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Tax guide for Americans in Canada

Tax guide for Americans in Canada

Moving to Canada is a significant life event that comes with many changes, especially when it comes to understanding and navigating the tax system.

For American expats living in Canada, determining your residency status is crucial as it affects your tax obligations to the Canadian government.

Table of contents

  1. Resident vs. non-resident of Canada
  2. Who can be considered a resident of Canada
  3. Types of taxation in Canada
  4. Types of income in Canada
  5. Social security in Canada
  6. Deductions and credits for expats in Canada
  7. A tax treaty between the US and Canada
  8. Most popular tax forms for US expats
  9. When are Canada taxes due?
  10. Canada tax forms for US Expats

Resident vs. non-resident of Canada

Your tax obligations in Canada are largely dependent on your residency status. The Canadian tax system differentiates between residents and non-residents, each having different tax implications.

Resident of Canada

If you are considered a resident of Canada for tax purposes, you are required to pay Canadian income tax on your worldwide income. This includes income from both inside and outside of Canada. As a resident, you are also eligible for certain tax benefits and credits that are not available to non-residents.

Non-resident of Canada

Non-residents, on the other hand, are only required to pay Canadian income tax on income earned from Canadian sources. This could include income from employment in Canada, business carried out in Canada, or rental and property income earned in Canada. Non-residents are not eligible for the same range of tax benefits and credits as residents.

Who can be considered a resident of Canada

Determining residency status can be complex and depends on a variety of factors. The Canada Revenue Agency (CRA) considers several ties to Canada that could influence your residency status:

  • Permanent home in Canada: If you own or rent a home in Canada and it is available for your use, this is a significant residential tie.
  • Spouse or common-law partner in Canada: If your spouse or common-law partner lives in Canada, this could indicate residency.
  • Dependents in Canada: Having dependents who live in Canada is another important residential tie.
  • Social and economic ties: Other ties, such as a Canadian driver's license, Canadian bank accounts, or membership in Canadian social or religious organizations, can also be considered.

The duration of your stay in Canada also plays a role. Generally, if you spend 183 days or more in Canada in a tax year, you may be considered a resident.

Types of taxation in Canada

Canada’s tax system is multifaceted, encompassing various types of taxes that fund the country’s extensive public services and social programs.

Personal income tax rates

In Canada, personal income tax is progressive, meaning that as your income increases, so does the rate at which it is taxed. The country employs both federal and provincial/territorial tax rates.

Federal tax rates for 2023:

Federal taxable income (CAD) Tax rate (%)
0-53,359 15
53,359-106,717 8,004 + 20,5% of the excess over 53,359
106,717-165,430 18,942 + 26% of the excess over 106,717
165,430-235,675 34,208 + 29% of the excess over 165,430
235,675 and above 54,579 + 33% of the excess over 235,675

Each province and territory in Canada has its own set of tax rates, which are applied to your income in addition to the federal tax rates. These rates can vary significantly from one region to another.

Provincial/territorial tax rates for 2023:

Location Taxable income (CAD) Top rate (%)
Alberta 341,502 15
British Columbia 240,716 20,5
Manitoba 79,625 17,4
New Brunswick 176,756 19,5
Newfoundland and Labrador 1,059,000 21,8
Northwest Territories 157,139 14,05
Nova Scotia 150,000 21
Nunavut 165,429 11,5
Ontario 220,000 13,16
Prince Edward Island 63,969 16,7
Quebec* 119,910 25,75
Saskatchewan 142,058 14,5
Yukon 500,000 15
Non-resident** 235,675 15,84

*Quebec operates under its distinct personal tax system, necessitating a unique computation of taxable income. Acknowledging Quebec's autonomy in tax collection, the federal income tax for residents of Quebec is reduced by 16.5% of the basic federal tax.

**For non-residents, instead of paying provincial or territorial tax, there is an additional tax of 48% of the basic federal tax on income that is taxable in Canada but not earned within any province or territory.

