US Expat Taxes Explained: Filing Taxes as an American Living in Canada
If you are a citizen or permanent resident of the United States, you are obligated to file US expat taxes with the federal government each year, regardless of the country in which you reside.
In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with Foreign Bank and Other Account Reporting (FBAR) Form 114, in addition to Form 8938 Statement of Specified Foreign Financial Assets.
While the US is one of the few governments that tax the international income of their citizens and permanent residents who reside overseas, it does have special provisions to help protect them from double taxation including:
- The foreign earned income exclusion allows you to decrease your taxable income on US expat taxes by the first $105,900 in 2019 earned as a result of your labors while a resident of a foreign country ($107,600 in 2020).
- A foreign tax credit that could allow lower your liability on US expat taxes by amounts paid to a foreign government on a dollar-to-dollar basis.
- A Foreign Housing Exclusion that allows an additional exclusion from income for certain amounts paid for household expenses that occur as a consequence of living abroad.
With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize or even eliminate your tax bill on your US expat taxes. Please do note that even if you do not believe that you owe any US income taxes you will, most likely, still be required to file a return.
Country Income Tax Rates
Federal tax rates per the Canada Revenue Agency are:
In addition to federal taxes, the provinces and territories also charge taxes with rates for those earning over $150,000 ranging from a low of 10% up to 21%! All provinces are different, and you can get a complete listing of tax rates at the website above.
Country Tax Due Date
For most individuals, April 30 is the magic date by which your Canadian tax return (T1), with payment included, must be filed. The self-employed have until June 15 to file, but still must pay by April 30. Non-residents also receive an extension to June 30.
Social Security Agreement with the United States
The US and Canada have a social security agreement in place that can be of benefit to those who have contributed to both systems over their working lives or who have spouses or parents who have contributed the plans of one or both countries. In addition, the agreement provides that a period of contribution to one system can be counted for the meeting the residency requirements of the other country.
Social Security in Canada
Canada’s public retirement program has two legs, the poetically named Old Age Security and the Canada Pension Plan. Generally, the Old Age Security is a monthly pension available to long-term Canadian residents of lower or middle incomes. The Canada Pension Plan is a contributory plan similar to Social Security on US expat taxes in which the employee pays 4.95% of the first 48,300 of their wages and the employer matches that amount dollar for dollar. For both plans, the normal retirement age in which the benefits can be accessed is 65 with exceptions for special circumstances. Unlike the Social Security that you may be used to in the States, the Canada Pension Plan is actually partially funded.
In addition to the public retirement options, Canada has a tax-deferred retirement savings option called a Registered Retirement Savings Plan or RRSP. Contributions are excluded from income in the year that they are contributed and taxed as ordinary income upon withdrawal.
Is Foreign Income Taxed Within the Host Country?
Like US residents, Canadian residents and citizens have the joy of paying taxes on their worldwide incomes. However, certain non-resident individuals are only taxed upon their Canadian sourced income. Note that the big difference between Canadian and US treatment is the issue of residency. US citizens and permanent residents are subject to US taxes wherever in the world they reside. In contrast, Canadian citizens who are not resident in the country have different requirements than residents, and the benefit that most income from outside Canada is not subject to Canadian income tax.
Canadian Residency for Tax Purposes
As mentioned above, whether are not you are considered by the Canada Revenue Agency to be a resident or non-resident can have important tax consequences for you. Per the Canada Revenue Agency, factors in determining whether you are considered a Canadian resident include: whether you have a home in Canada; whether you have a spouse, common law partner, or children in Canada; whether you have personal property in Canada; and what social and economic ties you have to the country. Also, non-residents who have stayed in Canada for more than 183 days in a year may be deemed Canadian residents and subject to income tax on their worldwide income.
Severing residency is a taxable event in Canada, with residents emigrating from Canada deemed to have disposed of all their property at fair market value and subsequently reacquired it. The net effect of this is for you to owe capital gains tax on the presumed disposition. Certain shelters can protect you from this tax if your stay in Canada is anticipated to be less than five years, but need to be structured in advance of immigrating to Canada. Please note that this applies to all residents of Canada, not just Canadian citizens. The important point to take away here is that tax planning needs to be done both prior to immigrating to Canada and emigrating from Canada.
Tax Treaty Between the United States and Canada
Canada and the US have a tax treaty in place that dates back to 1980 and has been revised four times since. Among the provisions of the tax treaty is an information-sharing agreement that allows the two governments to share information and cooperate in the collecting of revenue. Another aspect of the treaty is establishing what income is taxable to which country and what income may be exempt. This is especially important for individuals and organizations engaged in cross-border commerce. The treaty also includes the credit for foreign taxes the IRS gives to US citizens and permanent residents on their US expat taxes when they have paid Canadian taxes.
For the Self-Employed
The self-employed are subject to even tighter filing requirements on US expat taxes. If you have income of $400 or more from self-employment, then you have to file US expat taxes, no matter what side of the border the income was earned.
Canadian businesses can be organized in a number of different entities, including sole proprietorships, partnerships and limited partnerships, and corporations. Each of these entities offers varying levels of legal protections and is encumbered by different requirements on US expat taxes.
Sales Tax in Canada
In Canada, sales tax, called the Goods and Services Tax, is assessed both at the national and provincial level. The federal level is 5%, and the provinces add an additional amount ranging from 0-10%.