in mind that if you are regularly in the U.S. for a significant period of time (i.e., more than 121 days each year for several consecutive years), you may be toeing the line of being considered a U.S. resident for tax purposes—unless you maintain a closer connection to Canada and file Form 8840, Closer Connection Statement, with your U.S. non-resident tax return.


Your employer may also be exposed from a U.S. payroll withholding perspective if it has failed to withhold U.S. tax on your income earned while working in the United States.


I have been working in the United States for my Canadian employer, who has issued a U.S. W2 (equivalent of a T4) for my U.S. workdays. What should I do with the W2?


You are required to file a U.S. federal income tax return and possibly a U.S. state income tax return using the information reported on the W2. If you are taxable at the federal and state levels, you should be able to recover this tax through the foreign tax credit mechanism in Canada, which should give you a credit for the lesser of the U.S. federal/state tax paid or the Canadian tax actually owing on the same income. The tax withheld as showing on the W2 does NOT represent a final tax to you as a U.S. taxpayer and cannot be used for foreign tax credit purposes on the Canadian tax return until a U.S. or state tax return is filed.


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Cross-border commuters 

I am a Canadian citizen and reside in Canada. I just started working for a U.S.-based company and drive across the border every day to work. Do I have any U.S. tax filing requirements? 


Any time you are physically on American soil you are considered present in the United States for U.S. tax purposes—but to be deemed a U.S. resident you have to meet the IRS Substantial Presence Test for the calendar year. This test requires you to be physically present in the U.S. for at least 31 days in the current year and 183 days during the three-year period that includes the current year and the two preceding years. The days are counted as follows: all days present in the U.S. during the current year plus 1/3 of the days in the first preceding year plus 1/6 of the days in the second preceding year. 

However, there are exceptions to this test, one of which is the number of days in you regularly commute to work in the U.S. from a residence in Canada. You are considered to commute regularly if you travel to the U.S. for work and return to your residence in Canada within a 24-hour period on more than 75 percent of your workdays during the working period (which generally means the calendar year). 


If your days are not counted toward the requirements of the Substantial Presence Test because you are a regular commuter, you will not be considered a resident of the United States. As a non-resident, you will not be required to file any of the disclosure statements such as a Report of Foreign Bank and Financial Accounts (FBAR). 


As a non-resident of the U.S., you remain subject to tax on U.S. source income. Therefore, the employment income you earn while commuting will likely be subject to tax both at a federal and state level—meaning you will be required to file a 1040NR tax return and the equivalent state tax return for non-residents. Because you reside outside of the United States, your federal income tax return would be due on April 15 of each year. Each state, however, may have a different filing due date. Furthermore, any amount of tax due is required to be paid on or before April 15; however, you may be able to extend this filing deadline to October 15. 


As a resident of Canada, you are also subject to tax in Canada on your worldwide income. Therefore, if you pay tax in the U.S. on income that is also taxed in Canada, you may be entitled to claim a foreign tax credit on your Canadian tax return. The foreign tax credit in Canada will not be more than what the Canadian tax would be on the same income. 


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Ownership of non-Canadian investments 

I have a U.S. rental property and some investments in a U.S. Morgan Stanley account. I’ve heard that I need to report these to Canada. As a Canadian resident taxpayer, how do I do this?


As a Canadian resident, you are subject to tax on your worldwide income regardless of where it is earned. This means your U.S. rental income (or loss) and investment income should be reported on your Canadian income tax return. (You are also likely to have a U.S. tax filing requirement if you have U.S. rental income).


Additionally, if the total cost of your non-Canadian assets is more than $100,000 in the year, you may have to complete and file Form T1135, Foreign Income Verification Statement. This form requires you to provide the description of the property, the maximum cost of the property to you in and at the end of the year, and any income or gain realized on that property in the year. Note that this disclosure does not include personal use property (e.g., U.S. vacation property), pension assets (e.g., U.S. 401(k) or IRA), or U.S. securities held within a Canadian brokerage account for which a T3 or T5 was provided in the year to report income.


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Canadian tax residency 

My wife and I are considering moving permanently (i.e., retiring) to Panama. I have heard that if I remain a resident of Canada that Canada will still be able to tax my worldwide income. What are some of the steps I can take to ensure I will not be considered a resident of Canada once I move? 


