Canada has been becoming more popular for US Americans lately. There are many reasons for moving to Canada from the USA. For some, it is the stunning natural scenery and welcoming culture. Others are driven by politics or business opportunities. In addition, US citizens living in Canada get to enjoy special foreign tax treatments.
Before moving to Canada as American, be aware of the tax implications both in Canada and the United States.
In this article we cover:
- US-Canada tax treaty
- Canada tax on US Social Security benefits
- Self-employed taxpayers in Canada
- US LLC taxed as a corporation in Canada
- Americans employed in Canada
- Canada and US Foreign Tax Credits
- Canada tax deadline
- Special Canada tax exemptions
- US tax treatment of Canadian pension plans
- Canadian charitable contributions
- And importantly: What to do BEFORE moving to Canada from the US
US-Canada tax treaty
Just like the United States, Canada taxes its residents on their worldwide income. Thanks to the tax treaty between the US and Canada, Americans living in Canada can avoid being double-taxed.
The Canada-United States Tax Treaty ensures that a resident of Canada is not taxed by both countries, United States and Canada, on the same income in the same year.
One provision in the treaty is the agreement to share data between the governments of the two countries in the process of collecting tax revenue. This means you can’t hide income in one country from the other country.
Another provision establishes the income that is taxable in each country and the income that might be exempt from taxes. This becomes very important for people and companies engaging in commerce across the border.
Yet another treaty provision makes the foreign tax credit available to both permanent residents and citizens of the United States when Canadian taxes are paid.
Canada tax on US Social Security benefits
Under the treaty, US social security benefits paid to a resident of Canada are taxed in Canada as if they were benefits under the Canada Pension Plan. However, 15% of the benefit amount is exempt from Canadian tax.
That means, if you receive US Social Security benefits and are a resident of Canada, Canada will tax 85% of the benefits you receive. Fortunately, you can take a Foreign Tax Credit on your US tax return.
Self-employed taxpayers in Canada
The Canada Revenue Agency (CRA) taxes self-employed Americans conducting business in Canada on their net profits (income minus expenses) if they have a permanent establishment there.
A permanent establishment is a fixed place of business through which you are conducting business. This can be
- A brick and mortar office or building such as a warehouse or factory, or
- An agent (person) who is a Canadian resident performing actions on behalf of the business.
Even if you don’t have a brick and mortar building and don’t reside in Canada continuously, the CRA may still treat you as if you had a permanent establishment. This applies to you if you meet one of the two criteria:
- If you are present in Canada for more than 183 days during a 12-month period and during that time you earned more than 50% of your gross income from services you performed in Canada; or
- Your business provided services for 183 days or more to residents of Canada or to other businesses that have a permanent establishment in Canada.
Since the US and Canada have a Social Security Totalization agreement, it generally means you will only be paying self-employment tax to the country you are residing in while self-employed. It is important to obtain a certificate of coverage from the local Canadian office to be able to show the IRS you are paying into their system.
US LLC taxed as a corporation in Canada
Canada does not treat a US Limited Liability Company (LLC) as a pass-through entity like the US does. Instead, Canada does not recognize and tax this entity structure as anything other than a corporation.
This means that if you are running your business in Canada through your US LLC, the CRA will impose corporate tax rates ranging from 25%-31%. The specific tax rate depends on the province where the permanent establishment is located.
You may also have to pay an additional 25% branch tax on any amounts earned above CAD $500,000.
Depending on the structure of your LLC , certain tax treaty benefits may apply that will help reduce your Canadian tax liability. Consult with an experienced international tax accountant.
Americans employed in Canada
The pay you receive from your employer will be taxed by the Canada Revenue Agency (CRA). Canadian employers automatically withhold Employment Insurance (EI) premiums, Canada Pension Plan (CPP) contributions, and income tax, and they remit those payments to the CRA.
As a US citizen you also still need to report your Canadian income on your US tax return. You may even have to pay US tax on it. You can use the Foreign Earned Income Exclusion (FEIE) and/or the Foreign Tax Credit (FTC) to avoid or reduce your US tax liability when living in Canada.
Personal taxes are generally higher in Canada than in the United States. Therefore, claiming the Foreign Tax Credit (FTC) is often better for US expats in Canada. Also, they will be able to carry forward the unused FTC on their US tax returns.
Additional factors go into the selection of FEIE vs FTC. A tax accountant with experience in expat taxes can help you decide the best approach for your specific situation. If you need an experienced tax accountant, you can schedule a consultation with us.
Canada and US Foreign Tax Credits
The US and Canada both allow credits to be taken on their respective income tax returns for taxes paid to the other countries on income earned there. This again helps to alleviate double taxation.
