It’s vital to know the law if you’re a Canadian that’s working from home for a company that’s based south of the border. Most importantly, you’ll need to comprehend the tax regulations that are imposed on cross-border job opportunities.
Since you’ll be mostly working abroad in this situation, it helps to know which tax collection agencies you’re accountable for. That way you can avoid unnecessary headaches when managing your quarterly or annual filings.
We’ve created this quick guide to help you better understand your tax debt position as a Canadian working for a US company. Hopefully by reading this you’ll learn more about the intricacies of cross-border taxation.
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Please note this article is not a direct substitute for comprehensive and up-to-date legal advice. We highly recommend consulting with a professional to ensure that your knowledge is accurate.
Due to increasing globalization, demand for offshore/foreign national work is steadily rising. Technology is making it much simpler to bridge geographical distance and deliver timely content pieces from anywhere in the world.
As workplaces are granted more and more freedom as to where they can prospect employees, awareness of foreign tax rules is vital in order to keep up with the times.
Throughout the decades, the United States and Canada have collaborated on countless economic projects and both nations have benefited from doing so. Assuming both countries own something that the other needs, a win-win scenario exists.
In some cases, US workplaces will seek out Canadian employees to benefit from having a stronger dollar. Alternatively, Canadians might be able to provide them with certain resources or skills that they can’t find domestically.
Regardless of the reason for hiring, US employers can take advantage of remote working Canadians since they won’t require a work visa. A work visa is only necessary if the Canadian contractor wishes to physically reside south of the border for the job.
At the end of the day, when you’re submitting your yearly gross income to the CRA you must include all sources – even foreign ones – and calculate them in CAD. This should be stated on your Canadian T1 tax return.
When working for a company south of the border, you can expect to receive a W-2 Form at the end of the fiscal year which declares your job earnings. Naturally, this amount will be in USD and you’ll have to convert it to Canadian Dollar based on the most up to date Canadian federal exchange rate.
If you’ve had irregular payments/multiple income sources throughout the year, you may need to use the yearly averaged rate.
Although it’s uncommon to miss a W-2, occasionally a company will fail to deliver it. However, you should still declare foreign income as accurately as possible if it happens. Of course without a W-2 to serve as written proof, the accuracy of the amount disclosed on your tax return is your responsibility.
In this situation, the best course of action is to call the IRS and notify them of your predicament. They can help you out by contacting your workplace directly and placing a formal request for the W-2.
Most of the time, failing to receive a W-2 Form by the due date could just mean it is in transit. Fortunately, if you happen to receive a W-2 after you’ve already filed your income tax you may submit an additional “amended” individual tax return.
Misrepresenting your income, regardless of where it came from, often comes with dreadful consequences. First time offenders can expect a minimum $100 penalty with up to half of the disproportioned amount as a surcharge.
Frequent misrepresentations in your tax returns can cause a ripple effect of negative repercussions on multiple levels of government. In Canada, tax inaccuracy penalties are carried out at the provincial, territorial, and federal levels. Speaking plainly, it’s not uncommon to pay the standard charge twice.
It should go without saying that intentional tax evasion is a highly punishable offence in Canada. If there’s ever proof of deliberate tax dodging, doing prison time is not out of the question.
As a permanent resident of Canada, who is an independent contract that’s employed remotely for the United States, you are not liable to owe US income tax.
This convenience is made possible by the CAN-US Income Tax Treaty which prevents cross-border employees from paying “double tax” on the same income source. In most cases under this scenario you answer to the CRA or the IRS but not both.
As a Canadian foreign non-resident you need to complete a W-8BEN form that details proof of your US income sources.
Normally as a foreign worker you would be subject to a 30% federal withholding rate which you would immediately see reflected in your job payment. However, thanks to your Canadian nationality status you won’t need to owe this tax debt to the IRS as long as you fulfill your duties to the CRA.
If you’d like to learn more about the W-8BEN check out our more in-depth guide.
A Canadian business rule of thumb when it comes to sales revenue is that you’ll need to accumulate some form of sales tax from your buyers. This factor comes into play the moment your company does over $30k CAD in sales in a given year.
Normally, your buyers will be obligated to pay GST/PST or HST depending on their provincial or territorial sales legislation. Nevertheless this rule does not carry over when you’re selling your products internationally.
As long as all tangible goods or services are wholly distributed south of the border, meaning they don’t resurface in Canada in some way, Americans do not have to pay GST/PST or HST.
The only instance where US residents pay Canadian sales tax is when Americans traverse the border to buy products directly from within Canada.
A common example of this is tourism. Under certain circumstances, US tourists may be eligible for a sales tax rebate by the FCTIP (Foreign Convention Tour Incentive Program).
If you can provide documented proof of your residence in the US for more than 183 days at a time, you may avoid paying certain duties to the CRA. In this instance you will be recognized as a Canadian non-resident.
In this category you’d only be eligible to pay Canadian tax on Canadian income. In other words, if you’re listed under an American company’s payroll you would not be indebted to the CRA on that.
However, if you operate a side business that generates income in Canada while you’re staying in the US, your earnings on that venture are certainly accountable to the CRA.
Although we’ve already established that 183 days is a “safe” number to cross into Canadian non-residency territory for tax purposes, there are still a few workarounds if you’ve stayed in the US for less than 183 days.
If your payments have been affected by the US federal withholding rate (see the W-8BEN Form) you may be eligible for compensation in the form of a tax credit.
To do this you can complete a Canadian T2209 Form which adheres to the Federal Foreign Tax Credits system.
The number one most important thing to keep in mind while working abroad is your tax situation. Regardless of where your income sources stem from, as a Canadian resident your primary duty is to the CRA.
It’s always a good idea to stay up to date on this subject as globalization expands and tax rulings periodically change.
If you’re planning on visiting the US for a brief period (whether for leisure or for work) check out our article on basic snowbird tax advice to get you started on the right foot.
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