Canada’s tax laws are based on residency—and your tax residency status is based on your specific facts and circumstances, otherwise referred to as ‘residential ties’. There are two types of residential ties: primary and secondary. Primary ties generally refer to your spouse, dependent children and house. Secondary ties include your personal and financial connections with Canada. The fewer ties you have in Canada—and the more you establish in your new location—will assist in this change in residency. 


Your answers to the following questions may affect your residency status: 


What is happening with your home in Canada? Will it be rented or be vacant? If you return to Canada, would you stay at this home? 

If you return to Canada, how long will your visits be and how frequently will you return? 

What is happening with your personal belongings? Will these items move with you, be stored in Canada or sold? 

Will your vehicle continue to be registered in Canada? What have you done with your driver’s license? 

If you belong to any clubs or professional memberships, will you be considered a resident or a non-resident member? 

Have you advised your financial advisors and banks that you will be relocating outside of Canada? 

Have you advised your employer that you will no longer be residing in Canada? 

Have you advised your provincial health office of your permanent relocation? 


It should be noted that you are not required to complete Form NR73, Determination of Residency Status (Leaving Canada), to the Canada Revenue Agency (CRA) prior to consulting with a tax professional. We recommend consulting with a tax advisor who specializes in this area of taxation prior to consulting with CRA. Having the answers to the above questions will greatly assist your tax advisor in making the correct residency determination and providing you with the guidance on the steps you will be required to take to obtain non-residency. 


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Snowbirds retiring to or in the United States 

As a recently retired Canadian citizen, I plan to spend my winters (between the months of November and March) in Florida. I will return to Canada for the remainder of the year. I know that I am still a tax resident of Canada, but are there any U.S. tax implications for ‘snowbirds’ like myself? 


Canadians present in the U.S. for extended periods of time should be aware of the IRS Substantial Presence Test, which is used to determine whether a person is considered a U.S. tax resident for income tax purposes. This test is based on days of presence in the U.S. in a calendar year, with “day of presence” defined “as any part of a day”. If you have more than 183 days of presence in the current calendar year, you have ‘substantial presence’ in the United States. 


If you’ve spent fewer than 183 days in the U.S. in the current year, you must calculate the Substantial Presence Test based on current and prior years. The first part of this test asks whether you have 31 or more days of presence in the current year. If the answer is yes, those days are added to 1/3 of your days from the first prior year plus 1/6 of your days from the second prior year. If the total number of days is 183 or greater, you are considered to be a U.S. resident. If you do not have 31 days of presence in the current year, you are not considered a U.S. resident. 


If you have never spent more than 121 days in the U.S. in any calendar year, you will not be considered a U.S. resident under either variation of the test. 


If you do not have substantial presence: 

If you do not meet the requirements of the Substantial Presence Test, as a non-U.S. resident, you would remain subject to U.S. tax only on U.S. source income and may have the requirement to file a U.S. tax return. 


If you do have substantial presence: 

If you do meet the requirements of the Substantial Presence Test and were present in the U.S. for fewer than 183 days in the current calendar year, you can file Form 8840, Closer Connection Exemption Statement for Aliens. This form acknowledges that you met or exceeded the Substantial Presence Test but are not going to file a U.S. income tax return because you maintained a closer connection to Canada, where you are subject to tax on your worldwide income. This form should be filed no later than June 15. 


If you have more than 183 days of presence in the U.S. in the current calendar year, you will be required to file an annual U.S. tax return reporting your worldwide income. You may be able to claim a provision under the Canada–U.S. Tax Convention that would allow you to claim Canadian residency and file as a U.S. non-resident tax return. By making this claim, your U.S. tax obligation would be minimized. Although using the treaty may allow you to avoid calculating income tax as a U.S. resident, the requirements to file forms required by U.S. residents—for example, foreign (i.e., non-U.S.) bank reporting, foreign trust reporting for interests in TFSAs or family trusts, and U.S. resident ownership of foreign corporations—may continue to exist. In many cases, these forms carry significant penalties should you fail to file them on a timely basis. 


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Departure tax 

I have taken all of the necessary steps to become a non-resident of Canada and am filing my last Canadian income tax return. What are the most important things I need to know about filing my tax return in this year of departure?


From an income tax perspective, nothing is required before filing your final tax return from Canada before you leave. You will need to report the change in residency by filing a part-year return and disclosing a date of departure to the Canada Revenue Agency (CRA). Tax returns are due on the regular due date and no clearance from CRA is required.


