US/Canada Tax Treaty Summary: A Quick Read
Both Canada and the US have established beneficial tax relationships with other nations to encourage commerce and reduce overall tax burdens. As a result, citizens and permanent residents of these two countries may have different tax return obligations based on their location.
Technically speaking, American ex-patriots who live north of the border need to file a tax return in the US as well as in Canada. However, due to the income tax agreements formulated between US/Canada, these individuals won’t have to pay double in taxes when it’s time to file.
A BRIEF SUMMARY OF THE INCOME TAX TREATY BETWEEN THE US AND CANADA
Please be advised – the information provided in this summary should not be considered a substitute for expert advice.
For increased information accuracy, up-to-date notes, and a more detailed breakdown of tax treaty sections, we highly recommend consulting with a knowledgeable tax treaty professional and supplementing this article with additional research.
If you’re feeling highly motivated to learn, a fully-detailed and comprehensive source on the tax treaty can be found here (Government of Canada).
Definition of US/Canada Tax Treaty
Initially formed in the year of 1980, this mutual taxation agreement limits the duties between Canadian and US citizens and permanent residents that live in on the other side of the border.
In other words, a Canadian citizen who is living in the US for a work placement won’t need to face “double taxation” (a single source of income taxed by two government bodies).
Some exceptions do apply based on your income scenario – the rules get more complicated for self employed individuals, and for people who own homes/residence on either sides of the border.
Can You Avoid Paying US/Canada Multinational Taxes?
If you meet the residence eligibility requirements in both countries then you will have no choice but to file two separate tax returns.
Naturally this means that if your residency is only officially recognized in one country (while you’re living in the other) you’d only file a return with your home nationality.
When Are You Considered Eligible For Residency?
Let’s use an American ex-patriot who lives in Canada for their career as an example. There are certain criteria that need to be met before their official Canadian residency can be declared.
First of all, they would need to have maintained legitimate consecutive residency in Canada for 183 days. In other words, if the American expat only spent 180 days within the country (during the year) they would not be subject to Canadian tax.
Another criterion on the list (when discussing taxable residency situations) is the minimum income level. No matter what your income situation is in Canada, as an American expat you’ll always have an obligation to the IRS.
Having said that, you’d only be indebted to the CRA if you’ve earned over $10,000 during the operating year. Income that amounts to less than $10,000 means that you’d be exempt from paying Canadian tax.
Tax Advantages as an American Expat Living Abroad
Ultimately, regardless of where you choose to reside in a given year, American expats must file a US tax return that declares their total annual income (foreign sources included). This process is not inherently negative because it does feature a few tax benefits:
- FOREIGN TAX CREDIT – to prevent double taxation by working in Canada, American expats can limit their tax obligation with a credit equal to the amount due on one return.
- FOREIGN PERSONAL INCOME EXEMPTION – in the year 2020, Americans can legally exclude $107,600 of foreign income (per capita). The exact dollar amount is subject to change year over year.
- FOREIGN PROPERTY EXEMPTION – you may be eligible for tax deductions on your primary residence living expenses in another country.
FINAL THOUGHTS: A SHORT SUMMARY OF THE US-CAN TAX TREATY
Thanks to the treaty formed between Canada and the United States, working in one country while living in the other can be very lucrative for one’s career. And if you’re seeking a job offer across the border, you’ll need a reliable foreign exchange service to send international money transfers back to your home country.
KnightsbridgeFX offers professional, safe, and simple money transfers internationally with absolutely zero hidden fees and no charges for wire transfers. The best part about choosing KnightsbridgeFX as your foreign exchange service is that you are guaranteed competitive rates that beat the offerings presented by big banks.
If you’re looking to learn more about cross-border income tax, click here for our article on paying US income tax while in Canada.