Expat Taxes for Canadians: What Should You Know

Posted on September 30, 2022 by Dylan Callaghan

Canada's high standard of living and powerful social strategies have made the country a popular choice for Americans living abroad. Besides Mexico, Canada serves to be a home for more expats from the US compared to other countries. But the real question is, do Canadian citizens working in the U.S. pay taxes to both countries?

What are the tax rules for Canadians abroad?

Canada takes pride in offering a wide array of tax benefits to its people. The country has developed comprehensive tax systems in effect to make that possible. A significant sector of US expats struggles to understand Canada's municipal, federal, and provincial taxes. If you are one of them, you have arrived at the right place.

First things first. Regardless of where you live, all US citizens must file the US Federal Tax Return annually. Nonetheless, this adds to the confusion in the minds of Americans living in Canada about the already complicated tax structure.

Who needs to file returns for taxes in Canada?

In Canada, those deemed residents must file a yearly income tax report of their income earned worldwide. On the other hand, non-residents will have to file a tax return when they receive some specific kind of income sourced in Canada. These can include:

  • Dividends
  • Pension plan
  • Employment income
  • Royalty payments
  • Rental payments
  • Annuity payments

Who is classified as a tax resident in Canada?

Before you get a thorough idea about tax rules for Canadians abroad, it's important to note that three factors measure residency status in Canada. These are dependents, spouses, and dwellings. Generally, residents tend to have a fixed abode in Canada. Other factors can also cast an influence in deciding the residency status. And these can include:

  • Insurance
  • Business connection
  • Social connection
  • Membership in different clubs
  • Ties with religious institutions
  • Canadian driver's license

Lastly, any individual who stays in Canada for at least 183 days within the span of one year will be deemed a resident even when they do not apply to other factors listed above.

Tax returns are dated from 30th April to the year-end of the fiscal year, 31st December. No provisions have come into existence for extending this deadline. Penalties for late tax filing, as well as taxes, are typically dependent on the taxes that remain unpaid. But there is also a system for assessing penalties on late-filed information forms. 

It's worth noting here that the country's tax system is based on self-assessment. This means individuals liable to pay taxes must find out how much they have to pay as income taxes and file the returns. The tax rules for Canadians abroad are also the same, where individuals file for themselves and spouses cannot file the same jointly.

What are the various tax forms for Americans residing in Canada? 

If you are an American living in Canada, you might have to file taxes and fill out tax forms with the Canadian and the United States governments. Some of the primary documents for each of the countries include: 

T1135

This form is meant for those individuals who are foreign investment property owners valued at over 100,000 CAD. You are bound to report the same using this form which serves to be the Foreign Income Verification Statement. If you see that you need to file the T1135, you will have to attach the same to Form T1 and file it as well. 

T1

This one is the main form for filing income tax returns for expats in Canada. It is also called the T1 General for Income Tax Benefit and Returns. The form is equivalent to the Canadian IRS 1040 Form. This is an important return filing form that all expats are required to use for reporting all kinds of incomes, such as:

  • Rental
  • Capital gains
  • Interest
  • Employment
  • Dividends
  • Self-employment

The standard due date for filing this form is 30th April of the current financial year. But those who are self-employed expats can use the automatic extension of filing the form until 15th June. You may request an extension of the deadline for filing your T1 form when necessary. 

If you are planning to leave Canada for a prolonged period, it's essential to report the same to the CRA or Canadian Revenue Agency. This should be done before you ask the government to determine residency status.

This is because the residency status depends on whether you will leave the country permanently or only for a stipulated period, along with the residential connection the individual keeps with the other country and Canada. 

Is there any treaty between the US and Canada regarding taxes? 

The US comes with a formal treaty regarding tax with Canada. This treaty is highly beneficial for the Americans living in Canada to avoid unwanted double taxation. The United States has also developed a totalization agreement with Canada to set clear regulations to determine whether a US expat must pay taxes into the Canadian or the US Social Security System. 

The treaty allows all Americans living in Canada to be exempted from the issue of double taxation. Moreover, the IRS also offers numerous prospective tax credits as well as deductions for expats, such as:

  • Foreign tax credit
  • Foreign earned income exclusion
  • Foreign housing exclusion

As most US expats do, you can manage US tax debt with the help of these tax credits. So if you are thinking, do Canadian citizens working in the US pay taxes to both countries, then the answer would be no. 

Final thoughts

Canada is one of the most desirable countries for people to settle in. This is because of the beautiful climate, amicable people, and unmatched quality of life. But as it goes with any relocation, it's essential to understand the taxes for Canadians in case you are planning to move to Canada or have recently started living there. 

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Dylan Callaghan

About the author

Dylan is the co-founder of Stocktrades.ca and an avid self-directed investor. He holds a portfolio of Canadian growth and dividend growth stocks, and believes that anyone, regardless of financial status, stands to benefit from investing in the stock market. His ultimate goal with his writing and the continual development of Stocktrades.ca is to create a resource that helps Canadians, and investors from around the world, make more money and retire earlier.

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