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 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.
Find your tax question among the categories below:
Frequently Asked Tax Questions for Canadian Taxpayers
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.
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.
|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?|
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?
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 licence?
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.
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.
|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?|
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?
Sound complicated? It is for many! Contact us for more information on how we can help!