U.S. citizens who are relocating, expatriating or taking residency in Canada will need to consider various tax implications of the move to minimize the overall taxes owed on income earned.
Key Difference between U.S. and Canadian Tax Determination
- U.S. citizens are taxed by the U.S. on their worldwide income based on the fact of citizenship. The U.S. treats a citizen as a resident for U.S. tax purposes.
- Canada, on the other hand, has a taxing system based on residency as opposed to citizenship.
Canadian Residency – What is at Stake?
A U.S. citizen can be a “resident” or a “non-resident” of Canada. The implications for Canadian taxes due may be significant. If a person is considered a Canadian resident, their worldwide income will be taxable in Canada as well as the U.S. If a person is considered a non-resident of Canada, generally only their Canadian income will be subject to Canadian income taxation. The benefit of U.S. foreign tax credits for the Canadian income taxes owing is intended to reduce the effects of double taxation of income earned in Canada by a U.S. citizen. However, given the very significant Canadian provincial tax rates, the combined Canadian Federal and provincial taxes may exceed U.S. income taxes on the same income. Also, most U.S. states do not allow for crediting Canadian provincial tax against state-imposed income taxes. This assumes the U.S. citizen has not given up his or her U.S. state of residency.
Determination of Canadian Residency
“Residency” in Canada is determined as a question of fact. Any person spending more than 183 days in Canada is generally considered a resident of Canada. Additionally, Canadian residency can be determined by factors indicating the place a person customarily lives. Such factors include residential ties to Canada such as owning or renting a home, dependents in Canada and other factors similar to U.S. domicile considerations. Many U.S. citizens may find themselves residents of both Canada and the U.S as a result of application of the residence rules of the U.S. and Canada.
A U.S. citizen taking a job in Canada must consider the Canadian income tax implications in his or her analysis. If the position would require taking up residence in Canada, then it is likely the U.S. citizen will be considered a resident of Canada and this conclusion would subject all worldwide income to Canadian income taxation. Since the Canadian Federal and provincial tax rates combined are very significant, the overall Canadian income taxes may exceed U.S. Federal and state taxes resulting in an unexpected net out-of-pocket tax. To the extent the Canadian employer agrees to a gross-up for Canadian added out-of-pocket tax, the employer may only be envisioning Canadian tax on the Canadian earnings not the employee’s world-wide earnings. The employee may be able to plan for the Canadian residency implications ahead of time to help minimize the effect of a Canadian worldwide income system.
How We Can Help: Guidance on Canadian Residency and U.S. Tax Issues Unique to Your Relocation
Paul Simons, J.D., M.B.A., C.P.A, is a tax expert and shareholder with DS+B, located in Minneapolis. DS+B is a member of BKR International, which has offices in 19 Canadian cities. We can advise on Canadian cross-border planning and facilitate Canadian and U.S. tax compliance considerations. Click here to contact Paul Simons.
This article generally discusses U.S.-Canadian residency and tax considerations and does not contain an exhaustive list of all considerations. Individuals should consult with a tax professional to be advised on their own specific factual situation and considerations.