The Complete Tax Guide for US Expats in Canada

Today, we at CPAs for Expats are launching a new series here on the blog. We are going to be putting out guides for US citizens abroad from specific countries which will help with navigating US tax from the point of view of their countries of residence. Please let us know what you think of these guides by sending us a note, and feel free to let us know if there is a country you would like to know about which we haven’t covered. First up, America’s closest neighbor: Canada.

Canada At a Glance

Official Name: Canada Capital city: Ottawa Currency: Canadian Dollar (CAD) Area: 9,984,670 km2 (3,855,100 sq mi) Population (estimated, 2020): 38,005,238 Head of State (2020): Elizabeth II Prime Minister (2020): Justin Trudeau

To many Americans, Canada can seem like practically a different universe: a land full of polite people who mostly speak English but somehow don’t have American citizenship—a country so close, yet so far away. To others, Canada remains the country that invaded the United States in 1812 and burned down the White House (never mind that Canada as an independent entity didn’t exist at the time, and the British get all the blame for the attack on Washington, DC). But for nearly 800,000 US citizens, Canada is home. Cities like Toronto, Calgary, Vancouver, and Edmonton have significant populations of US expats, as do other areas of the country near the border with the United States.

US expats living in Canada, like other US expats, have to straddle both countries’ tax systems and be sure to keep up on filings for both the IRS and the Canada Revenue Agency (CRA) every year. Today, we will cover some common issues US expats in the Great White North will have to deal with, and hopefully we will be able to alleviate some concerns that you may have.

Canadian Tax Overview

Some basics before we get into the nitty-gritty:

• Canada’s tax year is January 1 to December 31, just like the United States.

• The Canadian tax return (Form T1) is generally due April 30, with no extensions possible in most years.

• If you are self-employed, then the tax return is due June 15, but any tax due must still be paid by April 30.

Residency

In Canada, as in most countries, residents are taxed on their worldwide income—whether or not the income is earned from Canadian sources. While there are many factors taken into consideration when determining whether a person is a Canadian resident or not, the following are usually good indicators of being a resident:

• If you have a spouse or partner in Canada;

• If you own a home in Canada;

• If you have dependents living in Canada;

• If you are in Canada for more than 183 days during the year.

• If you are a non-resident, then you would only report Canadian-source employment, business, or property-related income to the CRA. Conversely, non-residents are not entitled to certain personal tax credits on their Canadian return if less than 90% of their income is from non-Canadian sources during the year.

• Residents and non-residents are taxed at the same rates and have the same due dates for filing and payments.

Income Tax Rates

Taxpayers in Canada have to pay Federal and Provincial (or Territorial) tax, similar to residents of the United States, who pay taxes to the IRS and to state governments. The main difference is that most Canadian provinces (with the exception of Quebec) do not require the filing of a separate return; the Federal government collects the provincial taxes on behalf of the provincial governments.

Federal tax in Canada is bracketed, similar to US tax. For tax year 2020, rates range from 15% for taxable income below $48,535 CAD to 33% on incomes above $214,368 CAD. Quebec residents receive a credit on the Federal tax of 16.5% (the “Quebec Abatement”) because of the way the province chooses to receive its health and social transfers.

Provincial tax depends on the province or territory charging it and is also bracketed. Rates range from 4% (for income below $46,277 CAD in Nunavut) to an eye-watering 25.75% (for Quebec residents with incomes above $108,390 CAD) on top of Federal tax. Non-residents whose income is not allocable to a province or territory are charged a surtax of 48% of their federal tax to make up for the fact that provincial tax is not being paid.

Canadian Social Security Tax

Canadian residents pay into the Canadian Pension Plan or the Quebec Pension Plan (CPP or QPP), as applicable, similar to the way US residents pay for Social Security Retirement—through withholding on their paychecks. For CPP, the tax rate for tax year 2020 is 5.25% up to the “yearly maximum pensionable earnings” limit of $58,700 CAD. Employers contribute the same amount. Self-employed individuals (just like in the United States) pay both the employer and employee portions of the tax. In Quebec, the rate is 5.7% up to a cap of $58,700.

