If you are an American living in Canada, the U.S. government has the right to impose taxes on your income provided you retain your United States citizenship. For that reason, it is essential to be aware of American taxation laws to avoid committing tax frauds. On the bright side there are some benefits including a personal tax credit, which we explain below.
As a resident of Canada, you must also understand how the Canadian tax laws operate for foreigners. The Canadian tax system base its taxation principles on residency. You’re to pay taxes on your income so long as you reside in Canada.
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While both the United States and Canada have different tax policies, the two countries have established a tax treaty that protects Americans from getting taxed twice. That's what we will explore in this guide. So keep scrolling down and learn more.
Tax Obligations and personal tax credit for Americans Living in Canada
If you're an American working in Canada, you must confirm your residential status for taxation purpose. If you have residential ties in the country, the Canadian government will subject the income you earn in Canada to taxation.
However, you will not get considered a Canadian resident during taxation when you:
- Stayed outside Canada during the entire tax year
- Don’t have any residential ties in Canada
- Lived in Canada for not more than 183 days during the tax year
- Routinely or customarily stay in another country
Canadian Residence for Tax Purposes
When it comes to taxation, many factors can determine an American’s claim for Canadian residence, including number of days spent in Canada in a tax year. The Canada Revenue Agency (CRA) will consider you a resident if you spend more than 183 days in Canada.
If you live in Canada regularly and routinely and have residential ties in the country, you'll also get considered an ordinary resident. Such links include a house or apartment, spouse, dependents, and even when planning to apply for a permanent residence.
Filing Tax Returns for Canada and the United States
As an American citizen, you must file your United States tax return each year, regardless of the country where you live. And if you don’t understand your tax obligations, you should consult a tax professional to guide you through the entire process.
When staying in Canada, it will be easy to file your Canadian tax returns first. Once you’ve done that, convert the tax amount to the United States dollars and file the American tax returns. Find the right conversion rate at Knightsbridge Foreign Exchange.
When converting the Canadian dollars to U.S. dollars for filing tax returns, you may also use the conversion rates of the Internal Revenue Service (IRS). But there are no official conversion rates. You only have to review and use the rates consistently.
According to the Canada-USA tax agreement, the United States shouldn’t tax any income earned and already taxed in Canada. However, this exemption only applies when you fill out the U.S. 1040EZ form appropriately. Otherwise, your income might get taxed twice.
If you’re in Canada on a working holiday visa and you’ve never filed any tax return before, you can still file your returns as non-resident. That can be better for taxation purposes, especially when expecting to travel back to the U.S. when the visa expires.
Personal Tax Credit Allowance for Americans Living in the United States
The federal government of Canada entitles a tax-free allowance (personal tax credit) for Americans working in Canada. It doesn't impose taxes on an American's earnings of up to $12,069. Determine your eligibility for the personal tax credit by filling the TD1 form.
If you earned income both in Canada and the United States in the same tax year, you might not be eligible for the personal tax credit. That may apply to Americans moving to Canada for a working holiday.
Tax Rates in Canada after adjusting for personal tax credit
As an American living and working in Canada, you are liable to pay federal and provincial taxes on your income. The federal government of Canada collects income taxes on behalf of Canadian provinces, except for Quebec.
With a personal tax credit, your income of up to $12,069 will not get taxed. The federal tax rate begins at 15 per cent of the first $45,916 taxable income. The provincial tax rates vary depending on the province where you live and work.
As you move from the United States to Canada, ensure that you change your tax address by filling out the legal forms. That will be the best way to demonstrate that you are no longer a resident in any State of America. But don't stop filing your state tax returns without making an official communication.