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Canada has charming cities, natural beauty, and close proximity to the US. Given that, it’s no wonder that the Great White North is the number two destination for Americans living abroad! However, US expats should be aware that living in Canada can complicate your US taxes.
All American expatriates living in Canada still need to file US taxes, even if they’re filing Canadian taxes as well. Although filing taxes as a US citizen living abroad may seem intimidating, research and prep work go a long way.
That’s where Bright!Tax comes in. With over a decade of helping US expats worldwide prepare their tax returns, we’re well-versed in filing US taxes in Canada. We are also excited to be able to offer US expats based in Canada the option of filing both their US and Canadian taxes. Feel free to submit an inquiry before reading on for our complete guide to US taxes in Canada.
Snapshot of Canadian Taxes
- Primary tax forms: T1 General
- Tax deadline: April 30 (June 15 for self-employed)
- Reporting website: Canada Revenue Agency
- Administrative language(s): English, French
- Tax treaty: Yes
- Totalization agreement: Yes
How do Canada federal taxes work for Americans living there?
The Canadian government collects taxes from Americans living in Canada according to whether or not they qualify as a tax resident.
Who qualifies as a tax resident in Canada?
Tax residents are required to pay federal taxes in Canada. Tax residency is determined by factors like the length, purpose, intent, and continuity of your stay; whether you maintain a home in Canada; and whether a spouse or dependent lives there (among others).
Those who have spent 183 or more days in Canada during the tax year are considered tax residents. To stay long enough to qualify as a tax resident, you’ll typically need a visa, such as:
Express Entry Visa
The Express Entry Visa is granted to skilled workers moving to Canada.
Self-Employed Persons Program
The Self-Employed Persons Program grants visas to freelancers, independent contractors, and other self-employed people.
Canada Student Visa
The Canada Student Visa is granted to students attending an institute in Canada. Unlike some other countries, Canada does require students to pay taxes if they qualify as tax residents.
The Family Sponsorship Program
Americans who have family members in Canada may be eligible for the Family Sponsorship Program.
Start-Up Visa Program
The Start-Up Visa Program grants visas to entrepreneurs hoping to launch and grow innovative businesses in Canada.
Do US expats living in Canada also have to file US taxes?
All US citizens and Green Card holders who meet the minimum reporting threshold are required to file a US federal tax return, regardless of where they live or earn their income. So if you’re a US expat with tax residency in Canada, you’ll need to do both a Canadian tax return and a US tax return. The good news is that there are tax breaks available that can often help you eliminate double taxation (more on that later).
Other tax reporting obligations might include:
- State and/or local taxes: This will depend on where you last lived, so make sure to look up the tax obligations of your former home.
- Form 8938: Required for expats with financial assets registered or held outside the US worth over $200,000 on the last day of the tax year, or more than $300,000 at any time during the year.
- FBAR: Required for expats with $10,000 or more in foreign financial accounts.
In 2023, US taxes are due on April 18. However, the US tax filing deadline for non-residents and Americans abroad is June 15. This deadline can be extended further upon request until October 16, or even December 15. (We don’t recommend waiting that long, though.)
Filing taxes in Canada: What entity is the tax-governing authority?
The Canada Revenue Agency (CRA) is responsible for administering, taxes, benefits, and related programs.
There’s another tax administration agency in Canada for Quebec only, called Revenu Québec.
Read more about US Taxes For American Expats In Quebec City.
Income tax rates Canada
If you are a US citizen working in Canada, you may be liable for taxes. It is important to understand that your tax liability is determined by your tax residency. Income tax rates in Canada range from 15% to 33%. However, this rate only applies to income that falls above a certain threshold.
- 15% on the portion of taxable income that is $53,359 or less, plus
- 20.5% on the portion of taxable income over $53,359 up to $106,717, plus
- 26% on the portion of taxable income over $106,717 up to $165,430, plus
- 29% on the portion of taxable income over $165,430 up to $235,675, plus
- 33% on the portion of taxable income over $235,675
Each of the provinces has its own rates as well.
Property Taxes in Canada
Those who own property in Canada must pay taxes on it, but the rate varies from municipality to municipality as well as according to the value of the property. Some of the highest property taxes in Canada are in New Brunswick, while some of the lowest are in British Columbia. There are some property tax breaks available in Canada, including for first-time homeowners and those with disabilities.
If you’re wondering “is there a tax on foreigners buying property in Canada,” the answer is yes. It’s called the Land Transfer Tax, and rates vary by province and municipality. Generally, however, those who buy property will be taxed about 1% for the first $200,000 of the value of their property, and 2% on anything thereafter.
Is property tax deductible in Canada?
Property tax is only deductible in specific circumstances, such as for owners renting out their property and sometimes, self-employed individuals using their home for business purposes.
Capital Gains Tax in Canada
Typically, 50% of capital gains earned is subject to taxation by the CRA, and factored into your overall taxable income.
How to avoid capital gains tax on property in Canada?
You may be able to mitigate capital gains taxes by claiming capital losses.
Payroll Tax in Canada
Payroll taxes are automatically deducted from your earnings by your employer, and fund Employment Insurance (EI), the Canada Pension Plan (CPP), and Federal and Provincial Income Tax. Rates vary by province and tax bracket.
Do I have to pay social security in Canada?
The US’s Totalization Agreement with Canada helps US expats in Canada avoid paying social security taxes to both governments. Expats’ contributions made while in Canada can be credited to either system, depending on how long they will be living in Canada.
