More and more Canadians are earning at least part of their income in the U.S. If they stay in the U.S. for more than 183 days or earn more than US$10,000 a year, the U.S.
Internal Revenue Service and state revenue agencies could be interested in taking their cut.

“You don’t want to turn a blind eye to [your U.S. tax liability],” says Kerry Gray, a partner in the human capital, global mobility practice at Ernst & Young LLP. “You don’t want it to become an issue years later.”

The Canada-U.S. Income Tax Convention, known as the “treaty,” spells out the regulations concerning the taxation of the residents of one country earning income in the other. It also allows the Canada Revenue Agency and the IRS to share information and to enforce collections on each other’s behalf.

Canadian residents have to declare all their worldwide income on their Canadian federal tax return. If they have incurred tax liabilities in the U.S., Canadians can claim foreign tax credits on their Canadian federal returns, eliminating double taxation. Under the treaty, the CRA will give returning Canadians a foreign tax credit against their Canadian taxes payable for the lesser of two amounts — either the taxes they pay Canada on that income or the taxes they pay on it in the U.S.

In past years, a Canadian who worked in the U.S. might not have bothered with the hassle of filing a U.S. tax return. He or she would simply declare the U.S. income on Canadian taxes and be done with it.

But times have changed.

“As the amount of travel has increased, it’s become a bigger issue,” says Steve Roberts, tax partner, international assignment services, at Deloitte & Touche LLP in Toronto. “And systems that can track people are becoming better and more sophisticated.” According to Roberts, the IRS is becoming increasingly interested in capturing tax revenue earned by foreign workers.

So, what should you tell your clients? There are two thresholds that apply to Canadians who are sent to the U.S. and are paid by their Canadian employers.

The first is the US$10,000 earned income threshold, under which Canadians aren’t required to pay U.S. federal income taxes. The second is the 183-day threshold: if a Canadian spends less than 183 days in the U.S. during a tax year, taxes aren’t owed in the U.S. However, if a Canadian resident works in the U.S. as an employee of a U.S.
company, only the US$10,000 threshold rule applies, while the 183-day threshold does not.

A Canadian resident who works as an independent contractor for a U.S firm from a business base in Canada is not required to pay U.S. taxes, no matter how much he or she earns. However, the situation is different for a Canadian resident who works as an independent contractor for a U.S. company if there is a business base in the U.S. In that case, the Canadian is liable for U.S. taxes if it can be determined he or she has a “fixed business base,” such as a permanent office, in the U.S.

If a Canadian resident is required to pay taxes in the U.S., he or she will have to file a U.S. tax return, as well as any state or even city tax returns that apply. Some states follow the federal rules, but others don’t and tax more aggressively.

“You would do your U.S. tax returns first,” explains Roberts, “because all you’re reporting on is the income you earned in the U.S. Then you would claim the foreign tax credit on the Canadian return and send them both in.”

If a client believes he or she will be liable for U.S. taxes, the client should ask his or her employer to start withholding the appropriate amount of U.S. taxes. Both the CRA and the IRS have charged companies for taxes they failed to withhold on behalf of employees working in foreign jurisdictions, says Roberts. That leaves the companies trying to collect from employees.

Meanwhile, a Canadian who works in both countries, perhaps even in a number of different states and provinces, should consider consulting an accountant who is knowledgeable about the tax systems in both countries. “It does require an increased level of tracking one’s time,” Gray says. “There’s much more likelihood of being questioned because you have two or more tax authorities you’re dealing with.”

@page_break@The silver lining for Canadians is that filing a U.S. tax return probably won’t increase the total tax bill.

“In most cases, all the U.S. taxes you’re going to pay — federal, state, anything — it’s generally all going to be creditable on your Canadian return,” Roberts says. IE