Thousands of Canadian Expats In The U.S. Needlessly Pay Canadian Tax!

Canadian citizens are not subject to Canadian tax on worldwide income if they are not resident in Canada. Rather, a Canadian citizen who is a non-resident of Canada is only subject to Canadian tax on certain Canadian source income (most commonly, rents or capital gains from Canadian real estate; dividends from Canadian companies; income from employment in Canada). This is no different than any other non-resident-citizenship generally is not relevant in determining liability for Canadian taxation.

Every year thousands of Canadians move to the U.S. to continue their careers there. In many cases, these Canadian expats continue to file Canadian tax returns and pay Canadian tax on their U.S. employment income under the assumption that they are still tax residents of Canada. This generally translates into a big tax cost. Even though Canada will grant a foreign tax credit for any U.S taxes paid, there will usually be a substantial residual Canadian tax liability, because of the fact that personal income tax rates in Canada are generally significantly higher that they are in the U.S.

In numerous cases, the decision to continue to file Canadian tax returns as a resident is based on a lack of understanding of the law.

Often, Canadian expats will think that, if they still maintain certain “residential ties” to Canada, such as bank accounts, drivers’ licenses, club memberships, credit cards, and membership in professional organizations, they will still be Canadian residents for tax purposes, even though they are living in the U.S. Information found on the website of the Canada Revenue Agency will often reinforce that conclusion.

However, what those expats usually fail to understand is the fact that the “tie breaker rule” found in Article IV(2) of the Canada-U.S. Tax Convention (“the Treaty”) will usually have the effect of overriding the fact that, based on domestic law concepts of residency, they may still be Canadian residents.

In the simplest, and most common, situations, a Canadian living in the U.S. will be a U.S. resident, and not a Canadian resident, under this rule, as long as the following three elements are present:

(a) The individual is a resident alien of the U.S. for tax purposes (whether by virtue of holding a “Green Card” or by virtue of the “substantial presence” test),
(b) There is no “permanent home available” to that individual in Canada, and
(c) There is a “permanent home available” to that individual in the U.S. (NB-a rented apartment will normally qualify).

In that scenario, subsection 250(5) of the Income Tax Act will deem the Canadian expat to be a non-resident of Canada. This will be the case regardless of how many “residential ties” he or she may maintain to Canada.

In most such cases, the individual will not even have to file any Canadian tax return at all, unless they are earning income from renting Canadian real estate. Canadian expats living in the U.S. may be able to ask CRA to look at their situation and refund taxes incorrectly paid for up to ten prior taxation years.

In accordance with Circular 230 Disclosure

Mr. Atlas is a Toronto-based Chartered Accountant who practices as an independent consultant on a wide-range of international and domestic tax issues. Most of his practice consists of advising accounting and law firms on high-level tax issues. Prior to forming an independent tax practice in 1991, was Partner in charge of tax practice of major independent accounting firm in Toronto. Advises clients worldwide. Author of leading book, Canadian Taxation of Non-Residents, considered one of the few Canadian tax professionals, outside of the big accounting and law firms, who is an expert on high-level international tax matters.

Subscribe to TaxConnections Blog

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

9 comments on “Thousands of Canadian Expats In The U.S. Needlessly Pay Canadian Tax!

  • Breaking ties with Canada will subject you to Canada’s departure tax, however! I also have strong suspicions that a great number of Canadians living in the US aren’t reporting their Canadian bank accounts via the US’s FBARs or F8938’s. They are in for an unpleasant surprise should FATCA be implemented in Canada.

  • Few of the Canadians I see who move to the US would have any departure tax because the appreciated assets that they hold, would usually be limited to real estate in Canada, which is exempt.

    Normally, the only Canadians I see who have departure tax issues are those with interests in private companies. However, we can generally defer that tax without interest by posting security.

    In addition, as indicated, even if not all ties with Canada are broken, the expat will generally be a deemed non-resident under subsection 250(5) unless they maintain a residence here.

    For sure, many Canadian expats in the US are not compliant with US tax laws-in addition to Canadian bank account issues, there are issues regarding to Canadian RRSPs, and failing to make the special election under the Treaty.

  • Mr Atlas, are you advising these Canadians that FATCA will make them American persons for life and must file taxes and FBARS? I do wish to see your reply on this. Thank you.

  • I am not sure what you mean by “for life”. Certainly, as long as they are resident aliens of the US for tax purposes (and that is not overridden by Article IV(2) of the Treaty, they have to comply with US tax laws, including FBRAR and 1040 filing-that is not new-that was the case before FACTA.

  • Mr Atlas, I can’t see how these Canadians, living and legally working in the US can get away with claiming to be resident in Canada. If I’m correct, many of them are going to work every day, paying US tax, social security, etc through payroll deductions and use tax credits to cover a portion of their Canadian taxes? I guess that’s until all our comings and goings are cross monitored at the border. Like the hapless snowbird who thinks they can stay a full 6 months a year, every year, they’re going to be in for a rude awakening soon!

  • It is not a matter of “claiming to be resident in Canada” and not paying US taxes.

    They still pay the required US taxes, and likely file a 1040 rather than a 1040NR. However, what I am talking about are people who then file Canadian tax returns as residents too, and pay additional Canadian taxes, after claiming foreign tax credits for US taxes.

    I see it all the time!

    You see, not everyone know that, because of the tie-breaker rule in the treaty, they cannot be resident in both Canada and US, and they don’t necessarily get sophisticated tax advice.

    • Thanks for clarifying that. Are Canadians doing this to be able to contribute to TFSA’s, RRSP’s, etc, and in the process not reporting them to the IRS? I see you wrote that they aren’t making the elections around RRSP’s on their US taxes. I predict these Canadians are going to end in OVDP soon. Not good.

  • No-it is strictly out of ignorance! The ones I see are doing this because they have not gotten proper advice, an think that, because of the fact that they have some “ties” to Canada, that they have to still treat themselves as residents!

    Remember, this is usually costing them thousands of extra dollars in taxes because they wind-up having to top-off their total tax liability to the higher Canadian rates, I am sure that if this were explained to them, they would gladly stop filing in Canada,

    That is why I wrote the article!

  • Unlike US “persons” living in Canada who are obligated to report their worldwide income to the IRS, and haven’t/won’t/did not know.

Comments are closed.