If you’re an American citizen living in Canada, the US federal government requires you to yearly file US tax returns. You may also have to submit a return stating your assets in foreign bank accounts. All US Green Card Holders are also obligated to the laws.
In this guide, we explore some of the tax policies Americans living in Canada need to know. You will also learn some of the provisions to protect you from double taxation when living in Canada. The conditions might vary depending on your tax situation.
Provisions to Protect You from Double Taxation
While most US ex-pats living in Canada fear getting taxed twice, the US government has put in place measures to protect you from double taxation. Here are the provisions.
- Foreign Tax Credits: Allows tax on the remaining income to get reduced based on the taxes you’ve already paid to the foreign governments. You’ll only pay the US’s taxes if Canada’s tax rate is lower than the US tax rate.
- Foreign Earned Income Exclusion: You can exclude up to $107,600 (for the tax year 2020) of foreign earned income from getting taxed yearly. You must be a bona fide resident in Canada or have been out of the US for 330 full days.
- Exclusion on Foreign Housing: This allows additional exclusions on the part of your income used to cover household expenses when living abroad. The exclusion limit varies depending on the foreign tax home’s location.
By filing your tax returns correctly, you can take advantage of the three provisions to avoid double taxation. You may have to file tax returns even if you owe no taxes. If you fail to file the US tax returns, you’ll pay a monthly penalty of up to five percent.
Tax Rates in Canada
As an American ex-pat, you should understand both the US and Canadian tax systems. For example, it could be worth taking a look at canada tax residency rules if you split your time between the two countries, as this will affect the taxes that you pay. Of course, you’ll be required to file both countries’ tax returns while residing in Canada. Here are the tax rates in Canada for 2020, according to the Canada Revenue Agency.
|2020 Federal Tax Rates And Income Thresholds|
|Annual taxable income (CAD)
From – To
|Federal tax rate (%)
|0 – 48,535||15%||0|
|48,535 – 97,069||20.5%||2,669|
|97,069 – 150,473||26%||8,008|
|150,473 – 214,368||29%||12,522|
|214,368 and over||33%||21,097|
The amount of tax you’ll file depends on the CAD to USD exchange rates at the time of tax returns filing. It’s important to note that all the provinces and territories also impose taxes. Visit the CRA’s website for more information on territorial and provincial tax rates.
The Basic Tax Filings for Americans Living in Canada
If you are an American residing in Canada, there are two basic filings you must fulfill. They include the Canadian T1 income tax return and the US 1040 income tax return.
Canadian T1 Income Tax Return
The due date for filing and paying the Canadian tax returns has always been April 30. Self-employed Canadians can have up to June 15 to file returns, but they have to pay the taxes before April 30. Non-residents get until June 30 to file their returns.
However, the government extended the due date for the regular Canadian T1 income tax return for everyone up to June 1, 2020. That was as a result of COVID-19, which affected many businesses significantly. The employment sector was the most hit.
The US 1040 Income Tax Return
Before the coronavirus pandemic, the due date for filing the regular US 1040 income tax was always on April 15. But in normal circumstances, the US government grants a two-month automatic extension up to June 15 for US citizens residing abroad.
However, this year the federal government extended the due dates for filing 1040 tax returns to July 15, 2020, under Form 4868. All US ex-pats in Canada who filed 2018 and 2019 tax returns are also eligible for the US Economic Impact Stimulus Payments.
The US and Canadian Social Security
To help US ex-pats file and pay their tax returns yearly, the United States and Canada agreed regarding the social security number. The agreement will help Americans living in Canada pay their social security taxes to both countries.
Without the social security agreement in place, it might be challenging to establish who receives the disability, retirement, and survivor’s benefits. Generally, American ex-pats won’t pay the US social security if you’ve already paid the Canadian social security.
Canadians living in the United States are also able to enjoy the benefits of the social security agreement. Those who have the Canada Pension Plan and Old Age Security plans cannot access them until they turn 65. Also, they are subject to income limits.
The US – Canada Tax Treaty
Canada and the United States have a tax treaty to help taxpayers reduce and eliminate double taxation. Here are some of the treaty’s provisions.
- Allows data sharing between the two governments when collecting tax revenues
- Establishes the income taxable in each country and those exempted from taxes
- Highlights the foreign tax credits available to the US citizens and permanent residents when Canadian taxes get paid
The tax treaty between the two countries has helped many people and companies doing business (commerce) across the border. There are many more provisions in the treaty.
If you are an American ex-pat residing in Canada, you can now fulfill your tax obligations more easily. Some of the tax rules are quite different for US citizens retiring to Canada. Visit the Internal Revenue Service’s site to learn more about retiree’s tax obligations.
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