Value-Added Tax (VAT)
Canada’s version of a value-added tax is called the federal Goods and Service Tax (GST). A GST of 5% is placed on most goods and services. A few exceptions include health, legal, and child-care services.
What are the filing deadlines in Canada?
Tax residents of Canada must have their returns in by April 30th of a given year. For self-employed tax residents of Canada, the deadline is June 15.
Does Canada have a tax treaty with the US?
Yes, the US-Canadian Tax Treaty covers double taxation with regards to income tax and capital gains tax. However, due to the Savings Clause, the benefit is limited for American expats in Canada. The better solution for US expats hoping to avoid double taxation is to claim US tax breaks, which we’ll dive into below. To claim a provision in the tax treaty (other than one of the aforementioned tax breaks), expats should use IRS form 8833.
It’s also worth noting that many of the tax-free investment instruments available in Canada are taxable under US law. This includes (but is not limited to): Registered Retirement Savings Plans, Tax-Free Savings Accounts, and Canadian-based mutual funds. Ultimately, for an American living in Canada, taxes will vary.
Read More: Planning For Americans Citizens In Canada With US IRAs
Common tax deductions available for expats in Canada
For a US citizen working in Canada, taxes can feel like a labyrinth. Fortunately, there are several ways that Americans living in Canada can reduce their US tax bill, most often to zero:
Foreign Tax Credit (FTC)
The FTC allows you to subtract anything you’ve paid in taxes to another country from what you owe the US, provided that those taxes are legal, paid, based on income, and charged specifically to you. The FTC is a good option for those who pay a higher income tax in Canada than they would in the US, as they can apply any excess US tax credits toward future tax returns. To claim it, expats must file Form 1116 along with their federal tax return.
Read more in our complete guide to the Foreign Tax Credit.
Foreign Earned Income Exclusion (FEIE)
The FEIE allows expats to exclude a certain amount of their earned income from taxation. For tax year 2022 (the taxes you’ll pay in 2023), that amount is $112,000. For tax year 2023 (the taxes you’ll pay in 2024), that figure will increase to $120,000.
As part of the FEIE, you may also be able to deduct certain qualifying foreign housing expenses through the Foreign Housing Exclusion (FHE) or Foreign Housing Deduction (FHD).
To qualify for the FEIE, you must meet one of two tests:
Physical Presence Test
The Physical Presence Test requires you to prove that you’ve been out of the US for 330 days in any 365-day period.
Bona Fide Residence Test
The Bona Fide Residence Test requires you to provide official documentation showing residence of at least one calendar year in another country, such as residence cards, rental contracts, utility bills made out in your name, etc.
Read more in our complete guide to the Foreign Earned Income Exclusion.
Child Tax Credit (CTC)
The Child Tax Credit offers all US taxpayers a partially-refundable tax credit of up to $2,000 per qualifying child, provided that they meet the basic criteria. However, when filing for the 2022 tax year in 2023, most expat parents can expect to receive a partial refund of up to $1,500 per qualifying child due to common international tax filing circumstances.
Understanding how to qualify for (and even retroactively claim) the CTC can be complicated, especially when bearing in mind the brief changes that accompanied the American Rescue Plan Legislation in 2021. We’ve got all of this covered and more in our complete guide to the Child Tax Credit.
Tax implications of renting out your US residence while in Canada
If you rent out your US residence while living in Canada, you’ll need to report the income and expenses associated with it under Part I of Form 1040.
Rental income while living in Canada: Frequently Asked Questions
I own a rental property in the US or outside of Canada. Do I have to report it to Canada?
Yes, all tax residents of Canada must report all of their income to the Canadian government. This applies even if it comes from a rental property located outside of the country.
Which country do I pay taxes to on my rental property income?
If you’re a tax resident of both Canada and the US, your rental property income will be subject to taxes by both countries. However, using one of the tax breaks mentioned above can often help you avoid being taxed twice on this same income.
US expats living in Canada may need to file an FBAR
As mentioned earlier, Americans with over $10,000 in total in foreign financial accounts — including all bank, investment, and pension/retirement accounts — at any time during the tax year must also file FinCEN form 114, better known as a Foreign Bank Account Report (FBAR).
Note: the Supreme Court recently overturned a preexisting ruling and substantially reduced the potential financial penalties for non-willful non-compliance with FBAR filing. However, it is still in an expat’s best interest to have a handle on this filing from the outset to avoid any potential for complications down the road.
I’m a US expat who’s lived in Canada for years. Do I owe past US tax returns?
Yes, all US citizens and permanent residents who meet the minimum reporting threshold in a given tax year must file a return for that year — even if they were living abroad.
The Canadian government sends US expats’ Canadian tax information, as well as their Canadian bank and investment account balances, directly to the IRS, enabling the IRS to see who owes outstanding taxes and enforce their collection. Furthermore, the Canadian government can collect fines and penalties on behalf of the IRS.
Given how steep these fines and penalties can be, it’s critical to get caught up on your back taxes as soon as possible.
Catch up on your US taxes with the Streamlined Procedure
Thankfully, the IRS offers an amnesty program called the Streamlined Procedure. This program allows expats behind on their US taxes (because they were unaware of the requirement to file from abroad) to catch up without facing penalties, as long as they do so before the IRS contacts them about it.
Whether you need help getting caught up on back taxes, filing this year’s return, or just learning more about your tax obligations as a US expat, Bright!Tax is here to help.
Register now, and your Bright!Tax CPA will be in touch shortly. We are also able to offer US expats in Canada exclusive access to our vetted Canadian tax partner. So, if you’re seeking trusted experts to complete both tax returns, let us know!
