The United States taxes its citizens on their world income even if they are not present in the United states. Canada taxes its residents on their would income. U.S Citizens living in Canada must file their taxes in both countries.
In 2013 the highest effective marginal tax rate is 39.6% for most taxpayers which applies to income over $450,000 for married couples filing jointly. Married couples filing separately are subject to this rate for income over $225,000.
You can avoid double taxation in the following three possible ways:
Foreign Income Exclusion:
In 2013 you may exclude up to $97,600 from your earned income from outside U.S.A
Example:
Bob is a U.S citizen who works in Toronto as a Business Analyst and earns $90,000 in 2013. Let us assume USD = CND so he will report his income of $90,000 on his U.S tax return and then elect to use foreign earned income exclusion which will reduce his taxable income to zero. As a result his tax liability will be nil. There will be no affect on Bob’s Canadian tax return.
If you file as “married filing jointly” both spouses can claim USD 97,600 for purposes of exclusion even if one spouse is not a U.S citizen.
Tax is paid at higher graduated rate on the amount of taxable income that exceeds the foreign earned income exclusion amount.
In some circumstances it is beneficial to claim a foreign tax credit instead of claiming foreign earned income exclusion.
Foreign Tax Credit:
USA and Canada both provide foreign tax credit to prevent double taxation.
If you are a U.S Citizen who is subject to U.S taxation and you have paid tax to Canada, you can, in general, claim a foreign tax credit to offset your U.S tax on that income. Your credit cannot be more than the tax you have paid in Canada. Investment income is not eligible for foreign earned income exclusion. If you receive income for personal services performed in U.S and Canada, it is a good idea to keep a complete record of work days in each country.
For U.S foreign tax credit purpose, excess foreign tax credit can be carried back one year and forward 10 years.
For Canadian foreign tax credit purposes, certain excess foreign tax can be deducted from income in the current year. If the excess foreign tax relates to business income, the excess can be carried back 3 years and forward 10 years.
Foreign taxes on investment income and employment income that are not used as a credit or deduction in the year cannot be carried back or forward.
Canada – US Tax Treaty:
Tax Treaties prevent double taxation and reduce tax evasion by exchanging taxpayer information between two countries.
If a U.S citizen has funds in RRSP or other pension plan, the funds will grow tax free as allowed by the US – Canada tax treaty.
You must disclose specific details of treaty benefits on your U.S tax return if you want to use treaty to reduce your U.S taxes.
If a Canadian resident receives U.S social security benefits, these are not subject to U.S taxes but 85% of these benefits will be taxable in Canada.
Disclaimer:
This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.
References:
www.jct.gov/publications.html
KPMG Tax Planning for you and your family 2014
U.S Taxation of International Transactions by Robert J. Misey, Michael S. Schadewald
Introduction to United states International Taxation by Paul R. McDaniel, Hugh j. Ault and James R. Repetti
International Taxation by Joseph Isenbergh
Mansoor Suhail (Mani)
Accountant
BSBA – EA – ICIA – RA
Tax for Canada and U.S.A
Web: www.theaccountingandtax.com and www.taxservicesguru.com
Blog: http://taxservicesguru.blogspot.ca
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