The USA-Canada Tax Treaty – How It Benefits US Expat Taxpayers

Navigating taxation laws is one of the most significant issues that US expats living in Canada must manage. Thanks to the historical US-Canada tax treaty, the process has been streamlined. This treaty outlines how expats can calculate and remit taxes in specific circumstances and income groups. When filing your returns, consider hiring the services of an expat tax consultant in Canada, who can guide you on the dos and don’ts so you stay on top of the regulations. You’ll also get advice on the exclusions to take advantage of and how to lower the applicable taxes. Here’s a quick look at some of the essential tips.

The Tax Treaty Helps US Expats Avoid Double Taxation

The US administration taxes citizens and Green Card holders regardless of where they reside, including all locations worldwide. However, Americans living in Canada are also liable to pay taxes in the country where they live and work. The treaty has clauses that allow US expats to lower their tax obligations and avoid double taxation. For starters, you can use tools like the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) to offset some of the taxes. Using the Foreign Housing Exclusion (FHE), expats can get their housing expenses excluded from the taxable income.

Understanding Taxes on Retirement Funds

If you’ve been working for a Canadian employer, they’ll set up and contribute toward a Canadian Registered Retirement Income Fund (RRIF) and Registered Retirement Savings Plan (RRSP). You’ll incur taxes on these payments similar to US Social Security benefits when filing returns with the IRS. But, you can defer paying taxes on the amounts you pay into these plans. At the same time, you must declare the assets in these accounts and comply with Foreign Bank and Financial Accounts Reporting (FBAR) and Foreign Account Tax Compliance Act (FATCA) filing requirements. Accordingly, you’ll complete and submit FinCEN Form 114 and Form 8938, respectively.

Tax Dues Are Calculated According to Physical Presence

The amount of taxes payable to the Canadian government will depend on the number of days US expats have a physical presence in the country. For instance, if you have lived and worked in Canada for 182 days or less and earned an income of $10,000, you’re not required to pay taxes to the Canadian Revenue Agency (CRA). Of course, this rule applies only if you work for a Canadian employer and are not self-employed.

You Need Not Avail of All the Benefits

The USA-Canada Treaty has several benefits for US expats living across the border. However, you need not take advantage of all of them. Rely on the services of an experienced CPA for guidance on the exclusions applicable to your particular situation.

Taxation regulations for US expats can be complicated to understand to the layperson. But, with the advice of a tax consultant, you can lower the tax burden and ensure you don’t pay double taxes on the same income.