If you have a homebuyers plan balance or lifelong learning plan balance, these amounts will be included as income in your year of departure unless you repay the amount outstanding prior to 60 days after you become non-resident of Canada. If you have deferred stock options, the associated income will be included on your departure return in the year you become a non-resident of Canada.


Deemed disposition of property


To ensure your Canadian tax is paid on all gains accrued while you were a resident in Canada, you will be deemed to have disposed of all of your property at fair market value on your date of departure. This ‘deemed disposition’ applies to most property (although there is some property that Canada retains the right to tax). The tax that results from this deemed disposition is commonly referred to as a departure tax. To disclose the gains or losses on your assets, you will need to file with your tax return Form T1243, Deemed Disposition of Property by an Emigrant of Canada.


Where the deemed disposition results in a taxable gain, you can either pay the tax immediately or defer payment until the property is actually disposed of (with no interest) provided ‘adequate security’ is given to CRA. No security is required for the first $100,000 of gain (i.e., $50,000 of taxable gain). To defer the payment of tax, file Form 1244, Election to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property, on or before April 30 of the year after you depart from Canada.


If the fair market value of all the properties you owned when you left Canada was more than $25,000, you will also be required to complete and submit Form T1161, List of Properties by an Emigrant of Canada. The penalty for not filing this form is a minimum of $100 up to a maximum of $2,500. Some types of properties are excluded from this list, including cash, pension plans, RRSPs, RRIFs, RESPs and personal-use property (e.g., household effects, car, clothing) where the fair market value is less than $10,000.


Once this tax return is filed—and assuming you no longer receive Canadian source income—you should not have any further Canadian tax filing requirements.


Sound complicated? It is for many! Contact us for more information on how we can help!

Frequently Asked Questions for Non Resident Rental Returns

Non-resident ownership of rental property in Canada

I don’t live in Canada but I am considering buying a residential investment property in Canada. What are the tax considerations? 


With the understanding that you are not considered a resident (for tax purposes) of Canada, your property manager or a Canadian resident agent will have to withhold non-resident tax at the rate of 25 percent on the gross rental income collected on your behalf. This is a tax that must be sent monthly to the Canada Revenue Agency (CRA) and is refundable only if your tax is computed to be less on the filing of a tax return with CRA. 


Many of our clients find their own tenants and do not use a formal property manager. As non-residents, they must appoint a Canadian resident to act as an agent on their behalf—often a family member or friend. Because there are significant responsibilities with this role, Citizen Abroad Tax Advisors can help you understand them to ensure your agent meets his or her obligations. 


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After property taxes, insurance and mortgage payments, I expect to experience a loss on my Canadian rental property. Does tax still have to be withheld? 

You can have the 25 percent gross rental income tax reduced throughout the year by filing a ‘budget’ for the rental property with the Canada Revenue Agency (CRA). The budget is submitted with Form NR6, Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real Property, which is signed by you and your agent or property manager and then sent to CRA for approval. 


Form NR6 is your notice to CRA that you are choosing to file a tax return annually under Section 216 of the Income Tax Act. Until you receive approval from CRA, your property manager or agent must withhold tax on the gross rental income. Once approved, your property manager or agent can withhold non-resident tax at the rate of 25 percent on the net rental income, which, if you expect a loss, would be zero withholding. It should be noted that Form NR6 has an annual filing requirement. 


Form NR4, which is an annual reporting statement of rents collected and tax withheld, must also be filed by your agent or property manager each year. 

Finally, if you are a non-resident property owner you will also have a tax filing requirement for your rental property on or within six months of the end of the calendar year (if NR6 filed) or within 24 months of the end of the calendar year (if 25% tax is withheld). This is a separate and distinct tax return (commonly referred to as a ‘Section 216’ tax return). If it is not filed timely, CRA will almost certainly assess non-resident tax of 25 percent on your gross rental income. While this return is due in June, any tax owing must be paid on or before April 30, otherwise interest will be assessed. 


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Sale of Canadian real estate

I am selling my rental property in Canada. I have never resided in this property. Although I was a prior resident of Canada, I left many years ago and have been filing non-resident rental tax returns annually. Is there anything I need to do for Canadian tax purposes? 


As a non-resident of Canada disposing of a rental property, you will need to advise the Canada Revenue Agency (CRA) of the sale by completing Form T2062, Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property, no later than 10 days after the property is sold. Additional documents will also need to be forwarded to CRA along with Form T2062, including your original purchase and sales agreements. 


