Us Individuals And Taxation In Canada

<div class="Section1">If an individual is not considered a resident of Canada by fact, or is not deemed to be a resident of Canada by statute, then the individual will be considered a non-resident. Non-residents are not taxed on their worldwide income, but rather only on income that is derived from a source in Canada. This would include, for example, business or employment income in Canada or monies generated from a disposition of taxable Canadian property. A non-resident is also subject to Part XIII<br /> withholding tax on income earned from property held in Canada, otherwise known as “passive” income. Examples of passive income include the payment of dividends, royalties or interest.</div><br /> <div></div><br /> <div class="Section1">U.S. citizens who are non-residents of Canada but have Canadian source income must file a T1-NR Individual Tax Return with the CRA.<a href="#_ftn1" name="_ftnref1">¹</a> U.S. residents who are non-residents of Canada and earn only passive income need not file a Canadian tax return. Instead, a withholding tax is withheld by the payor and remitted directly to the CRA on behalf of the non-resident. This requirement imposed on payers of monies going to non-residents simplifies the CRA tax collection efforts as against non-residents.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   <a href="https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/non-residents.html">https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/non-residents.html</a> (2022 Income Tax and Benefit Package (for non-residents and deemed residents of Canada)).<br /> <br /> </div>

<div class="Section1">Canadian resident taxpayers will be subject to tax on half of the realized capital gains arising from the disposition of Canadian real property (assuming the property is held on capital account as opposed to on income account). That is, only half of the realized capital gains will be subject to tax at the individual’s marginal rate.<a href="#_ftn1" name="_ftnref1">¹</a> If a loss is realized, then such losses are deductible, but only as against other capital gains.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     CRA: Calculating your capital gain or loss, <a href="http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/gns/clclt/menu-eng.html">http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/gns/clclt/menu-eng.html</a>.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Canada does not have estate taxes. However, the provinces in Canada levy probate taxes. Canadian probate taxes are narrower in application than U.S. estate tax.<a href="#_ftn1" name="_ftnref1">¹</a> For example, Ontario probate taxes will apply on assets that are the subject of a will probated in Ontario, but will not apply to real property situated outside Ontario.<br /> <br /> U.S. Individuals residing in Canada will need to consider both U.S. and Canadian tax in their estate planning.<br /> <br /> Special care needs to be taken in developing succession plans for U.S. citizens resident in Canada due to the potential for mismatch in tax treatment of individuals in Canada versus the U.S. As these individuals are potentially subject to both the ITA and Internal Revenue Code, care must be taken to ensure that any estate plan is advantageous under both. There are many traps that can catch taxpayers dealing with both systems. Seeking professional advice from cross-border proficient advisors is well advised if you are a U.S. citizen who lives in Canada or who has assets situated in Canada.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     See https://www.attorneygeneral.jus.gov.on.ca/english/estates/calculate.php for how to calculate Ontario rates.<br /> <br /> </div>

U.S. citizens living in Canada have many considerations that should be taken into account, only some of which are discussed here. In addition to the filing requirements already outlined above, U.S. citizens should be aware of the Net Investment Income Tax, or “Medicare Tax” as it has become colloquially known. U.S. citizens who historically have not had any U.S. income tax liability may be subject to this new tax at a rate of 3.8 percent if they have ‘net investment income’ (generally investment income such as interest, dividends, capital gains, etc. less permitted expenses related to that income such as brokerage fees and interest expenses) and they have a modified adjusted gross income over $200,000 if single, or $250,000 and filing jointly, Unfortunately for U.S. citizens subject to this tax, it seems unlikely that foreign tax credits can be used to reduce or eliminate this tax liability as the net investment income tax is not imposed by Chapter 1 of the U.S. Code and foreign tax credits are only applied as against Chapter 1 taxes.

Status as a part-year resident typically applies to an individual who enters Canada for the first time as a resident, or who leaves Canada permanently. A U.S. resident who becomes a Canadian resident for tax purposes in any given year (because of factual considerations such as moving to a permanent residence in Canada), or a U.S. resident who is also a Canadian resident but decides to permanently leave Canada will likely be considered a part-time resident of Canada in both the year of entry and in the year of departure. Part-time residency status applies to individuals who have ties in Canada that have been severed mid-year.<br /> <br /> In these situations, the ITA alters the “taxation year” of the individual to be the part of the year that the individual was in Canada prior to departure, or the part of the year that starts when the individual entered Canada and ends at the end of that calendar year. For the part-year<br /> that the individual is a resident of Canada, he or she is subject to taxation on worldwide income. For the part-year that the individual is a non-resident of Canada, he or she is only subject to taxation on Canadian sourced income.

