How Are Cross Border Taxes Assessed for American Citizens Working in Canada?

November 2, 2021 | Written by: Sohail Afzal

Cross Border Taxes Assessed for American Citizens Working in Canada

The united states tax system is said to be one of the most complex tax systems of all time. There are some fundamental differences between the US and Canada regarding their taxation. The US citizens have different income tax issues arising from employment in Canada. In this article, we will explain how are cross-border taxes are assessed for American citizens working in Canada?

Tax Difference Between Canada And The US

Income tax in Canada is assessed upon residents, those who maintain residential ties while working in Canada. However, the US bases the tax on both citizenship and residence. The difference could lead to several situations. But to explain it in easy words, the US citizen only has to pay tax regardless of the residential agreements included.

Canada and US have this agreement that makes an exception for US citizens, so they don’t get taxed upon the income earned and taxed in Canada. This exception is driven properly by the US 1040 federal tax return.

US Citizens Residing In Canada

Suppose you are a US citizen residing in Canada. In that case, your income earned in Canada will be taxed whether it is a Canadian-operated company or any investment return from Canadian stocks, bonds or any mutual funds.

A Canadian residence is generally very flexible in these terms. While many factors may allow the taxpayer to claim Canadian residence for tax purposes, the most basic thing to focus on is how much time the taxpayer has spent inside Canada.

Suppose they spent more than 183 days in Canada. In that case, the person is likely to be considered a lawful taxpayer and a resident of Canada by the CRA. A Canadian must declare all income from every source on a Canadian tax return.

A US Citizen And Resident Working In Canada

Given the length of the border that both citizen shares, there are possibilities that a US citizen who is also a US resident is earning income based in Canada. A non-resident is usually obligated to pay only Canadian tax on their sources of income under the cross-border treaty between Canada and the US. a worker could be exempted from Canadian taxation and may apply for exemption on withholding of taxation from Canadian sources.

In easy words, if the taxpayer is working in Canada but for a US-based company and paid by that same company, the employment income of such taxpayer can be exempted from Canadian taxation as long as they are not reading inside Canada.

If you want o know more about taxation, feel free to contact us, and we would be much happy to assist you.

Sohail Afzal CPA Toronto

Sohail Afzal, CPA, CMA, MBA

Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.

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