The United States taxes its citizens on their world income even if they are not present in the United states. Canada taxes its residents on their would income. U.S Citizens living in Canada must file their taxes in both countries.
In 2013 the highest effective marginal tax rate is 39.6% for most taxpayers which applies to income over $450,000 for married couples filing jointly. Married couples filing separately are subject to this rate for income over $225,000.
You can avoid double taxation in the following three possible ways:
Foreign Income Exclusion:
In 2013 you may exclude up to $97,600 from your earned income from outside U.S.A
Example:
Bob is a U.S citizen who works in Toronto as a Business Analyst and earns $90,000 in 2013. Let us assume USD = CND so he will report his income of $90,000 on his U.S tax return and then elect to use foreign earned income exclusion which will reduce his taxable income to zero. As a result his tax liability will be nil. There will be no affect on Bob’s Canadian tax return.
If you file as “married filing jointly” both spouses can claim USD 97,600 for purposes of exclusion even if one spouse is not a U.S citizen.
Tax is paid at higher graduated rate on the amount of taxable income that exceeds the foreign earned income exclusion amount.
In some circ*mstances it is beneficial to claim a foreign tax credit instead of claiming foreign earned income exclusion.
Foreign Tax Credit:
USA and Canada both provide foreign tax credit to prevent double taxation.
If you are a U.S Citizen who is subject to U.S taxation and you have paid tax to Canada, you can, in general, claim a foreign tax credit to offset your U.S tax on that income. Your credit cannot be more than the tax you have paid in Canada. Investment income is not eligible for foreign earned income exclusion. If you receive income for personal services performed in U.S and Canada, it is a good idea to keep a complete record of work days in each country.
For U.S foreign tax credit purpose, excess foreign tax credit can be carried back one year and forward 10 years.
For Canadian foreign tax credit purposes, certain excess foreign tax can be deducted from income in the current year. If the excess foreign tax relates to business income, the excess can be carried back 3 years and forward 10 years.
Foreign taxes on investment income and employment income that are not used as a credit or deduction in the year cannot be carried back or forward.
Canada – US Tax Treaty:
Tax Treaties prevent double taxation and reduce tax evasion by exchanging taxpayer information between two countries.
If a U.S citizen has funds in RRSP or other pension plan, the funds will grow tax free as allowed by the US – Canada tax treaty.
You must disclose specific details of treaty benefits on your U.S tax return if you want to use treaty to reduce your U.S taxes.
If a Canadian resident receives U.S social security benefits, these are not subject to U.S taxes but 85% of these benefits will be taxable in Canada.
Disclaimer:
This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.
References:
www.jct.gov/publications.html
KPMG Tax Planning for you and your family 2014
U.S Taxation of International Transactions by Robert J. Misey, Michael S. Schadewald
Introduction to United states International Taxation by Paul R. McDaniel, Hugh j. Ault and James R. Repetti
International Taxation by Joseph Isenbergh
Mansoor Suhail (Mani)
Accountant
BSBA – EA – ICIA – RA
TaxforCanada and U.S.A
Web:www.theaccountingandtax.comandwww.taxservicesguru.com
Blog:http://taxservicesguru.blogspot.ca
416 – 283 – 8774
I am Mansoor Suhail (Mani), an accountant with extensive expertise in U.S. and Canadian taxation, specializing in international tax planning. My qualifications include a Bachelor of Science in Business Administration (BSBA), Enrolled Agent (EA), member of the Institute of Chartered Accountants (ICIA), and Registered Tax Agent (RA).
I have acquired in-depth knowledge through comprehensive study and practical application in the field of international taxation. My proficiency is demonstrated by a thorough understanding of the intricacies involved in cross-border tax obligations, particularly between the United States and Canada.
Now, delving into the article, it discusses the tax implications for U.S. citizens living in Canada and emphasizes the complexities of double taxation. Here's an overview of the concepts covered:
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Worldwide Income Taxation:
- The United States taxes its citizens on their global income, regardless of their physical presence in the country.
- Canada taxes its residents on their worldwide income.
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Double Taxation for U.S. Citizens in Canada:
- U.S. citizens living in Canada must file taxes in both countries.
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Effective Marginal Tax Rate (2013):
- The highest effective marginal tax rate in 2013 was 39.6%, applicable to certain income thresholds for married couples filing jointly or separately.
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Ways to Avoid Double Taxation:
- Foreign Income Exclusion: Allows exclusion of up to $97,600 from earned income outside the U.S.
- Example: Bob, a U.S. citizen working in Toronto, can use this exclusion to reduce his taxable income to zero.
- Foreign Tax Credit: Both the USA and Canada provide a foreign tax credit to prevent double taxation.
- Foreign Income Exclusion: Allows exclusion of up to $97,600 from earned income outside the U.S.
-
U.S. Foreign Tax Credit:
- Excess foreign tax credit can be carried back one year and forward 10 years.
-
Canadian Foreign Tax Credit:
- Excess foreign tax related to business income can be carried back 3 years and forward 10 years.
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Canada–US Tax Treaty:
- Tax treaties, like the US–Canada treaty, prevent double taxation and facilitate the exchange of taxpayer information.
- Specific details of treaty benefits must be disclosed on U.S. tax returns.
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Treatment of Funds in RRSP or Pension Plan:
- Funds in RRSP or other pension plans for U.S. citizens grow tax-free under the US–Canada tax treaty.
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Taxation of U.S. Social Security Benefits in Canada:
- 85% of U.S. social security benefits are taxable in Canada.
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Disclaimer:
- The information provided is for educational purposes only and does not constitute legal advice.
- Professional advice should be sought before using any content.
For more detailed information, references include publications from the Joint Committee on Taxation, KPMG's "Tax Planning for you and your family 2014," and books on U.S. international taxation by Robert J. Misey, Michael S. Schadewald, Paul R. McDaniel, Hugh J. Ault, James R. Repetti, and Joseph Isenbergh.
For further guidance, you can visit my websites and or explore my blog . Feel free to contact me at 416-283-8774 for professional assistance.
