With a number of different visa options available for moving to Canada, including a new digital nomad visa, many Americans need to understand what is considered taxable income if and when they become subject to tax in Canada.
As US expat tax experts, we’re well-versed in the intricacies of international tax law and can even provide in-house expertise to advise on Canadian tax matters. Below, we’ll go over how to determine whether or not you qualify as a Canadian tax resident, what income is considered taxable income in Canada, how to navigate Canadian tax filing, and more.
Determining your tax status in Canada
So, who exactly is a tax resident in Canada? While the answer isn’t always 100% clear-cut, Canadian tax residents are generally defined as individuals with “a continuing relationship” with Canada. The following factors typically indicate somebody has a continuing relationship with Canada and therefore is considered a tax resident:
- Staying in Canada for 183 days or more in a tax year
- Maintaining a home in Canada
- Having a spouse and/or dependents living in Canada
Secondary factors that may also influence tax resident classification include:
- Social and business ties in Canada
- Maintaining personal property in Canada
- Owning a Canadian driver’s license or other official IDs
- Having a vehicle registered in Canada
- Being registered for Canadian medical insurance
In some cases, Americans who would otherwise be considered Canadian tax residents can claim to be solely US tax residents under “tie-breaker” tax rules — more on that later. (1)
Types of income that may qualify you as a Canadian tax resident
There are various types of income types and streams to consider when determining your Canadian residency status for tax purposes.
Employment income refers to income earned as an employee. This includes:
- Honoraria (i.e., voluntary payments for services that are traditionally not paid)2
Self-employment income refers to income earned from a business, profession, commission, farming, or fishing. In this context, business income is defined as income from activities carried out with a reasonable expectation of profit. This includes anything you earn as a(n):
- Sole proprietor
- Small business owner
- Independent contractor
Self-employed individuals must pay their income taxes via quarterly estimated payments if their income exceeds $30,000 CAD across three consecutive months or tax quarters. (3)
Rental income refers to the income you get from renting out property, such as houses, apartments, rooms, office space, etc.4
Capital gains income is income derived from the sale or transfer of capital property, such as land, buildings, shares, bonds, and fund and trust units.
Note: You can find the full list of all types of taxable income on the Canadian Revenue Agency’s website.
Navigating taxes in Canada
Personal income taxes in Canada are generally levied at marginal tax rates between 15% and 33%, depending on how much you earn.5
Canada 2023 Federal Income Tax Rates
|Tax bracket (all amounts in CAD)||Tax rate|
|Up to $53,359||15%|
|More than $53,359 up to $106,717||20.5%|
|More than $106,717 up to $165,430||26%|
|More than $165,430 up to $235,675||29%|
There are also provincial and territorial taxes on income. These provincial and territorial tax rates can range from as little as 4% in Nunavut for the lowest income tax bracket to as much as 25.75% in Quebec for the highest income tax bracket.6
However, there are certain exceptions to the way income is taxed. For example:
- Typically, only 50% of capital gains income is subject to taxation
- Most gifts and inheritances are not taxed7
- Some types of income are eligible for tax credits and other relief
And remember, income taxes aren’t the only kinds of taxes you’re on the hook for — you may also be subject to social security taxes, GST and HST, unemployment insurance taxes, and others, depending on your unique situation.
While most Canadian tax residents end up having to file annual tax returns, there are certain exceptions.8 However, given the complexity of this topic, it’s often best to work with a tax professional to understand what your tax and reporting obligations are and how you can minimize your tax liability.
Nonresident taxes in Canada
So far, we’ve discussed tax rates for Canadian tax residents. But nonresidents earning income sourced in Canada — like Americans who live in the US, but own and rent out property in Canada — may be subject to different tax rates.
Nonresidents are taxed at the same federal and provincial tax rates as residents on their employment and business income associated with a permanent establishment in one province or territory. Nonresidents are subject to a surtax of 48% of federal tax if income taxable in Canada is not earned in a province or territory. This surtax is paid instead of a provincial or territorial income tax.