However, non-residents are subject to the provincial or territorial tax rates for employment income received, and business income associated with a permanent establishment (PE) in that specific province or territory. It's important to note that different tax rates may be applicable to non-residents under various circumstances.

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that all individuals pay at least a minimum amount of tax, regardless of the deductions and credits they may claim.

The AMT calculation takes into account certain preference items and adds them back to your taxable income. If the AMT is higher than your regular tax liability, you are required to pay the AMT amount.

In Canada, the AMT is calculated as 15% of your adjusted taxable income, minus federal non-refundable tax credits.

It’s important to note that not all individuals will be subject to AMT, as it typically only affects those with large amounts of deductions or tax-preferred income.

Kiddie tax

The Kiddie Tax in Canada is designed to prevent income splitting between parents and their minor children. Income splitting is a strategy where higher-earning parents transfer income to their lower-earning children to reduce the overall family tax liability.

The Kiddie Tax applies to certain types of income earned by children under the age of 18, including dividends and interest from unearned income. This income is taxed at the highest marginal tax rate, regardless of the child’s own tax bracket.

There are some exceptions, such as income earned from employment or a business operated by the child, which are not subject to the Kiddie Tax.

Federal Goods and Services Tax (GST)

The Goods and Services Tax (GST) is a federal value-added tax applied to most goods and services sold in Canada. The current rate is 5%. Businesses collect GST on their sales and remit it to the government, while also receiving credits for the GST paid on their purchases. This ensures that the tax is ultimately borne by the final consumer.

Certain goods and services, such as basic groceries, prescription drugs, and medical devices, are exempt from GST or zero-rated, meaning they are taxed at 0%.

Harmonised Sales Tax (HST)

The Harmonised Sales Tax (HST) is a combined tax that includes both the federal GST and a provincial sales tax component. The HST is applied in provinces that have chosen to harmonize their provincial sales tax with the GST. The rate of HST varies by province, ranging from 13% to 15%.

Like the GST, businesses collect HST on their sales and remit it to the government, while also receiving credits for the HST paid on their purchases. The HST is designed to be a more efficient tax system, simplifying the collection and remittance process for businesses.

Provincial Retail Sales Tax (PST)

Provincial Retail Sales Tax (PST) is a sales tax levied by individual provinces in Canada, applied to the sale of goods and services within the province.

The rate of PST and the types of goods and services it applies to vary significantly across provinces. Some provinces have chosen to harmonize their PST with the federal Goods and Services Tax (GST), creating the Harmonized Sales Tax (HST), while others maintain separate GST and PST systems.

Businesses operating in provinces with PST are required to collect the tax on applicable sales and remit it to the provincial government. Consumers ultimately bear the cost of PST, as it is added to the sale price of goods and services at the point of purchase.

Quebec Sales Tax (QST)

The Quebec Sales Tax (QST) is a sales tax specific to the province of Quebec, applied to the sale of most goods and services within the province.

The QST is similar to the GST and is calculated at a rate of 9.975% on the sale price of taxable goods and services. Like the GST, the QST is a value-added tax, meaning that businesses collect the tax on their sales and remit it to the government, while also receiving credits for the QST paid on their purchases.

The QST is administered by the provincial government of Quebec, and businesses operating in Quebec are required to register for, collect, and remit the QST in addition to the GST.

Inheritance tax

Canada does not have a federal inheritance tax, meaning that there is no tax payable by the beneficiaries of an estate on the value of the inheritance they receive.

However, Canada does tax the deemed disposition of a deceased person's assets at their fair market value at the time of death. This means that any accrued capital gains on the deceased's assets are subject to tax on the final income tax return of the deceased.

Some provinces also impose probate fees or estate administration taxes, which are fees paid to the provincial government for the legal validation of a will and the administration of the estate. The rates and thresholds for these fees vary by province.

Estate tax

In Canada, there is no specific estate tax levied on the value of an individual’s estate upon their death. However, Canada does impose a deemed disposition tax at the time of death, which can have similar financial implications.

Upon death, a person is deemed to have sold all their capital property at its fair market value, and any resulting capital gains are subject to tax on the deceased’s final income tax return. This can result in a significant tax liability, especially if the individual held valuable assets that appreciated over time.