Canadian Employment Insurance

Canadian taxpayers are also required to pay Employment Insurance (EI). For 2020, the tax rate is 1.58% up to the earnings cap of $54,200, paid by both employees and employers. For EI, self-employed individuals pay the same amount as employees—the rates are not doubled like they are for CPP and QPP.

Taxes For US Citizens Working In Canada

OK, that was all very interesting, you say, but where does that leave US citizens living and working in Canada in regards to their taxes? Glad you asked. Let’s go…

Filing requirements in the United States

The United States taxes its citizens and residents (including Green Card holders) on their worldwide income, no matter where they live. Therefore, you should assume that any income being reported on your Canadian return will need to be reported on your US return as well.

Filing requirements in the US are determined by your filing status and your income. For tax year 2020, the following thresholds apply:

Filing status Minimum income to be required to file a 2023 return

Single $14,600

Married Filing Jointly $29,200

Head of Household $21,900

Married Filing Separately $5

Self-employed $400 (after expenses)

If you or your spouse were age 65 or older at the end of 2020, different thresholds may apply, so contact us for more information.

Should I file the T1 before the 1040?

US citizens living in Canada should usually file their Canadian tax return (Form T1) before filing their US tax return (Form 1040), but if you have income from the United States, you may need to calculate your tax bills from both countries at the same time. If necessary, we will be in communication with your Canadian accountant in order to make sure you are paying the appropriate amounts to both the IRS and the CRA.

The IRS grants taxpayers outside the US and Puerto Rico an automatic 2-month filing extension to June 15. If you still need more time, you can file Form 4868 to get an automatic extension to October 15.

No double taxation

No one should ever pay tax twice on the same income. Income tax is usually paid to your country of residence first, so most Americans in Canada would pay tax to Canada first and then file their US return. Both Canada and the United States allow for Foreign Tax Credits, which allow a dollar-for-dollar reduction in tax due on foreign-source income; and because Canada’s tax rates are (usually) higher than those in the US, you would generally not owe tax to the IRS once you have paid the CRA.

Social Security and the US-Canada totalization agreement

The US and Canada signed a Totalization Agreement, which has been in effect since August 1, 1984. The Agreement eliminates double social security coverage and tax for US citizens living in Canada and vice versa. Therefore, self-employed individuals living in Canada will not need to worry about paying self-employment tax on their US returns.

Foreign Earned Income Exclusion

US taxpayers in Canada are entitled to use the Foreign Earned Income Exclusion (Form 2555) to reduce or eliminate their Canadian wage or income from US taxation if they meet either the Bona Fide Residence Test or the Physical Presence Test.

Canadian Financial Accounts

US taxpayers with bank or financial accounts outside the United States with an aggregate balance of $10,000 USD or more need to file the Report of Foreign Bank and Financial Accounts (a.k.a. the FBAR, or FinCEN Form 114) every year before October 15. The FBAR should include all bank, investment, and retirement accounts, translated into US dollars at the US Treasury’s year-end exchange rate. In addition, taxpayers with more than $200,000 USD in Canadian accounts at the end of the year need to file Form 8938 together with their tax returns.

Canadian Retirement Accounts

US citizens who have money invested in Registered Retirement Income Funds (RRIFs) or Registered Retirement Savings Plans (RRSPs) can defer tax due on the accounts’ earnings until they are withdrawn from the account after retirement, just like with an IRA or 401(k) plan in the US. Form 8891, which was required by the IRS until 2014, is no longer required. However, RRIFs and RRSPs must be included on the FBAR and Form 8938.

Conclusion

From the time of the American Revolution, when thousands of “the King’s Loyal Americans” fled the rebellious colonies over the northern border; to the nineteenth century, as escaped slaves migrated north via the Underground Railroad; to the twentieth century, when draft dodgers during the Vietnam War and oil workers swelled the ranks of Americans up north; Canada has always been a destination of choice for Americans looking for a change of scenery. However, the long arm of the IRS can reach across the northern border, so keeping up with your annual filings to the IRS is essential.

Any questions, comments, or criticism? Was there something we left out or something else you would like to know? Need a quote on your US return? Contact us!