Find your tax question among the categories below:
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?
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.
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.
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 10 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 10 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 10 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 10 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 10 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.
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?
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.
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