Filing taxes on US source income while being Canadian Resident Best answer on the web

January 9, 2009 on 7:17 am | In mybachcars.com |
Filing taxes on US source income while being Canadian Resident Best answer on the web
  • How do I file US taxes on source income from the US made while I was a Canadian resident? I own a house in Canada, and went to work July 2004 in the US travelling to job sites in different states until Dec 10th. I was paid a gross amount with no withholdings into my Canadian bank. I had no W2 and was not considered an employee. I have filed with CCRA and need to file with IRS, but since the earnings were US source income I am not sure how to avoid paying US taxes. I had no US residence only worked there. How do I file so I don't have to pay tax to both IRS and CCRA?


  • Hello and thank you for your question.

    The answer is controlled by the US-Canada Income Tax Treaty. You'll report the income in both countries, but you'll get foreign tax credits that will eliminate most of the double tax.
    "The treaty contains a credit provision (Article XXIV) for the elimination of double taxation. In general, the United States and Canada both allow a credit against their income tax for the income tax paid to the other country on income from sources in that other country. ...See paragraphs (4) and (5) of Article XXIV for certain provisions that affect the computation of the credit allowed by the United States forCanadian income taxes paid by U.S. citizens residing in Canada." http://www.irs.gov/pub/irs-pdf/p597.pdf

    Article XXIV
    http://www.intltaxlaw.com/treaties/canada/treaty.htm#CaArticle XXIV

    "Paragraphs 4 and 5 of Article XXIV of the Convention provide double taxation relief rules, for both the United States and Canada, with respect to U.S. source income derived by a U.S.citizen who is resident in Canada. These rules address the fact that a U.S. citizen resident in Canada remains subject to U.S. tax on his worldwide income at ordinary progressive rates, and may, therefore, be subject to U.S. tax at a higher rate than a resident of Canada who is not a U.S.citizen. In essence, these paragraphs limit the foreign tax credit that Canada is obliged to allow such a U.S. citizen to the amount of tax on his U.S. source income that the United States would be allowed to collect from a Canadian resident who is not a U.S. citizen. They also oblige the United States to allow the U.S. citizen a credit for any income tax paid to Canada on the remainder of his income." http://www.irs.gov/pub/irs-trty/canatech.pdf

    So on your Canada return you'll take a credit for US tax paid on the US-source income, and on your US return you'll take a credit for Canada tax paid on your non-US-source income.
    In other words,
    "Liability for U.S. income tax is based on citizenship, as well as residence. As a U.S. person, you must file annual U.S. income tax returns regardless of where you live or how long you have been away from the U.S. For U.S. tax purposes, you must report your worldwide income from all sources. You can, however, claim a credit against your U.S. tax liability for taxes you pay in Canada or where the income is earned. In many cases the credit will be enough to eliminate any U.S. tax liability, since Canadian taxes are generally higher. However, because of the U.S. alternative minimum tax, in some cases there may be an additional U.S. tax liability that can't be eliminated with a foreign tax credit claim. Note that other non-tax information reporting requirements may also apply.
    "Canadian tax law will limit foreign tax credit claims allowed to U.S. persons. It is Canada's position that foreign tax credits will only be permitted for taxes that would be paid by Canadian residents (non-U.S. persons) in a similar situation. This may result in additional tax costs for U.S. persons living in Canada." http://www.bdo.ca/en/library/publications/taxpub/taxbulletins/taxconseqforusinca.cfm
    Search terms used:
    canada income treaty site:irs.gov
    canada income treaty "us citizen" example credit

    Thanks again for letting us help.

    Google Answers Researcher
    Richard-ga


  • I am a US citizen and a Canadian citizen.
    Since I am a US citizen, I must file with IRS every year.