To mitigate the impact of this deemed disposition, there are various tax planning strategies and exemptions available, such as the Principal Residence Exemption for a primary home and the rollover of assets to a surviving spouse.

Gift tax

Canada does not impose a gift tax, meaning that individuals can give gifts of money or property to others without incurring a tax liability. However, if you give someone a gift of property that has appreciated in value, you are deemed to have sold the property at its fair market value, and any resulting capital gain is subject to tax.

It’s important to note that while Canada does not have a gift tax, there are implications for both the giver and the receiver of the gift. The giver may be subject to capital gains tax if the gifted property has appreciated in value, and the receiver may be subject to tax on any income generated by the gifted property.

Property tax

Property tax in Canada is a local tax imposed by municipal governments on real estate property owners. The tax is calculated based on the assessed value of the property, which is determined by the local assessment authority.

The rate of property tax varies significantly across different municipalities and provinces, and it is used to fund local services such as education, public transportation, and municipal infrastructure.

Property owners are required to pay property tax annually, and failure to pay can result in penalties or even the seizure of the property. Some municipalities offer property tax relief programs for seniors, low-income individuals, or those facing financial hardship.

Luxury tax

As of 1 September 2022, Canada has implemented a federal luxury tax on certain high-value goods.

This tax is applied to sales made for personal use of luxury cars and personal aircraft with a retail sales price exceeding CAD 100,000, and boats with a retail sales price over CAD 250,000.

The tax is calculated at the lesser of 20% of the value above the sales price threshold or 10% of the full value of the luxury car, boat, or personal aircraft.

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Types of income in Canada

Understanding the various types of income recognized in Canada is crucial for tax purposes and financial planning.

Employment income

Employment income is money earned by an individual for providing services or performing work. This is the most common type of income in Canada and includes wages, salaries, bonuses, commissions, and other similar payments. Employment income is fully taxable, and employers are required to withhold taxes and remit them to the Canada Revenue Agency (CRA) on behalf of their employees.

Equity compensation

Equity compensation is a form of non-cash payment provided to employees, granting them ownership interests or rights in the company. This can take various forms, including stock options, restricted stock units (RSUs), or employee stock purchase plans (ESPPs). Equity compensation is often used to attract, retain, and motivate employees, aligning their interests with those of the company and its shareholders.

Stock options give employees the right to purchase company stock at a predetermined price, potentially allowing them to benefit from the increase in the company’s stock value. RSUs are grants of company stock that vest over time, and ESPPs allow employees to purchase company stock at a discount. The taxation of equity compensation can be complex, depending on the type of equity awarded and the timing of the sale of the stock.

Employee Profit Sharing Plans (EPSPs)

An Employee Profit Sharing Plan is a type of deferred compensation plan that allows employees to share in the profits of their employer. Under an EPSP, an employer can distribute a portion of its pre-tax profits to employees, providing them with a direct financial interest in the company's performance.

The contributions made by the employer to the EPSP are tax-deductible for the company, and the income is only taxed in the hands of the employee when it is actually received. This allows for potential tax deferral benefits for the employee.

However, it’s important to note that the CRA has implemented rules to prevent excessive contributions to EPSPs, which could be used as a means of income splitting or deferring tax. Contributions that are deemed to be excessive are subject to a special tax, ensuring that the EPSP is used appropriately.

Business income

Business income refers to the money earned from conducting business activities, including the sale of goods or services. This can apply to sole proprietors, partnerships, and corporations. Business income must be reported on the individual’s or company’s tax return, and it is subject to federal and provincial/territorial income taxes.

Expenses incurred to earn business income can generally be deducted, reducing the taxable income.

Capital gains

Capital gains in Canada refer to the profit made from the sale of a capital asset, such as real estate, stocks, or bonds. Only 50% of the capital gain is taxable, and it is added to your income and taxed at your marginal tax rate.

The inclusion rate for capital gains is lower than for other types of income, making it a tax-advantaged form of income.