<p>The term &ldquo;permanent resident&rdquo; has a specific meaning in the immigration context that is beyond the scope of this article. For this discussion, a &ldquo;permanent&rdquo; resident of Canada is treated as a resident of Canada for tax purposes, as detailed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="1005">1005</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="1008">1008</a>.<br /> <br /> U.S. individuals are most likely to acquire Canadian residency for tax purposes by fact; that is, they will be determined to be a Canadian resident based on their ties to Canada, or, more simply, because the individual ordinarily resides in Canada. The length of time the individual spends in Canada is not a factor; rather, it is the ties to Canada that are determinative.<br /> <br /> U.S. individuals can also sojourn in Canada for more than 183 days in a calendar year, in which case the individual is treated as a Canadian resident for tax purposes, whether or not their primary &ldquo;living&rdquo; connection is with Canada. In this case, the length of time in Canada is the only factor, and the reason for the individual&rsquo;s stay in Canada is irrelevant.<br /> <br /> Interestingly, it is possible to be a resident of Canada as determined by fact, and yet spend less than 183 days in Canada per year.</p><br />

<div class="Section1">Leaving aside any significant non-tax considerations, rescinding one’s U.S. citizenship may not necessarily be the answer to ongoing U.S. tax requirements and potential liabilities. There is an expatriation tax under the U.S. IRC that will apply to citizens who have renounced their citizenship.<a href="#_ftn1" name="_ftnref1">¹</a> The consequences and tax liabilities that result from rescinding U.S. citizenship may prove to be onerous, and professional tax and/or legal advice is strongly recommended in this circumstance. The benefits that are provided for under the Canada- U.S. Tax Treaty are designed to ameliorate the ongoing tax consequences that are borne by U.S. citizens living or working in Canada.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    IRS “Expatriation Tax,” http://www.irs.gov/Individuals/International-Taxpayers/Expatriation-Tax.<br /> <br /> </div>

<div class="Section1"><br /> <br /> The Canada Revenue Agency (“CRA”) provides guidance on residency and taxation in <em>Folio S5-F1-C1: Determining an Individual’s Residence Status.</em> The concept of residence, and whether one is considered to be a Canadian resident, involves an assessment of a combination of factual indicators, some factors of which are considered as being more significant (the primary factors) compared to others (the secondary factors). That said, no one factor is determinative. An assessment of all the factors guides the eventual determination of residency.<br /> <br /> Primary factors include:<br /> <p style="padding-left: 40px;">Having a Canadian residence that is ordinarily inhabited; that is to say having a residence in the normal course as compared to special, occasional or casual use (house, cottage, condo, etc.);</p><br /> <p style="padding-left: 40px;">Having a spouse or partner who is resident in Canada; and</p><br /> <p style="padding-left: 40px;">Having dependents, such as minor children, who are resident in Canada.</p><br /> Secondary factors include, but are not limited to:<br /> <p style="padding-left: 40px;">Health coverage in a province;</p><br /> <p style="padding-left: 40px;">Personal property in Canada such as cars, recreational vehicles, or personal effects;</p><br /> <p style="padding-left: 40px;">Possessing a driver’s license in one of the provinces, or holding a Canadian passport, or work/immigration status in Canada;</p><br /> <p style="padding-left: 40px;">Economic ties, such as employment or business in Canada;</p><br /> <p style="padding-left: 40px;">Having active bank accounts, investments, or Canadian based credit cards;</p><br /> <p style="padding-left: 40px;">Having a seasonal dwelling place in Canada; and</p><br /> <p style="padding-left: 40px;">Affiliations with religious, social or business related organizations or entities, such as a church, social or golf club, or membership in a Canadian business or professional organization.</p><br /> A U.S. individual can also be deemed to be a Canadian resident by operation of statute (the deeming provisions of the ITA),<a href="#_ftn1" name="_ftnref1">¹</a> even if an assessment of the factors would result in a different determination. In most instances, however, the deeming provisions of the ITA are typically engaged if the individual is not resident in Canada throughout the year, and thus fails to meet the factual threshold.<br /> <br /> The most common of the statutory deeming provisions applies to a sojourner.<a href="#_ftn2" name="_ftnref2">²</a> Where a U.S. resident sojourns in Canada for a total of 183 or more days in any given calendar year, that individual will be deemed by operation of subsection 250(1)(a) of the ITA to be a resident of Canada, whether or not the individual has a permanent residence in Canada, and whether or not the individual has any other significant ties to Canada. The deeming provision deems an individual who is present in Canada for more than 183 days to be a resident of Canada for that year, for taxation purposes, regardless of the reason for the stay in Canada. Examples of situations where this may affect an unsuspecting U.S. resident include U.S. individuals who vacation in vacation homes in Canada, or individuals who work in Canada (depending on the hours of work).<br /> <br /> There is some discrepancy as to how part of a day is treated for the purposes of the sojourning rule. The general approach to a part day is that any stay in Canada that exceeds a half-day in length is considered to be a full day for the purposes of the sojourning rule. The CRA, however, can take a different approach in different contexts.<br /> <br /> There are other situations in which an individual is deemed to be a Canadian resident by operation of statute for tax purposes even though the individual does not reside in Canada, although most of these situations do not affect U.S. residents. For example, individuals that are members of the Canadian armed forces, and federal or provincial civil servants stationed outside of Canada in a given taxation year, are deemed to be Canadian residents for tax purposes.<br /> <br /> Since it is possible to be resident of both Canada and the U.S. simultaneously, a U.S. citizen who is resident of Canada will still have U.S. tax filing obligations and potential U.S. tax liabilities that are not mitigated by Canadian federal tax credits (FTCs) or the Canada- U.S. tax treaty. However, it is possible with proper tax planning to minimize double taxation.<br /> <br /> The primary consequence of being a Canadian resident for tax purposes to U.S. individuals is that they become responsible for filing a return on their worldwide income in both countries. Non-residents of Canada are only liable for tax on Canadian source income. Section 115(1) of the ITA determines taxable income in Canada for non-residents. “Passive income” from Canadian sources will generally be subject to Part XIII withholding tax, although the rate of withholding tax may be reduced or eliminated by virtue of the Canada- U.S. Tax Treaty.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   See subsection 250(1) of the ITA.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   Subsection 250(1)(a) of the ITA.<br /> <br /> </div>

