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Tax Guide for Canadian Expats in the United States

Tax Guide for Canadian Expats in the United States
Ines Zemelman, EA
15 September 2021

and the United States have the world's longest shared border, but geography alone doesn't explain why the two nations enjoy a unique relationship. They are bound by deep personal ties, a shared historical and cultural heritage, and similar values.

Their partnership is one of the most stable and fruitful in the world. They are both founding members of the NATO alliance. Trade and migration are at an all-time high. It is no surprise that the United States is the most popular destination for Canadian expats.

There are many reasons why many Canadian expats have relocated to the United States. The U.S. is home to many of the world's biggest brands and corporations. Canadian and American culture and entertainment are also deeply intertwined. 

You're bound to have a lot of questions when you move to the United States: Do I need to pay income tax? What forms do I need to use? What will happen to my assets in Canada?

Here's everything you need to know about taxes for Canadian expats in the United States.

What's my tax status?

Your tax status mostly depends on your visa. There are two categories of U.S. visas: immigrant and non-immigrant.

Immigrant visa

Canadians who wish to immigrate to the United States are granted an immigrant visa. It grants permanent residency within the country, and many Canadian expats obtain an immigrant visa through employment or U.S.-based relatives who are also U.S. citizens or permanent residents.

If you have an immigrant visa, your tax obligations begin when you enter the country.

Non-immigrant visa

Meanwhile, non-immigrant visas allow for a temporary stay within the United States. They are granted to students, tourists, researchers, and temporary workers. Diplomats, foreign military personnel stationed in the U.S., and employees of international organizations (e.g. United Nations, NATO) are also covered by this category.

Nonimmigrant visa holders only need to pay income tax on U.S.-sourced income. They also use non-resident tax forms to file a return.

What's my residency status?

Another factor that could affect your U.S. tax obligation is your length of stay within the country.

The Internal Revenue Service uses the Substantial Presence Test (SPT) to determine whether a Canadian expat qualifies as a non-resident or resident for tax purposes. What does this mean for you?

Even if you have a nonimmigrant visa, you may be considered a U.S. resident for tax purposes if you meet the Substantial Presence Test. That means you're covered by the same tax rules that apply to U.S. citizens and permanent residents.

It's important to note that diplomats, foreign government employees, students, and researchers are exempt from this rule. Even if they meet the Substantial Presence Test, they are treated as a non-resident for tax purposes. 

What is a resident alien?

Canadian expats that hold a Green Card or meet the Substantial Presence Test are considered U.S. Resident Aliens by the IRS. For resident aliens, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same as for U.S. citizens.

It's important to note that Green Card holders still need to pay U.S. federal income taxes even if they are abroad during the tax year.

What taxes do I need to pay?

Canadian expats need to understand the different types of taxes they may need to pay during their stay in the United States. Here are some of the most important:

1. Federal income tax

The U.S. federal government imposes a progressive income tax based on your income, with 7 tax brackets ranging from 10% to 37%.

2. State income tax

The United States comprises 50 states and the District of Columbia. Each state imposes its own tax rules, and where you decide to live will affect your tax liability. 

Nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no individual income taxes. While the state of New Hampshire has no tax on earned wages, it taxes investment income.

3. Local income tax

Some cities and counties impose a local income tax on top of the federal and state income taxes. While most local taxes range from 1-2%, some major cities such as New York City charge as much as 3.8%

4. Social Security and Medicare tax

A payroll tax is deducted from an employee's paycheck or paid directly by a self-employed individual to fund Social Security and Medicare programs. The tax is based on your gross income.

Your employer will deduct 6.2% of your gross wages for the Social Security tax and 1.45% for the Medicare tax. They will also match your contributions for a total of 15.3%

If you are self-employed, you will need to pay the full amount. However, you can deduct half of the tax as a business expense.

Canadian diplomats and government officials, as well as their families and home employees (e.g. housekeepers, nannies), are exempt from the payroll tax.

What's the difference between SSN and ITIN?

You will need a Taxpayer Identification Number to file an individual tax return and claim tax treaty benefits.

A Social Security Number (SSN) is a nine-digit identification number given to United States citizens and permanent residents. Noncitizens authorized to work in the U.S. can also get an SSN.

An Individual Taxpayer Identification Number (ITIN) is a tax processing number only available for certain nonresident and resident aliens, their spouses, and dependents who cannot get an SSN.

What happens to my physical assets in Canada?

Once you become a U.S. Resident Alien, the proceeds from the sale of your real properties in Canada or anywhere else in the world will be taxed as part of your worldwide income. 

However, you can exclude the first $250,000 of capital gains from U.S. tax if the property meets the IRS-defined criteria of a primary residence.

Make sure to check the relevant tax laws before disposing of your Canadian assets.

What happens to my Canadian retirement account?

Pensions received from sources outside the United States have different tax rules from U.S. retirement accounts. For starters, there is no rollover: funds transferred from a Canadian retirement account to a U.S. retirement account are taxable.

You may want to consult an expert tax advisor if you have questions about your retirement accounts.

Do I need to report foreign financial assets?

If you own foreign financial assets such as foreign bank accounts, investment accounts, and insurance policies, you may need to submit a report to the U.S. Department of Treasury.

The Foreign Bank Accounts Report (FBAR), or FinCEN 114, is filed electronically with the Financial Crimes Enforcement Network, a division of the U.S. Department of Treasury. It is not part of your IRS tax return. 

U.S. citizens or resident aliens who own or have signature authority over foreign financial accounts with an aggregate balance of $10,000 or higher on any given day during the calendar year must file this form. 

The balance on foreign retirement accounts is also counted towards the $10,000 threshold and must be reported. Joint bank accounts with a spouse who is not a U.S. resident must be reported, as well.

Another financial report you may need to file is the Foreign Account Tax Compliance Act (FATCA), or Form 8938. Like the FBAR, this form does not affect your tax liability and only informs the federal government of your foreign financial assets. However, the filing threshold is higher. FATCA is submitted along with your federal tax return.

Tax treaty between the US and Canada

The US-Canada tax treaty can help you understand what to do when it’s not obvious which country you should pay taxes to. As a general rule, the country that should receive the tax payment is usually determined by the taxpayer’s resident status in the country. 

The tax treaty between the two countries was originally designed to prevent double taxation on dual citizens, but it can also be used to settle tax questions and issues.

How to file Canadian expat taxes in the U.S.?

The U.S. tax code can be difficult to understand if you're a Canadian. You may incur heavy fines and penalties if you accidentally omit information on your tax return or miss a key deadline. If you have any questions about your taxes as a Canadian expat in the United States, you might want to contact a tax expert. 

Ines Zemelman, EA
Founder of TFX