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 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>.   https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/non-residents.html (2024 Income Tax and Benefit Package (for non-residents and deemed residents of Canada)).<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>.   https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package.html (general income tax and benefit package).<br /> <br /> </div>

Yes, there is tax payable on income from property, but a U.S. citizen who is not a resident of Canada is not required to file a Canadian tax return if their only income from Canada is from certain types of “passive income.” Common examples of Canadian “passive” income include:<br /> <p style="padding-left: 40px;">(i)      royalties;</p><br /> <p style="padding-left: 40px;">(ii)     interest;</p><br /> <p style="padding-left: 40px;">(iii)    dividends;</p><br /> <p style="padding-left: 40px;">(iv)    rental income; and</p><br /> <p style="padding-left: 40px;">(v)     pension income.</p><br /> When royalties or interest, for example, are owed to a U.S. citizen who is not resident of Canada, the payer withholds tax at the time of payment to the non- resident. Thus, the U.S. citizen receives the balance of the funds owed. The general rate of withholding tax is 25 percent, but this may be reduced to a lower rate pursuant to the Canada- U.S. Tax Treaty. Given that the U.S. citizen must also report this income on their U.S. income tax return, there may be relief from double taxation under the Canada- U.S. Tax Treaty and the foreign tax credits available in the U.S. to offset the Canadian taxes paid. The payer of rental income earned by a non- resident must also withhold 25 percent of the gross rents received and remit that payment to the CRA, although there may be an option to reduce the withholding tax by calculating the amount relative to net income earned from the property in the case of real property rentals.

<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, https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/calculating-reporting-your-capital-gains-losses.htm.<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"><br /> <br /> Real property is generally considered taxable Canadian property.<a href="#_ftn1" name="_ftnref1">¹</a> The disposition of taxable Canadian property may lead to a tax liability under the ITA where a capital gain results from the disposition. A non-resident may be liable to pay tax on the capital gain notwithstanding the application of the Canada- U.S. Tax Treaty. In the first instance, there is a requirement under the Canada- U.S. Tax Treaty for the purchaser (who is purchasing property from a non-resident) to withhold taxes from the sale proceeds and deliver only the balance of the sale proceeds to the vendor. However, under Article XIII(3) of the Canada- U.S. Tax Treaty, a capital gain on the disposition of real property will likely be exempt from Canadian tax but subject to U.S. taxation if:<br /> <ol><br /> <li>The Canada- U.S. Tax Treaty applies to the parties of the transaction;</li><br /> <li>At the time of the disposition, the property is subject to the Canada- U.S. Tax Treaty, and the property disposed of qualifies as treaty-protected (generally this is property that is not a resource property); and</li><br /> <li>The purchaser files with the CRA the appropriate notice. The non-resident will need to complete CRA Form T2062: Request by a non-resident of Canada for a certificate of compliance related to the disposition of taxable Canadian property.<a href="#_ftn2" name="_ftnref2">²</a></li><br /> </ol><br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Assumes the property is residential or recreation real estate, and does not have any mineral or resource exploitation rights associated with it.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2062/t2062-18e.pdf.<br /> <br /> </div>

<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>