Income tax treaties are implemented to prevent double taxation of citizens who are living abroad. The United States has income tax treaties with 58 countries, including Canada. While each tax treaty has the same general purpose, the specific provisions of each treaty vary. Canadians earning U.S. income and Americans working in Canada should both understand the basics of the Canada-US tax treaty and how it applies to their tax situation. If you have questions about this treaty or other Canadian tax matters, you can learn more by contacting the experienced Canadian tax lawyers of Jeremy Scott Law at (902) 403-7201.
The Canada-US Tax Treaty is especially important for Americans living in Canada, as the United States is one of the few countries that taxes based on citizenship, rather than residency. Americans who are living and working abroad are still required to file federal taxes with the Internal Revenue Service. Tax provisions like the Foreign Tax Credit (FTC) and Foreign Earned Income Exclusions (FEIE) can help prevent double taxation, but certain complicated tax situations may not be covered by these provisions. The Canada-US tax treaty addresses these complex tax situations and establishes how Americans in those situations should be taxed.
Like most other countries, Canada determines tax obligations based on residency. Thus, Canadians who are living and working abroad are not required to file Canadian income taxes. In addition, foreign residents who are living and working in Canada are required to pay Canadian taxes on their Canada-based income.
If the Canadian Revenue Agency determines that someone is a Canadian resident, that person is also required to pay income tax on income earned anywhere else in the world. Canadians who are temporarily working in the United States may have tax obligations with both countries if they meet the Canadian residence test and their income is based in the United States. However, if taxes were already paid on this foreign-earned income, the taxpayer can claim a foreign tax credit to avoid double taxation.
According to the Canada Revenue Agency, income tax obligations in Canada are based on residency status. A variety of relevant facts must be considered when determining residency, including residential ties with the country, the length of time spent in the country, the purpose and intent of the visit, and the continuity of the stay while living either within or outside of Canada. If you have questions about your residency status, contact Jeremy Scott Law to learn more.
Residential ties are the most important variable for determining residency, according to the CRA. Those who maintain or establish significant residential ties to Canada are typically considered residents for income tax purposes. The CRA considers a home in Canada, a spouse or common-law partner in Canada, or dependents in Canada to be residential ties.
In addition to these significant residential ties, the CRA may consider the following secondary residential ties when determining residency status:
- Personal property in Canada, such as furniture or cars
- Social ties, such as memberships in Canadian religious or recreational groups
- Economic ties, such as a Canadian bank account or credit card
- A Canadian passport or driver’s license
- Canadian health insurance
Canadians who leave the country may still be considered factual residents of Canada if they have residential ties to Canada and any of the following circumstances apply:
- Temporarily working outside of Canada
- On vacation outside of Canada
- Commuting between Canada and a workplace in the United States
- Attending school in a different country
Those who leave Canada, establish a permanent home in another country, and cut all residential ties with Canada may be considered emigrants and are not obligated to file Canadian taxes. The CRA may consider you a non-resident of Canada if you have established residential ties in a country that has a tax treaty with Canada and you are considered a resident of that country but are still considered a factual resident of Canada because you maintain significant residential ties to Canada.
The CRA may consider someone an immigrant if they have left another country to live in Canada, have established significant residential ties there, and became a Canadian resident in the tax year. Those who meet these criteria are obligated to file taxes with the CRA.
The Canada-US Tax Treaty is a complex document with several provisions, all of which are aimed at preventing double taxation and fiscal evasion. Here is an overview of a few of the most commonly applied provisions.
Under the Canada-US Tax Treaty, a non-resident must have a permanent establishment before their host country may tax them. Non-residents who conduct business in a host state without a permanent establishment may not be required to pay taxes to the host country. For example, Canadian residents who conduct business in the United States without a permanent establishment may not be obligated to pay US taxes, depending on the circumstances.
According to Article V of the Canada-US Tax Treaty, a permanent establishment is a “fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on.” Examples include branches, offices, factories, workshops, and places of management.
The permanent establishment provision applies to businesses as well. According to the treaty, business profits of residents of contracting states are only taxable in the host country if the resident conducts business in that country via a permanent establishment. In other words, Canadian residents who conduct business in the US only owe taxes there if that business is carried out in a US-based permanent establishment.
According to Article XV of the Canada-US Tax Treaty, salaries, wages, and other employment income earned by a resident of the contracting state for a job located in the host state is taxable in the resident state. For example, the income of Canadian residents is generally only taxable in Canada. However, a Canadian resident who provides employment services in the US may be subject to US income taxes. There is an exemption for workers who earn less than $10,000.
If you are a Canadian working in the United States, an American working in Canada, or a business that conducts operations in the other country, you should understand the Canada-US Tax Treaty. At Jeremy Scott Law, our Canadian tax lawyers work with clients on both sides of the border on tax-related matters. Contact us today at (902) 403-7201 to learn more about how we can help with your unique tax situation.