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Canada is home to more US expats than any country besides Mexico. Many Americans are drawn to Canada’s high quality of life, inclusive culture, and broad social programs. But what are Canada’s taxes like for US expats? Let’s take a look.
Canada prides itself in providing a wide variety of benefits to its citizens, and it has comprehensive tax systems in place to make that possible. Many US expats struggle to understand Canada’s complex provincial, municipal, and federal tax policies.
Plus, virtually all US citizens are required to file an annual US Federal Tax Return regardless of where they live. This only adds to the confusion of Americans living in Canada, who often have to file tax returns with both the Canadian government and Uncle Sam.
To help clear things up, here’s an overview of how Canada’s tax policies impact US expats living in Canada.
In Canada, tax residents (known as “deemed residents”) must file an annual income tax return to report their worldwide income. Non-residents, on the other hand, will only need to file a tax return if they receive certain types of Canada-source income, such as:
Non-residents will then only be taxed on their Canada-source income, not worldwide.
In Canada, residency status is determined by three elements: dwelling, spouse, and dependents. First and foremost, residents have a fixed abode for themselves in Canada. But other factors can also come into play regarding residency status, such as:
Finally, anyone who spends at least 183 days in Canada during a single year is considered a resident, even if they don’t meet any other qualifications.
The Canadian tax year is January 1 through December 31, which makes filing your US expat taxes easier because you do not need to pro-rate your income! The typical tax due date to file the main Canadian tax form, a T1, is April 30 of the following year. For businesses, the Canadian tax deadline is June 15, though tax payments are still due on April 30.
Remember: you will need to complete your Canadian taxes in order to complete your US expat taxes.
Canada has a longstanding commitment to the social distribution of its residents’ wealth, and as such, many specific taxes are applied to expats who fit certain financial scenarios. The most common taxes are described below.
If you’re considered a resident of Canada, you will be taxed on your worldwide income. However, Canada has tax treaties with many countries, including the US, to avoid instances of double taxation.
Peripheral benefits from employment—such as low-interest or interest-free loans—are taxed as employment income in Canada. Contributions from your employer into a qualified pension plan or deferred profit sharing system will also be taxed once you receive a distribution.
On the other hand, several types of income are not taxed in Canada. These types of income include:
Income tax comes in two forms in Canada: federal and provincial or territorial. The federal rates apply equally to all Canadian residents, while the provincial rates vary from province to province. The income tax rates in Canada are listed below. (All amounts are given in CAD.)
The provincial and territorial rates are typically progressive in Canada, and they vary widely. To give you a sense of the different taxes faced in each province, we’ve listed the highest income bracket’s tax percentage below.
Remember: non-residents are only taxed on certain forms of Canadian-sourced income.
Self-employed expats will have business income, which includes income obtained from any activities engaged in to boost profits. This income is taxed at the same rate as employment income.
Financial losses from self-employment can offset the tax liability from income earned. These losses can be carried back for three years and carried forward for 20 years. The burden of proof, in this situation, lies on the self-employed individual to demonstrate that this is where the income came from and that it does not include employment income.
In Canada, half of capital gains (minus any applicable capital losses) are included with standard income and taxed at the same rate. However, any capital gain realized from the disposition of an expat’s primary residence is exempt from taxation.
While Canada does not have a formalized system for taxing estates and inheritance, anyone who gives a gift of property is treated as disposing of the property for proceeds equal to the fair market value. And when a resident dies, they are treated as having disposed of all of their property immediately before the time of death at fair market value.
This federal 5% tax is applied to most goods and services in Canada. It functions much like a value-added tax, but it does not apply to certain products and services like:
The harmonized sales tax is a tax across five provinces that synchronizes Canada’s taxation systems and includes a goods and services tax.
The luxury and excise tax applies to alcohol, cigarettes, and fuel-inefficient vehicles.
While there is no national property tax in Canada, municipalities levy local taxes on property owners.
Canada has a comprehensive social security system in place, funded by taxing employee wages. In some cases, Americans living and working in Canada may be required to contribute to this system. Fortunately, the US-Canada totalization helps lay clear terms for which system expats must pay into, helping you avoid having to contribute to both.
Yes, the US has a formal tax treaty with Canada. This treaty helps Americans living in Canada avoid double taxation.
The US and Canada have a Totalization Agreement in place to help those who otherwise would have to pay social security taxes to both countries on the same earnings. Without the agreement in place, it could create a wrinkle with retirement, disability, or survivor’s benefits.
Generally, if you pay Canadian Social Security, you do not pay US Social Security. Different circumstances of your employment will factor into where you will be paying.
The same holds true for Canadians living in the US. Canada also has pension plans (Old Age Security and Canada Pension Plan) that you cannot access until age 65 and are subject to income limits.
As an American living in Canada, you’ll probably have to file tax forms with both the US and Canadian governments. Let’s take a look at some of the most common forms for each country.
T1 General: Income Tax and Benefit Return
The T1 General: Income Tax and Benefit Return is the primary income tax return in Canada—the Canadian equivalent of IRS Form 1040. This is the form expats must use to report virtually every form of income, including:
The standard due date for filing Form T1 is April 30. However, self-employed expats have an automatic extension to June 15. (Though the deadline for paying taxes is still April 30.)
Unfortunately, other extensions are only available if they apply to all taxpayers. For example, if the deadline falls on a weekend, the government will push the deadline to the following Monday.
If necessary, you can apply for a deadline extension for filing Form T1
Canadian tax residents who own foreign investment property valued at more than 100,000 CAD must report this using Form T1135: Foreign Income Verification Statement. If you are required to file Form T1135, you should attach it to your Form T1 and file it at the same time.
IRS Form 1040: Individual Income Tax Return
Form 1040 is the standard US individual income tax return. Virtually every US citizen is required to file Form 1040 regardless of where they live and work.
The due date for Form 1040 is typically April 15, but expats get an automatic extension to June 15.
If necessary, you can request a special extension to October 15 for filing your expat tax return.
IRS Form 8938: Statement of Specified Foreign Financial Assets (FATCA)
If you own non-US financial assets valued above certain thresholds, you must file a FATCA report. (The threshold for your finances will depend on your filing status and whether you are a bona fide resident of Canada.)
If you do have to file a FATCA report, simply attach it to your Form 1040 and submit them at the same time.
FinCEN Form 114: Report of Foreign Bank and Financial Accounts (FBAR)
If you have a combined total of at least $10,000 in one or multiple non-US bank accounts, you are required to report it by filing FinCEN Form 114, better known as the FBAR.
The FBAR must be filed electronically through the FinCEN BSA E-Filing System. The standard due date is April 15, but if you miss that deadline, the deadline automatically extends to October 15.
Because of the US-Canadian tax treaty, most American expats living in Canada are already exempt from double taxation. In addition to this, the IRS also provides several other potential tax credits and deductions for expats, such as:
Using these tax credits, you may be able to erase your US tax debt completely. (Most expats do.)
We hope that after reading this guide, you have a better understanding of how Canada’s taxes affect US expats. If you’d like to learn more, though, our team of tax experts is here to help.