Dividend income

In 2023, dividends received from Canadian corporations are categorized as either non-eligible or eligible and are increased by 15% and 38%, respectively, for the purpose of income inclusion. Subsequently, a federal tax credit is available at 9.03% for non-eligible dividends and 15.02% for eligible dividends, with additional provincial or territorial tax credits applicable.

Interest income

Interest income is money earned from savings accounts, certificates of deposit, bonds, or loans. This type of income is fully taxable at your marginal tax rate, making it less tax-advantaged than capital gains or eligible dividends.

There are, however, certain types of interest income that are tax-exempt. For example, interest earned on investments in a Tax-Free Savings Account (TFSA) is not subject to income tax. Additionally, interest from Canadian government bonds is tax-exempt at the provincial level, although it is still taxable federally.

Rental income

Rental income is the money earned from renting out property, whether it be residential or commercial. In Canada, this type of income must be reported on your tax return, and it is subject to federal and provincial/territorial income taxes.

Property owners are allowed to deduct expenses related to the rental property, such as mortgage interest, property taxes, insurance, maintenance and repairs, and property management fees. These deductions can help to reduce the taxable rental income.

If you rent a part of your principal residence, you may still be eligible for the Principal Residence Exemption on the portion of the home you use for personal purposes.

Foreign Accrual Property Income (FAPI)

FAPI is a category of income that is designed to prevent Canadian taxpayers from deferring Canadian tax by earning investment income through a controlled foreign affiliate. FAPI includes passive income such as interest, dividends, rents, and royalties, as well as income from certain businesses that earn income from property.

Canadian taxpayers who own shares in a controlled foreign affiliate are required to include their share of the affiliate’s FAPI in their income, regardless of whether the income is actually distributed to them. This ensures that the income is subject to Canadian tax in the year it is earned, preventing deferral.

Non-Resident Trusts (NRTs)

Non-Resident Trusts (NRTs) are trusts that are administered outside of Canada but have Canadian contributors or beneficiaries. The Canadian tax implications for NRTs can be quite complex, as they depend on the residency of the settlor, the beneficiaries, and the nature of the trust’s income and property.

If a Canadian resident contributes property to an NRT, they may be subject to Canadian tax on the income earned by the trust, even if the income is not distributed. The rules are designed to prevent Canadians from using offshore trusts to defer or avoid Canadian tax.

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Social security in Canada

Social security in Canada encompasses a variety of programs designed to provide financial support and assistance to citizens and residents during times of need. These programs are funded through taxes and are intended to help individuals and families cope with unemployment, disability, retirement, and other life events.

Key components of Canada’s social security system include:

  1. Employment Insurance (EI): This program provides temporary financial assistance to unemployed Canadians who have lost their job through no fault of their own. EI also offers special benefits such as maternity, parental, sickness, and compassionate care benefits.
  2. Canada Pension Plan (CPP): The CPP provides a monthly pension to eligible Canadians who are 65 years of age or older. The amount received depends on how much and for how long you have contributed to the plan. CPP also provides disability benefits and survivor benefits.
  3. Old Age Security (OAS): OAS is a monthly payment available to seniors aged 65 and older who meet the legal status and residence requirements. The amount received is determined by how long an individual has lived in Canada after the age of 18.
  4. Provincial and territorial programs: In addition to federal programs, each province and territory in Canada offers various forms of social assistance to help residents with low income, disabilities, or other needs.

Deductions and credits for expats in Canada

Expatriates living and working in Canada have access to various deductions and credits that can help reduce their tax liability.

Employment expenses

Expats working in Canada may be eligible to deduct certain employment-related expenses from their taxable income. These deductions are meant to offset costs incurred as a part of earning employment income. Common employment expenses that may be deductible include:

  • Home office expenses: If you are required to work from home, you may be able to deduct a portion of your home expenses such as utilities, rent, and maintenance.
  • Vehicle expenses: If your job requires you to use your personal vehicle for work-related activities, you may be able to deduct expenses related to its use, including fuel, maintenance, and insurance.
  • Tools and supplies: If you are required to purchase tools or supplies to perform your job, these costs may be deductible.
  • Moving expenses: If you moved to Canada for work or had to relocate to Canada for your job, you might be able to deduct eligible moving expenses.