They also face a 25% tax on certain types of income, such as:
- Rental income
- Royalty payments
- Pension payments
- Annuity payments
US-Canada income tax treaty
The US has a tax treaty with Canada that contains some benefits for American expats living in Canada. One of the noteworthy provisions is the presence of “tie-breaker rules,” which allow Americans with ties to both the US and Canada to claim tax residence in the US alone as long as that’s where they have stronger ties.9
The treaty also covers double taxation with regard to income tax and capital gains tax — at least in theory. In practice, however, the Savings Clause limits the benefits that American expats can receive. Often, you’re better off claiming a US tax break rather than trying to utilize the tax treaty, which we’ll dive into below.
Many investments that are tax-free in Canada are taxable in the US, such as Registered Retirement Savings Plans, Tax-Free Savings Accounts, and Canadian-based mutual funds.
The US and Canada have a totalization agreement that prevents American expats in Canada from making social security payments to both countries. Generally, the country to which you’ll make social security payments will depend on how long you intend to stay there:
- 5 years or less: Pay social security taxes to the US
- More than 5 years: Pay social security taxes to Canada
US taxes for US expats in Canada
For US citizens working in Canada, navigating the tax system can be like maneuvering a maze. However, there are several strategies that Americans living in Canada can employ to reduce their US tax bill, often down to zero. Below, we explore some of the tax benefits to maximize US tax benefits for American expats in Canada.
Leveraging the Foreign Tax Credit (FTC)
The FTC allows you to deduct foreign taxes paid from your US tax liability. Expats who pay higher income tax in Canada than they would in the US can apply any excess tax credits to future returns. To claim the FTC, expats must submit Form 1116 along with their federal tax return.
Learn more in our comprehensive Foreign Tax Credit guide.
Exploring the Foreign Earned Income Exclusion (FEIE)
The FEIE allows expats to exclude a portion of their earned income from taxation. For the 2023 tax year (taxes due in 2024), this exclusion is $120,000.
Under the FEIE, you may also qualify for deductions on certain foreign housing expenses through the Foreign Housing Exclusion (FHE) or Foreign Housing Deduction (FHD). To be eligible for the FEIE, you must meet either the Physical Presence Test or the Bona Fide Residence Test.
Explore more in our comprehensive guide to the Foreign Earned Income Exclusion.
The Child Tax Credit (CTC)
The Child Tax Credit offers US taxpayers a partially refundable credit of up to $2,000 per qualifying child. However, for expat parents filing for the 2023 tax year in 2024, the CTC is typically refundable up to $1,600 per qualifying child due to international tax filing circumstances.
Understanding eligibility and retroactive claims for the CTC can be complex. We cover all of this and more in our comprehensive Child Tax Credit guide.
Tax implications of renting out your US residence while in Canada
Renting out your US residence while residing in Canada requires you to report the associated income and expenses under Part I of Form 1040.
Do I need to report a US rental property to Canada?
Yes, all Canadian tax residents must declare their worldwide income, including rental income from properties located outside of Canada.
Which country taxes my rental property income?
If you’re a tax resident of both Canada and the US, your rental income may be subject to taxation in both countries. However, utilizing the tax credits mentioned above can often help avoid double taxation.
FBAR reporting for US expats in Canada
Americans with over $10,000 in total foreign financial accounts must file FinCEN Form 114, also known as a Foreign Bank Account Report (FBAR). The Supreme Court recently provided clarification on the limits of penalties for non-willful non-compliance with FBAR filing, but it’s advisable to handle this filing correctly from the start to prevent potential issues.
Catching up on US taxes while living in Canada
All US citizens and permanent residents, even if they reside abroad, must file a return for the year if they meet the minimum reporting threshold. The Canadian government shares Canadian tax information and bank account balances with the IRS, enabling them to identify individuals with outstanding tax obligations. The Canadian government can also collect fines and penalties on behalf of the IRS. To avoid significant fines and penalties, it’s crucial to catch up on back taxes as soon as possible.
Streamlined Procedure for Catching Up on US Taxes
Fortunately, the IRS offers the Streamlined Procedure, an amnesty program that allows expats behind on their US taxes (due to unawareness of the requirement while living abroad) to get up to date without facing penalties, provided they do so before the IRS contacts them about it.
- Canada – Individual – Residence
- Honorarium: Definition and Tax Treatment
- Lines 13499 to 14300 – Self-employment income
- Lines 12599 and 12600 – Rental income
- Income tax rates for individuals
- Canada – Individual – Other taxes
- Filing taxes in Canada
- Canada – US Tie breaker rule
- Texas hold ’em or taxes hold ’em? Taxes and gambling in Canada