Canada has always attracted American expats due to its proximity to the USA, political stability and Canada’s economic expansion. Many American expats in Canada don’t realize the complexity of the Canadian tax system before moving to Canada. American expats Canada must know that there are three levels of Canadian taxes: federal, provincial and municipal.
We get many expatriate tax questions from American expats in Canada. Do you offer US expatriate tax services for American expats Canada? How much is the foreign income tax rate in Canada? How should expats report their Canadian pension accounts?
Expatriate Tax Rules for American Expats Canada
The first expat rule is that US citizens and green card holders are taxed on their worlwide income whether they live in Montreal or New York. However, US expats Canada can avoid double taxation by applying several IRS provisions.
- Foreign earned income exclusion. American expats Canada can exclude up to $101,300 for 2016 on US expatriate tax returns if they have foreign earned income.
- Foreign housing exclusion. Additionally, American expats Canada may be able to deduct foreign housing expenses like rent, utilities if they can claim foreign income exclusion.
- Foreign tax credit. The third option is that American expats Canada can take a foreign tax credit for foreign taxes paid in Canada.
Additionally, American expatriates in Canada may be required to file the FBARs if they have foreign financial accounts (including RRSP) with an aggregate balance over $10K. To read more about FBARs, please review What is FBAR.
Tax system in Canada – FAQ
Are American expats Canada taxed on their worldwide income?
American expats Canada who are considered residents are subject to Canadian income tax on worldwide income. Non-residents are subject to tax only on Canadian-source income, however, double taxation treaties must be reviewed to minimize taxes.
Who is considered a tax resident in Canada?
As a general rule, American expat in Canada is considered a resident in one of the following cases:
– s/he is an “ordinarily resident”. Ordinarily resident is the person who has residential ties with Canada and doesn’t have these ties with another country.
– s/he lives in Canada as “permanent resident”.
What is the tax year in Canada?
Canada has a calendar tax year. This is similar to the US tax system.
What are foreign income tax rates in Canada?
Federal tax rate for residents has a progressive scale with a maximum rate of 29%. Most provinces except for Quebec use a federal tax amount and apply their own tax rates. Residents of all provinces except for Quebec file one tax return to pay federal and provincial taxes. Residents of Quebec are required to file a separate tax return.
Non-residents are subject to the same federal and provincial tax rates as residents. Although, if an income is not allocated to a province, an additional tax of 48% of the federal rate is applicable.
What types of income are taxable in Canada?
Generally, employment income is taxable as well as the following fringe benefits like board and lodging, vacation trips, stock option benefits, personal use of company’s vehicles, employee’s premium to provincial health insurance plans paid by an employer. Some benefits are not taxable like subsidized meals, certain moving expenses, employer’s contribution to certain registered pension or deferred profit-sharing plans, private health insurance plans and group sickness or accident plans. Employer’s contribution to pension or profit-sharing plans is taxed when an employee receives a distribution from the plan.
Non-residents are taxed on services performed in Canada as well as on gains from disposition of taxable Canadian property. Other passive income such as dividends, rents, and royalties is subject to source withholdings.
Can American expats Canada file a tax return on overseas taxes with a spouse?
Spouses are not allowed to file a joint tax return in Canada.
Is it a requirement to file a Canadian tax return and pay overseas taxes every year?
Canadian tax return must be filed if there is a tax liability or a refund due. Due date is April 30.
Does Canada have a tax treaty or social security agreement with the USA?
The USA and Canada signed a double tax treaty agreement in 1980 and it has been amended 5 times. Also, due to a totalization agreement signed between the USA and Canada on August 1, 1984, expats can claim social security benefits (except for US Medicare Program) for a job in a corresponding country. American expats Canada are advised to consult an expatriate tax professional to review issues related to overseas taxes.
These are some of the basic tax questions that American expats Canada must review before moving to Canada or filing US expatriate tax returns.
American expats Canada who have questions about US expatriate tax preparation, RRSP, FBARs, FATCA or any other overseas tax issue, please seek help of an expatriate tax professional. International tax experts at Artio Partners will be pleased to answer expat tax questions and to assist with US expatriate tax preparation.