Many Americans find themselves moving up north to the land of maple syrup and universal healthcare; namely, Canada. It’s easy to see the draw: you’re still close to the friends and family you’ve left behind in the US, the language barrier is easily navigable, and it’s home to great skiing and the northern lights. If you’re an American expat living in Canada, find out what you need to know about preparing your Canadian tax return.
Step One: Determining If You’re a Resident
Before you pay taxes, you’ll have to determine whether or not you are a tax resident of Canada. In Canada, residency is defined by a combination of significant ties and residential ties. Significant ties include owning a home in Canada, having a spouse or common-law partner in Canada, or having dependents in Canada. Residential ties include owning personal property in Canada, having other social and economic ties to Canada, or maintaining a Canadian driver’s license, passport, or health insurance with a Canadian province or territory. For residential ties, anyone who is in Canada for 183 or more days in a year might be considered a resident for tax purposes.
Step Two: Understanding Canadian Tax Rates and Deadlines
For 2019, the Canadian Revenue Agency published the federal tax rates for residents of Canada as follows:
- 15% on the first $47,630 of taxable income, plus
- 20.5% on the next $47,629 of taxable income (on the portion of taxable income over 47,630 up to $95,259), plus
- 26% on the next $52,408 of taxable income (on the portion of taxable income over $95,259 up to $147,667), plus
- 29% on the next $62,704 of taxable income (on the portion of taxable income over 147,667 up to $210,371), plus
- 33% of taxable income over $210,371
Provincial and territorial taxes are calculated the same way as federal taxes (on a graded progression), except in Quebec. When preparing your Canadian tax return, remember that the specific tax rates vary based on which province you live in.
The deadline for expat taxes in Canada is April 30th which is right around the corner! If you’re self-employed, you’ll have until June 17th to file (this extension typically extends to June 15th, but that falls on a Saturday in 2019), but still must pay by April 30th, similar to the American deadlines. Non-residents receive extensions to June 30th, and as a non-resident, you would only pay taxes on income sourced in Canada.
If you miss the deadlines, you face interest (the rate of interest changes every three months) and late-filing penalties that include 5% of the balance you owe plus 1% each month the tax is late up to a maximum of 12 months. For repeated failures, the penalties are much steeper.
Step Three: Learning What’s New for Expats in Canada
A few new tax credits are in store for Canadian residents in specific financial situations. This year, residents of Saskatchewan, Manitoba, Ontario, and New Brunswick will receive a tax credit to offset the cost of the carbon tax because they live in provinces that haven’t established a carbon price of their own.
Also, Canadian residents with specific medical conditions can claim the cost of service animals as a medical expense.
Self-employed expats in Canada are eligible for accelerated capital cost allowance rates for equipment and other items purchased after November 20, 2018. This can help reduce your taxable income.
Lastly, the tax rate for small businesses was reduced (which applies to business income up to $500,000) from 10.5% to 10% in 2018 and came down another notch, to 9%, at the start of 2019.
Step Four: Remember Money-Saving Provisions When Preparing Your Canadian Tax Return
In addition to filing your T-1 (the Canadian equivalent of a Form 1040) with the Canada Revenue Agency, you will still need to file an annual Federal Tax Return with the US. You will need to finish preparing your Canadian tax return in order to complete your US taxes.
For social security taxes, the US and Canada have a totalization agreement in place to help those who otherwise would be double taxed on the same earnings. Normally, if you pay into Canadian Social Security, you do not pay into US Social Security. Another provision that helps avoid double taxation is the tax treaty that the US and Canada have agreed upon.
Your US taxes are due on April 15th, and though expats receive an extension until June 15th, any tax owed starts accruing interest on April 15th.
Don’t forget to use these provisions on your US taxes to help save money:
Foreign Earned Income Exclusion – This exclusion allows you to decrease your 2019 taxable income by the first $105,900 (the amount was $103,900 for 2018 taxes) earned as a result of your labor while residing in a foreign country.
Foreign Tax Credit – This credit allows you to lower your US tax obligation on your remaining income by certain amounts paid to a foreign government.
Foreign Housing Exclusion – This exclusion allows an additional income exclusion for certain amounts paid for household expenses that occur from living overseas.
Want Expert Help Preparing Your Canadian Tax Return?
Greenback accountants can ensure your expat tax preparation is hassle-free. Get started with Greenback today!