Regardless of where you’re currently residing in the world, if you have obtained US citizenship status (or permanent US residency) then you’ll have to disclose any globally-sourced income to the government.
Your annual tax return must be filed each year without fail. If you’re holding foreign assets in offshore bank accounts you’ll need to submit a FBAR (FinCEN Form 114) which declares this ownership.
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As a general rule, the IRS (U.S. Internal Revenue Service) may tax income that was earned abroad if you’re an American tax payer – the US is one of a few nationalities that enables this practice for both citizenship and PR status holders.
However, there are a few ways to prevent unnecessary taxation that results from generating international personal revenue.
As an US citizen/resident, you’re eligible to exclude roughly $100,000 USD in foreign income on your annual filing.
For the year 2020, the exact amount covered was $107,600 USD per individual. It’s important to note that this amount is liable to change every year.
By utilizing foreign tax credits you can list remaining US income against international obligations. Using tax credits effectively will reduce your overall tax burden.
Depending on where your income gets transferred towards, certain expenses that come from living outside of the US can dodge income tax.
One specific example of this would be foreign household expenses, which can be successfully excluded.
Naturally, by living in Canada you’ve probably become more aware of Canadian mandates and forgotten about US regulatory standards.
Late tax filings in the United States are penalized at 5% for every month that you miss submitting (up to a 25% cap). However, if you’re living outside the country there are a lot more leniencies to this rule.
If you have cross-border dual citizenship and find yourself with a late tax submission surprise whilst living in Canada, the IRS may decide to simply waive this 5% to 25% charge. Hopefully this will provide you with some added taxation relief!
Even though you have secured US citizenship/PR status, by establishing residency in Canada (whether for work or personal reasons) you’re still subscribed to their tax legislation.
While you may not have to worry about double taxation thanks to the CAN-US Tax Treaty, it’s still important to be aware of possible tax duties when living primarily in Canada.
The date to submit the standard T1 General or Canadian Income Tax and Benefit Return falls once every year on the 30th of April. Regardless of what day you actually file your T1, tax obligations should have already been attended to before this date.
It’s worth mentioning that if a large portion of your income is generated from self-employment you’ll be given an extension to the 15th of June to file. Furthermore, Canadian non-residents get to file an extra 15 days later (with no added penalties) on the 30th of June.
No matter where you live in the country – assuming you’re an eligible tax payer with regular tax obligations – you’ll be subject to Canada’s progressive tax system. A progressive tax system ramps up the tax rate with an associative increase in annual income earned.
Note: Canadian territories and provinces have their own tax duties that are separate from the federal tax rates. For a complete list of these tax rates that are proposed by the CRA, check out this website from the Government of Canada.
Ultimately, the decision to determine “residency” in Canada is made by the CRA for tax purposes. There are five main factors which the CRA considers when looking for residency:
(1) LIVING SPACE – does this person own/rent a home in Canada that they live in?
(2) FAMILY LIFE – does this person have a relationship, partner, or children in Canada?
(3) PROPERTY – does this person own other properties apart from a main residence in Canada?
(4) OTHER RELATIONS – does this person have any social or economic ties to Canada?
(5) DURATION – does this person spend more than 183 days in a given year in Canada?
Both of these nations established this agreement to reduce the tax burdens for individuals and businesses who sought to make cross-border investments.
This treaty helps prevent “double taxation” by identifying foreign tax payable and leveraging it as a credit on the home country’s income tax return. In addition, the provisions developed within this treaty ensure that taxes are paid out appropriately (to the rightful countries).
If you fall under this category of US citizenship/PR status that lives north of the border, be very cautious when registering for Canadian registered accounts.
Most notably this includes Tax Free Savings Accounts (TFSA) and Registered Education Savings Plans (RESP). Becoming fully tax and rule compliant with these trust accounts can be excruciatingly difficult as a non-citizen, especially since you’d need to declare these accounts in your US taxes.
Often the amount of effort (and cost) to manage these accounts outweighs the benefit the accounts provide if you don’t have citizenship in Canada.
At the end of the day, it’s important to know the tax rulings of the government systems on both sides of the border – especially if your ultimate goal is to save money on tax returns.
Canada and the United States have developed a solid tax relationship overall, which can make living in one country as a member of the other seem very attractive. By understanding foreign tax credits, the CAN-US tax treaty, and international duties living in Canada as US citizen is very feasible.
Are you considering self-employment opportunities/starting your own online business in Canada as a US citizen? If that’s the case, check out this article to help you learn more about the process.
As always, we recommend that you consult with a tax professional in order to obtain more accurate knowledge on these topics. This guide should be treated as starting point for additional research.
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