The many perils of Canada-US Cross-border taxation: How to get it right!
Canada and the United States have a very special relationship. Canadians and US citizens, both individuals and business people, have significant cross-border associations – sometimes they are almost seamless. US entrepreneurs cross into Canada to do business, and Canadians enter and exit their neighbour to the South as business people, employees and contractors.
However, there are stark differences between our two countries’ tax codes. And that often catches citizens of both countries off-guard!
Cross-border Tax Filing Challenges
Many Americans visiting, investing or working in Canada, and Canadians doing the same in the USA, are not aware that there is a fundamental difference in cross-border taxation between the US and Canada. The US system is a residence/citizenship-based system. Canada's is based on "world wide income" – regardless of domicile.
Cross-border tax filings are further complicated as a result of differences in the tax laws of individual Provinces in Canada, and each State in the United States. If you are a reside of one country, travelling to the other, living in one Province/State, but work and invest in another Province/State, you could have to comply with multiple tax codes and legislations.
In the past, failure to understand and comply with these statues and regulations has resulted in severe repercussions for business people and individuals alike. The burden of incorrect filing, delayed filing, or not paying what you owe can be anywhere from huge penalties, to delayed paper-work when doing cross-border business. In extreme situations, you could lose your travel documents, or even be barred from flying .
Cross-border Tax Filing Scope
The scope of cross-border taxation is extremely broad, on both sides of the border. The jurisdiction of both the US’s Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA), cast a wide net, including:
- personal and business taxes
- rental income from property not used personally
- income from investments
- different treatment for treaty versus non-treaty income
- the sale of land and property
- dividends and distributions received from stocks and mutual funds
- capital gains
- withholding taxes
- complexities from being a U.S. Resident Alien versus a U.S. Non-Resident Alien
- issues related to filing as a U.S. Non-Resident
- variations in treating different “filing statuses” – Single, Married, Joint-filing, Qualifying Widow
As if those complications aren’t enough to deter anyone from making cross-border trips, or conducting cross-border business, there are other differences between the two countries’ tax codes too:
- a host of exemptions, and who is entitled to claim them
- a large list of potential deductions, which may or may not be applicable to everyone
- the rules around withholding taxes, how they are treated, and who can claim refunds
- credits and reimbursements that citizens of either country may be entitled to
- different due dates by which taxes must be filed, and taxes owed paid
Canadians should also be aware of other cross-border taxation complications with the US Estate Tax. While Canada does not have a "death tax" as such (ours in a Probate Tax to validate a Will), Canadians inheriting from US residents could be faced with an Estate tax or an Inheritance tax. Once again, the rules governing these taxes are as complicated as they are diverse!
US citizens living in Canada aren't immune to cross-border challenges either. Though the Canada-US Income Tax Convention is in place, which addresses critical issues like double-taxation, elimination/recouping Withholding taxes and tax arbitration, US citizens resident in Canada – and Canadians living/working across the border - might still have to file two sets of Tax returns - which further complicates the issue of cross-border taxation.
Cross-border Taxation Opportunities
It’s true that there are tremendous challenges associated with cross-border taxation policy, and filing cross-border tax returns. However, for every challenge, someone familiar with how those laws work can highlight an equal number of opportunities. The laws also present prospects for Canadians and US citizens to lower their tax burdens as a result of cross-border transactions.
One example of how Canadians can benefit from cross-border laws is the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) . If handled properly, FIRPTA provides a Canadian tax-payer, selling property in the U.S., the opportunity to both reduce your Capital Gains and apply the Withholding Taxes on that sale against your Canadian taxes owed.
Canadians can also take advantage of form W-8BEN to ensure that Withholding taxes aren’t applied to their earnings by the IRS. Of course, there is a defined process for how to file the form, and what your responsibilities are viz. the CRA when you file W-8BEN. Failure to comply or adhere to those terms can cost you dearly!
As a U.S. citizen who is deemed to be a resident of Canada, you need to comply with the “world wide income” standard, while U.S. citizens who are non-residents of Canada only report Canadian income. As non-resident working for a U.S. entity in Canada may have other cross-border opportunities and obligations to deal with.
Cross-border Taxation Done Right
If you are a US citizen living or working in Canada, or a Canadian residing and doing business across the border, it’s very likely that you don’t spend a ton of time studying cross-border tax laws. In addition to being thousands of pages thick, the laws are a maze of complex statues, rules, clauses and sub-clauses that can take even the savviest of us off-guard.
If you want to do cross-border taxation right, the only way is to work with a cross-border taxation professional who is intimately familiar with all the tips, tricks and traps of both systems. It’s not enough to work with someone who has a “general understanding” of tax laws in both countries. The ideal partner will have a deep understanding of:
- Individual and business tax law
- Cross-border taxation for personal and corporate entities
- How taxes impact Canadian and US citizens and businesses hiring, investing and repatriating revenue across borders
- US Federal and State tax laws
- Canadian Federal and Provincial taxation
- Tax laws as applied to residents, non-residents, resident-aliens, ex-pats, temporary workers
- Special exemptions and waivers embedded in both countries’ tax laws
Whether it's employment income or business tax situations, you should consult a cross-border tax expert in order to navigate through the myriad of tax laws on either side of the border. Not only will that help reduce your taxes, it'll also ensure you don't run afoul of either the IRS or CRA.