How to Reduce Double Taxation by Using U.S./Canada Cross Border Income Tax Treaty?

October 13, 2021 | Written by: Sohail Afzal

Income Tax

The U.S./Canada border income tax treaty solves the primary problem of paying taxes for citizens living in a foreign country. This tax treaty helps reduce double taxation as the citizens are no longer required to pay taxes in a foreign country.

Let’s understand it with the help of an example. Suppose you’re a Canadian citizen but living and earning in the U.S., then you wouldn’t have to pay tax on your U.S. income. However, you have to declare all your income when you file the Canadian income tax return.

All Canadian citizens living in Canada or the U.S. but getting their income from the U.S. must know all the details about how they can reduce double taxation. This article will let you know about the rulings for filing taxes and how they can decrease the U.S. withholding tax.

How can the tax treaty reduce Double Taxation?

The tax treaty focuses on facilitating people to alleviate taxation. This is a treaty between Canada and the United States which would help Canadians if they earn income in the U.S. and vice versa. If not for the treaty, the Canadians would be at a big loss financially as they would have to pay tax to the Internal Revenue Service and the Canada Revenue Agency on their U.S. income.

Now, Canadian residents and U.S. citizens have to make sure that they report their foreign income. It is highly recommended that you contact a reliable accounting firm with the required experience in cross border taxes to file your taxes. They can guide you through the entire process and make it easier for you.

To reduce double taxation, the U.S. offers a foreign tax credit. Due to this tax credit, double taxation is drastically decreased. Those U.S. citizens who reside in Canada have to be careful about the tax rules in Canada and the U.S. They should know about all the problems that would arise because of the Canada-US income tax treaty.

How Can Unincorporated Small Businesses Leverage the Tax Treaty?

If you are an owner of an unincorporated business earning income in the United States, you are generating income from the United States on that business. Then you are required to add the U.S. income to your Canadian tax return and pay taxes on it. The U.S. taxes were not withheld, so the tax credit doesn’t apply to this income.

And, in case you have paid the taxes to the IRS, you can claim those. You have the responsibility to report and add all your income when you are filing Canadian taxes.

Conclusion

The U.S./Canada tax treaty is a great relief for many people who reside in one country but earn all or part of their income from the other one. For instance, people living and earning in Canada but are residents of the USA and vice versa.

Contact us now to know more about it.

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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