Taxes in Canada for US Expats

There are more than one million U.S. expats living in Canada and paying tax to the Canadian government.  All of them are still required to file a U.S. tax return every year, report their worldwide income and pay any tax imposed by U.S. laws.

It is usually unnecessary to invoke the treaty to prevent double taxation.   This is because both jurisdictions recognise foreign tax credits.  Read more about foreign tax credits here - https://htj.tax/2021/04/lets-talk-about-foreign-tax-credits-form-1116/

Regardless, the tax laws differ greatly between the two countries.

Mandatory Filing

As previously mentioned, all US exposed persons must comply with US tax rules regardless of where they reside.  A return is due even though no taxes may be payable.

Under the treaty with the U.S., Canada shares taxpayer information with the IRS. For example, Canadian banks must report information to the IRS on their U.S. account holders.

If a U.S. expat has financial accounts in Canada and elsewhere?  An (Foreign Bank Account Report) FBAR and / or Form 8938 may also be due -
https://htj.tax/2020/10/fbars-and-form-8938-2/

Assets in this category include registered retirement savings plans, stock, pensions, annuities, partnership trusts, mutual funds and insurance contracts.  This form is required to ensure that the income attributable to these assets is properly reported on the individual’s U.S. 1040 income tax return.

Other Reporting Requirements

The IRS also requires expats to report shares they may have in a Passive Foreign Investment Company on form 8621. This includes owning non U.S. mutual funds. It also includes dividends, interest, rent, royalties, capital gains from the sale of securities.
https://htj.tax/2015/08/what-is-pfic/

Persons who have an investment in a foreign corporation may need to file a 5471 form. They may also have to file form 5471 in the year in which they obtain 10% or go from owning more than 10% to less than 10% -https://htj.tax/2014/03/the-scariest-us-tax-form-ever/

Avoid Double Taxation

The vast majority of expats living in Canada rarely pay any taxes to the U.S. government, because their tax bill in Canada is higher than it would be in the U.S.  As explained above, foreign tax credits allow them to offset taxes paid to the CRA against liabilities to the IRS.

Special Treatment

1. There are a number of tax free financial instruments available under Canadian law, which are taxable under U.S. law. These include Registered Retirement Savings Plans, Tax Free Savings Accounts and Registered Educational Savings Plans, Canadian-based mutual funds, and capital gains on selling one’s primary residence.

2. 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.  Of course, you can take a Foreign Tax Credit on your US tax return.

3. The US tax treatment of the Canadian pension plan will depend on the type of retirement plan. 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 as explained in the link above. However, in 2020, the IRS just announced that these pension plans are no longer considered as PFIC.

4.  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.

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.

Corporate and provincial taxes are due.  Furthermore, an additional 25% branch profits tax may be due 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.

You should speak with a US / Canada tax team.

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