Personal deductions

In addition to employment expenses, expats in Canada may also be eligible for various personal deductions that can reduce their taxable income. These include:

  • RRSP contributions: Contributions to a Registered Retirement Savings Plan (RRSP) are tax-deductible, and the funds grow tax-free until withdrawal.
  • Child care expenses: If you have young children and pay for child care to work or attend school, you may be able to deduct these expenses.
  • Student loan interest: If you are paying interest on a student loan for post-secondary education, this interest may be deductible.
  • Medical expenses: You may be able to claim a tax credit for eligible medical expenses that are not covered by your health insurance.
  • Charitable donations: Donations made to registered charities are eligible for a tax credit.

A tax treaty between the US and Canada

The United States and Canada have a tax treaty in place to prevent double taxation and to promote cooperation between the two countries in enforcing their respective tax laws. Key provisions of the tax treaty include:

  • Residency: The treaty provides rules to determine the residency status of individuals with ties to both countries, ensuring they are not considered residents of both countries for tax purposes.
  • Taxation of income: The treaty specifies which country has the right to tax specific types of income, such as employment income, business income, and investment income.
  • Relief from double taxation: The treaty provides mechanisms for individuals to claim foreign tax credits or exemptions on income taxed in both countries, preventing double taxation.
  • Non-discrimination: The treaty ensures that citizens and residents of one country are not discriminated against by the tax laws of the other country.
  • Exchange of information: The two countries agree to exchange tax information to assist in the administration and enforcement of their tax laws.
  • Assistance in tax collection: The treaty provides for cooperation in collecting taxes owed to the other country.

Most popular tax forms for US expats

U.S. citizens and green card holders residing in Canada are required to file U.S. tax returns, regardless of where they live. Here are some of the most commonly used tax forms for U.S. expats:

  1. Form 1040: This is the standard U.S. individual income tax return form. All U.S. citizens and green card holders are required to file Form 1040, reporting their worldwide income.
  2. Form 2555 (Foreign Earned Income Exclusion): This form is used to claim the Foreign Earned Income Exclusion, which allows qualifying expats to exclude a certain amount of their foreign earned income from U.S. taxation.
  3. Form 1116 (Foreign Tax Credit): Expats can use this form to claim a credit for income taxes paid to a foreign country, reducing their U.S. tax liability.
  4. Form 8938 (Statement of specified foreign financial assets): This form is required for expats who have certain foreign financial assets exceeding specific thresholds.
  5. FinCEN Form 114 (FBAR): U.S. citizens and residents must file this form if they have a financial interest in or signature authority over foreign financial accounts with an aggregate value exceeding $10,000 at any point during the calendar year.

When are Canada taxes due?

In Canada, the tax year is the calendar year, and the deadline for most individuals to file their income tax return is April 30th of the following year.

If you owe tax, you must pay the amount due by this date to avoid interest and penalties. For self-employed individuals, the filing deadline is June 15th, but any tax owed must still be paid by April 30th.

Canada tax forms for US Expats

U.S. expats living in Canada need to be aware of the Canadian tax forms that are relevant to their situation. Some of the key forms include:

  1. Form T1 (General income tax and benefit return): This is the main tax return form for individuals in Canada.
  2. Form T2202 (Tuition and Enrolment Certificate): If you are a student, this form is used to claim tuition and education-related credits.
  3. Form T1135 (Foreign income verification statement): If you own specified foreign property with a total cost of more than $100,000 CAD at any time during the year, you must file this form.
  4. Form T4 (Statement of remuneration paid): This form reports employment income and deductions. Employers provide this form to their employees.
  5. Form T5 (Statement of investment income): This form reports investment income such as interest, dividends, and royalties.
  6. Form T776 (Statement of real estate rentals): If you earn rental income in Canada, this form is used to report the income and claim related expenses.