Canada tax deadline
In Canada, the due date for personal tax returns is April 30th. There are no extensions.
The US deadline for individual tax returns is April 15th. Americans living in Canada, however, get an automatic 2-month extension, so their US tax return becomes due on June 15th. In 2020 however, due to the coronavirus situation, the deadline is extended to July 15, 2020.
This means that Americans in Canada usually file and pay the Canadian tax first. Then they file their US return and can use the Foreign Tax Credit to offset their US tax liability.
Special Canadian tax exemptions
The following groups are exempt from Canadian income tax on any payments they receive from any source outside of Canada for maintenance, education, or training during this time.
- Full-time students
- Business trainees (to gain business experience)
This perk can only be claimed for a period of one year from the date they arrived in Canada for training purposes.
Furthermore, US government employees living in Canada don’t need to pay Canadian income tax. Instead, they report their income on a US tax return and cannot use the Foreign Earned Income Exclusion. That means their income in Canada is fully taxable in the USA.
US tax treatment of Canadian pension plans
Americans working in Canada will likely pay into some sort of pension arrangement through their employer. The US tax treatment of the Canadian pension plan will depend on the type of retirement plan. We can assist you in determining this.
Previously, a typical Canadian retirement plan was at risk of being a PFIC (Passive Foreign Investment Corporation). A PFIC incurs unfavorable tax treatment in the US. However, in March 2020, the IRS just announced a new relief so that these pension plans are no longer considered as PFIC.
Canadian charitable contributions are tax-deductible in the USA
You can take a charitable deduction on your US return for contributions made to Canadian charities. If you have both US and Canadian income, the amount you can deduct will depend on your adjusted gross income and how much of it you earned in each country.
What you should do BEFORE moving to Canada from the USA to save taxes
This is probably one of the most neglected areas we have seen in dealing with Americans moving to Canada.
Bank and investment accounts
Before you move, take the opportunity to consolidate all your investment accounts, IRAs, 401(k)s, and brokerage accounts. In addition, reduce the number of bank accounts down to only one checking account and one savings account.
This is helpful because tax residents in Canada must report specified foreign investments on Form T1135. Canadian taxpayers must file Form T1135 with their tax return if the total value of their foreign property exceeds CAN$100,000 at any time during the year. Failure to file Form 1135 may result in multiple penalties.
Home or real property
Also, consider selling your home, and liquidating as many of your personal assets as possible including your automobiles, before moving to Canada. This is because when the home or assets are sold, the owner may realize a capital gain and potentially incur Canadian taxes.
For Canadian tax purposes, the cost of your properties at the time you move to Canada is equal to their fair market value on the date of your arrival. This cost is used to calculate your future capital gains or losses on the sale of properties.
Whether you incur a capital gain tax on your home depends on whether the property was your principal residence. If it was your principal residence for every year you owned it, then you do not have to pay tax on the gain. This is called the principal residence exemption.
A property qualifies as your principal residence for a year if it meets all of the following four conditions:
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
- You own the property alone or jointly with another person.
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
- You designate the property as your principal residence.
If at any time during the period you owned the property, it was not your principal residence, or solely your principal residence, you might not be able to benefit from the principal residence exemption on all or part of the capital gain that you have to report. As mentioned above, Canada calculates the cost basis for the tax using the market value of the property on the move date.
Likewise, Americans moving to Canada should consider selling personal properties (such as cars and boats). This is because Canada taxes the gains from the sale of personal properties.
When you dispose of personal-use property, in most cases you do not end up with a capital gain.This is because this type of property usually does not increase in value over the years. As a result, you may end up with a loss. Although you must report any gain on the sale of personal-use property, generally you cannot claim a loss.
When you dispose of personal-use property that has an adjusted cost basis (ACB) or proceeds of disposition of more than $1,000, you may have a capital gain or loss. You must report any capital gain from disposing of personal-use property.
However, if you have a capital loss, you usually cannot deduct that loss when you calculate your income for the year. In addition, you cannot use the loss to decrease capital gains on other personal-use property. This is because if a property depreciates through personal use, the resulting loss on its disposition is a personal expense.
Dealing with US and Canada taxes does not have to be difficult
Many US citizens moved north and made Canada their temporary or long-term home. Having to deal with the taxation in two countries can easily leave expats overwhelmed. Fortunately, expat tax accountants like Online Taxman specialize in the nuances of international tax.
Please keep in mind that this article can only give a general overview. It cannot replace advice from a qualified tax accountant, as every situation is different.
If you would like to avoid the headache and paperwork of expat taxes this year, contact Online Taxman for help.
Set up a consultation with one of our expert expat accountants.