Are you an American receiving payment for services performed in Canada? Understanding your tax obligations in Canada and the US can be a bit confusing. We’re here to help you understand the taxation rules that apply to your situation.
Will You Pay Tax for Services Performed in Canada?
Americans who are offering services in Canada will need to pay a withholding tax of 15%. A good example is an American independent contractor who traveled to Canada to offer their services to a Canadian customer. Your paycheck will have a 15% withholding tax applied to it. However, there’s a way that you can recover this money. You simply need to fill out a non-resident tax return form with the CRA after your year-end.
What if You Can’t Wait Until Year End?
There are situations where you may not be able to wait until the end of the year to reduce the money that is being deducted from your paycheck as withholding tax. The best alternative would be to file a regulation 105 waiver with the CRA. This allows you to reduce the withholding tax instantly from your paycheck.
Does the Duration of Your Contract in Canada Matter?
It certainly does. If you are performing services in Canada and your contract lasts for more than 6 months in a 12-month period then any profits that you derive within that year will be taxable. This means that you will need to file a Canadian tax return.
US citizens working in Canada
If you are a US citizen working in Canada, you are required to file a Canadian tax return which is due on April 30th of the following year. In Canada, US residents will file only one tax return unlike in their country where they have to file for both federal and state taxes. Your employer will issue what is called a T4 slip which is what you use to prepare your Canadian tax return for filing and to calculate the taxes owing.
If you are a US citizen who is deemed to be a resident of Canada, then you will be required to pay taxes on any income earned in Canada, US and other countries. Residents are typically those who have resided in Canada for 183 days within a 12-month period. Non-residents on the other hand will only pay taxes on the income earned in Canada. It will also depend if you are working for an American company in Canada. If this is the case, there are additional tax implications that your company should follow.
Speak to a Tax Accountant
US tax return requirements can be extremely complex. The last thing you need is to get penalties for failing to file. Therefore, it is critical that you consult a tax expert if you intend to travel to Canada for employment or to offer certain services as an independent contractor. Knowing the tax rules will help you to avoid hefty penalties and also reduce the risk of double taxation which costs you a lot of money in the long run.
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.