With the Certificate of Compliance, your real estate lawyer will be required to withhold non-resident tax of 25 percent of the net gain on the sale. Without the certificate, not only will there be a requirement to withhold 25 percent of the gross proceeds but you will also be subject to a penalty of $25 per day to a maximum of $2,500 for failure to file. 


Finally, you will be required to file a T1 tax return by April 30 of the year following the sale, disclosing the gross proceeds, the original purchase amount and additional outlays or expenses related to the sale. You will also need to include Copy 2 of Form T2068 with your tax return. 


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Ownership of rental property in the United States 

My spouse and I just purchased a condo in Florida. We expect to spend only two or three weeks at the condo each year and may have our family use it for a couple more weeks during the year. The condo will be available for rent in a rental pool for the remainder of the year. Because the condo operates at a loss annually, do we still need to file a U.S. tax return? 


Yes. If you have collected or been credited for rents on your condo, you are likely required to complete a U.S. non-resident income tax return. Additionally, the rental income/loss should be reported on your Canadian tax return. Depending on the amount of rental use versus personal use, you will be required to prorate your expenses between rental and personal—and may be limited in the amount of loss you can claim on both your U.S. and Canadian tax returns. 


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Sale of U.S. real estate 

We are selling the vacation condo we have owned in California since 2002. We have never rented the condo out, using it only for personal purposes. Is it true that we will lose 15 percent of the selling price to U.S. federal tax and potentially more to California state tax? 


The U.S. Foreign Investment in Real Property Tax Act (FIRPTA) is a federal tax law that requires the purchaser (or the purchaser’s agent) to withhold a 15 percent tax on the proceeds (i.e., selling price) of any foreign person’s sale of U.S. real estate. If the sale price of the property you are selling is more than $300,000, the 15 percent federal tax will apply unless you request a reduction from the IRS (i.e., ask that the withholding apply to the net gain only). It is important to note that the 15 percent tax is not a final tax and a U.S. individual income tax return should also be filed to report your final gain or loss. 

If the sale price of the property is less than $300,000 and the purchaser intends to reside at the property, there may be an exception to the 15 percent withholding under FIRPTA. 


You must also report the disposition on your Canadian income tax return and determine whether you will be claiming any exemption for any or all of the taxable gain for Canadian purposes (if you are eligible). Any U.S. tax paid would be creditable against Canadian tax otherwise payable on the U.S. gain through the foreign tax credit mechanism in Canada, which should give you a credit for the lesser of the U.S. federal/state tax paid or the Canadian tax actually owing on the same transaction. 


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Frequently Asked Tax Questions for Expatriate Assignment Tax Programs

We have 10 employees of our US entity in Ottawa for 2 months working on a project for our Canadian entity. Given that they will be paid by the US entity and in Canada for a short period of time, does the employer or employee have any Canadian tax obligations?

Short answer, yes.


At the bare minimum, the US entity would be required to report the salary of the employees to Canada Revenue Agency and remit payroll withholdings unless a withholding waiver is obtained either on a blanket level (covering all employees) or on an individual level.


However, if a waiver is not obtained, remitting payroll tax withholding for the employee does not necessarily mean this is a final tax obligation. An individual Canadian tax return would need to be filed by the employee and either a refund obtained as the employee could be exempt from final Canadian taxation under the Canada-US tax treaty or a refund or additional tax liability could be calculated on the filing of the return if the employee is taxable in Canada.


By the way, a similar process is required for Canadian employees temporarily working in the US regardless of their final tax liability.

What are the company obligations to the employee in the event our US employees temporarily working in Canada or are relocating to Canada for a longer term assignment (2-3 years) are required to file and pay Canadian Income tax?

It depends.


As figuring out the complexities of multi-country and cross-border taxation are often overwhelming, many employers choose to cover or provide, at a minimum, foreign country (in this case Canada) tax return services to employees. Many companies also decide to provide home country (in this case the US) tax return services to ensure that the employee is not subject to double taxation.


Other companies, understanding that a US employee working in Canada may be subject to higher income tax rates in Canada on the income earned while working there, may choose to ‘equalize’ the employee on the difference between the US tax and the Canadian tax on the same income (essentially reimburse the employee for the additional Canadian tax paid due to working in Canada). This typically involves providing the employee with tax return services and ensuring that payroll on both sides of the border is aware of the steps required to make this possible.


Contact us learn more about tax equalization and methods used to ensure income tax is not a barrier to your employee’s willingness to travel and work cross-border for your company on a project or longer term basis.