Canada and the United States have an income tax treaty designed to ensure that cross-border taxpayers aren’t subject to double taxation. Cross-border tax planning specialists at Cardinal Point Wealth Management point out that the treaty allows a tax credit on foreign income up the taxable income earned domestically. For example, if someone resides in the United States but works remotely for a Canadian business, they are typically required to file and pay taxes in both countries. The tax treaty allows a U.S. tax credit that can effectively offset their Canadian tax liability.
Today, more and more people live in one of the countries but derive income from across the border. The number of taxpayers doing this has dramatically increased in recent years due to the trend of working remotely (i.e.; U.S. Citizens living in Canada). There are also those who earn in one country through investments like real estate that they sell, although their legal residence as a taxpayer is across the border in the other nation. Perhaps a Canadian resident owns a second home across the border in the United States, but they stay in that second home for more than 183 days. That makes them legally liable to pay taxes in both countries. Whatever the circumstances may be, taxpayers may qualify for what is known as a foreign tax credit. This credit can be taken on foreign income up to the tax payable in their home country on the same reported income. It is important to understand that both Canada and the U.S. require taxpayers to file tax returns in their home country and report not only domestic income but any income derived from other sources worldwide. The tax treaty’s foreign tax credit aims to eliminate the taxpayer’s exposure to tax in both countries on the same income or double taxation. While not all of the taxpayer’s income can be offset by the foreign tax credit, it only allows them to pay the amount they would usually pay in their country of residence.
The U.S. and Canada impose income tax on residents regardless of their citizenship or legal immigration status. That includes requiring the annual filing of income tax returns, along with any other additional reporting and filing that tax authorities may require to comply with the law. Both nations also reserve the right to tax income derived from the rental income generated in their country and to tax sales of the property in their country. But each country has its own definitions and criteria for determining the place of legal residence, income sources, and other items relevant to tax law. In some situations, both countries may claim the first right of taxation on income – creating a dispute that may have to be resolved by a tie-breaker rule under the treaty.
The bottom line is that tax law is always complicated, but doubly so when it applies to cross-border taxation and how the tax treaty is applied. In fact, the treaty includes 31 different articles dealing with a variety of topics and circumstances, ranging from residency definitions to capital gains taxes. For example, under Article XVIII of the Treaty in Canada, U.S. Social Security income is only 85% taxable. That is why specialists like those at Cardinal Point Wealth Management strongly recommends that cross-border workers or anyone owning assets in both countries consult a qualified cross-border tax planning financial advisor before filing taxes. While tax filing can be confusing, getting good advice and strategically applying the rules of the U.S. and Canada tax treaty can also be financially rewarding by helping to minimize or eliminate tax liability.
About Cardinal Point Wealth Management
Cardinal Point is an independent cross-border wealth management firm with offices in both the United States and Canada. Cardinal Point provides personalized cross border investment management, cross border estate planning, cross border tax planning, cross border wealth management, and cross-border financial planning solutions to affluent individuals and families located in both the United States and Canada. For more information about Cardinal Point, please visit https://cardinalpointwealth.com/.
Company Name: Cardinal Point Wealth Management
Contact Person: Jeff Sheldon
Email: Send Email
Address:2255 Glades Road, Suite 324A
City: Boca Raton
State: FL 33431
Country: United States