Cross Border Taxation - October 2022 Prudent Money Coach Tax and Money Tips

Photo by Priscilla Du Preez on Unsplash

 
​Happy Thanksgiving! I am grateful for so many things: health, family, work, and others. I hope you also have many things to be thankful for. Are you gathering with family and friends this Thanksgiving? 

Canada borders the US in the south. There are many Americans living in Canada, so I thought it would be good if I had knowledge about cross-border taxation. I decided to take a course, and I am happy to let you know that I just passed my Cross Border Taxation course from the Knowledge Bureau. Woohoo!! This month, I thought I'd share with you some things I learned from the course. 


1. A big difference between Canadian and US tax systems is that the Canadian tax system uses residency, while the US tax system uses citizenship. What does it mean? Here are some examples. 

- If you are a US citizen, you would need to file your US taxes regardless of where you live in the world.

- It is important to understand whether you are considered a US citizen or not. If you were born in the US, you are automatically a US citizen. If you were not born in the US, but one of your parents is a US citizen, you may still be considered a US citizen even if you have never lived in the US.

- If you have a green card (permanent resident of the US), you have the same tax and reporting obligations as a US citizen. Did you know that even if your green card expires, you still have the same tax and reporting obligations if you have never surrendered your green card? Yup, just because your green card expires, doesn't mean your US tax obligation ceases. 

- Another group of people who may have to file US taxes or have US reporting obligations are those who may be caught by Substantial Presence Test (SPT). SPT is a formula that calculates the number of days you were present in the US in the last 3 years. Here's the wording from IRS website:
"You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year."
Source: https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

- If you have US rental income, then you definitely have to file US taxes regardless of your status. 

- Now, if you are a Canadian citizen, you may or may not be considered a Canadian resident for tax purposes. It depends on how strong your residential ties to Canada are.

- If you are not a Canadian citizen or permanent resident, you may still be considered a Canadian resident for tax purposes. For example, an individual in Canada with a work permit may be considered a Canadian resident for tax purposes.


2. Canada has a tax treaty with many countries, including the US. This is meant to prevent double taxation. So, if you have paid tax in Canada, you may be able to claim foreign tax credit in your US tax return, or vice versa. Note that foreign tax credit may or may not be applicable to US state tax or Canadian provincial tax. This means you may pay double taxes in certain situations.


3. If you live in Canada and you or your child are a US citizen or a permanent resident, please consult a cross-border tax specialist before you open any tax-sheltered accounts such as TFSA (Tax Free Savings Account) and RESP (Registered Education Savings Plan). A cross-border tax specialist is one who understands BOTH Canadian and US taxes, not just US taxes or just Canadian taxes. You need to understand your US tax and reporting obligations before you open Canadian tax-sheltered accounts; then decide whether the benefits outweigh the compliance fees. 


If you think Canadian taxes are complex, US taxes are even more complex. (Yikes...!) 

That's all for October. Enjoy the Autumn weather! :)


Disclaimer: Information provided above is intended to be general information and not tax advice. Please consult a cross-border tax specialist to get advice on cross-border tax matters.

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