<div class="Section1"><br /> <br /> The U.S. bases taxation on both residency and citizenship. U.S. citizens are taxed on their worldwide income (income from all sources derived from inside and outside of the U.S.), whether they are resident in the U.S. or not; that is, they do not need to be physically in the U.S. for this liability to arise. U.S. citizens must file Form 1040, U.S. Individual Tax Return with the IRS annually.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> U.S. citizens that reside in Canada are also taxed in Canada on their worldwide income. Canadian resident taxpayers – including any U.S. citizens resident in Canada – must file a T1 Individual return with the CRA annually.<a href="#_ftn2" name="_ftnref2">²</a> The deadline for filing a T1 income tax return is April 30th of the following year, unless the individual earns business, professional or self-employment income, in which case the individual has until June 15th to file his or her T1 tax return. It is important to note that payment of any tax owing to the Canadian government is due on or before April 30th of the year following the tax year, regardless of when the individual’s tax return is due.<br /> <br /> Part-year residents, which include U.S. citizens who become Canadian residents for tax purposes during the year, will have part-year tax returns to file in both Canada and the U.S. In Canada, the part-year tax return has the same filing deadlines as the general T1 income tax return applicable to Canadian residents.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   <a href="http://www.irs.gov/uac/Form-1040,-U.S.-Individual-Income-Tax-Return">http://www.irs.gov/uac/Form-1040,-U.S.-Individual-Income-Tax-Return</a>.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   <a href="http://www.cra-arc.gc.ca/formspubs/t1gnrl/menu-eng.html">http://www.cra-arc.gc.ca/formspubs/t1gnrl/menu-eng.html</a> (General income tax and benefit package).<br /> <br /> </div>

<div class="Section1"><br /> <br /> The Foreign Account Tax Compliance Act (“FATCA”) is an effort by the U.S. to detect tax non-compliance by U.S. taxpayers with foreign assets, specifically foreign accounts. U.S. citizens living abroad, including in Canada, should be concerned about FATCA if they have not been filing U.S. tax returns annually, even if they have no U.S. sourced income or accounts. This is because U.S. citizens are taxed on their worldwide income regardless of residency.<br /> <br /> Effective July 1, 2014, Canadian financial institutions will report to the CRA most bank accounts, mutual funds, brokerage accounts, annuity contracts and some life insurance policies with a cash value. What will not be reported to the CRA are most registered plans such as RRSPs, TFSAs, and RESPs.<br /> <br /> U.S. citizens with these accounts or who hold such assets may be contacted by their financial institution to verify their tax residency and U.S. citizenship. This will be done because it is the responsibility of the financial institution to undertake any reporting obligations to the CRA.<a href="#_ftn1" name="_ftnref1">¹</a> The CRA can then potentially exchange the information gathered in accordance with the existing provisions of the Canada- U.S. Tax Treaty, which will permit U.S. tax authorities to ensure reporting compliance.<br /> <br /> U.S. citizens who are not compliant with U.S. filing requirements may want to consider becoming compliant by means of the IRS Offshore Voluntary Disclosure Program.<a href="#_ftn2" name="_ftnref2">²</a> However, the IRS eliminated this voluntary compliance program on September 28, 2018. The streamlined filing compliance procedures program (available to taxpayers who may not have been aware of their filing obligations) will continue in place, but the IRS has indicated that it may also be winding down in the future.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/enhanced-financial-account-information-reporting.html CRA: Enhanced Financial Account Information Reporting.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     https://www.irs.gov/newsroom/irs-offshore-voluntary-compliance-program-to-end-sept-28 IRS: Offshore Voluntary Compliance Program to end Sept. 28.<br /> <br /> </div>