Filing Tax in both U.S. and Canada?

[teddiegracie]

Hello – I’d like to file tax in both the U.S. and Canada this year, and I am wondering if anyone can offer some useful insights.

I currently work in the U.S., have recently landed in Canada, and would like to start filing tax in Canada this year. I heard there is something called “Foreign Tax Credit” that allows those who file in the U.S. to claim a credit in Canada. Is this true? If so, does anyone know how it works? And does claiming the credit mean that I won’t have file double-tax?

Also, has anyone done this without going to an accountant? I usually do my U.S. filing online (ex. TurboTax), and I’m wondering if filing online would still be doable in this situation.

Thank you so much in advance for your help!

 

[FSW_Applicant]

Following the thread as I recently moved to Canada from the US.

 

[AshesNdust]

Hello – I’d like to file tax in both the U.S. and Canada this year, and I am wondering if anyone can offer some useful insights.

I currently work in the U.S., have recently landed in Canada, and would like to start filing tax in Canada this year. I heard there is something called “Foreign Tax Credit” that allows those who file in the U.S. to claim a credit in Canada. Is this true? If so, does anyone know how it works? And does claiming the credit mean that I won’t have file double-tax?

Also, has anyone done this without going to an accountant? I usually do my U.S. filing online (ex. TurboTax), and I’m wondering if filing online would still be doable in this situation.

Thank you so much in advance for your help!

I file in both US and Canada. I went ahead and used an accountant so, I can't tell you how hard it is to do on your own. First thing, go look online for the T1135 form, if you have to fill out the detailed one, use an accountant!
That being said, yes, there is the Foreign Tax Credit you can use for your US taxes. It'll keep you from having to pay taxes in both the US and Canada on the same income. Basically, the US allows you to have a tax credit for the amount of income taxes you pay on your Canadian tax return. So, you fill out your Canadian tax return first and then fill out your US one.
As a US citizen you have to do a tax return regardless of your physical location. No way around it.

 

[One_Topsy]

I file in both US and Canada. I went ahead and used an accountant so, I can't tell you how hard it is to do on your own. First thing, go look online for the T1135 form, if you have to fill out the detailed one, use an accountant!
That being said, yes, there is the Foreign Tax Credit you can use for your US taxes. It'll keep you from having to pay taxes in both the US and Canada on the same income. Basically, the US allows you to have a tax credit for the amount of income taxes you pay on your Canadian tax return. So, you fill out your Canadian tax return first and then fill out your US one.
As a US citizen you have to do a tax return regardless of your physical location. No way around it.

AshesNdust can you recommend your accountant?

 

[kateg]

I currently work in the U.S., have recently landed in Canada, and would like to start filing tax in Canada this year. I heard there is something called “Foreign Tax Credit” that allows those who file in the U.S. to claim a credit in Canada. Is this true? If so, does anyone know how it works? And does claiming the credit mean that I won’t have file double-tax?

Start here:

http://www.fin.gc.ca/treaties-conventions/usa_-eng.asp

Also, has anyone done this without going to an accountant? I usually do my U.S. filing online (ex. TurboTax), and I’m wondering if filing online would still be doable in this situation.

If you're lucky, and your situation is simple, you can do that. For us, it wasn't nearly that simple. We ended up filing two Canadian returns and a US one, because we were partial-year residents, and it was different before we became Permanent Residents. Ended up going with H&R block, mainly because if they screw it up, it becomes their problem.

 

[teddiegracie]

Thank you so much for your kind reply! Were you able to claim the foreign tax credit or did you end up having to pay more tax in Canada?

Thanks again!

 

[kateg]

Thank you so much for your kind reply! Were you able to claim the foreign tax credit or did you end up having to pay more tax in Canada?

Thanks again!

As a Canadian resident/US person, you generally end up paying the higher of the two taxes. I ended up deciding what the official date was that my affairs ended up mostly in Canada - until that date, I owed only US taxes. After that date, I owed only Canadian taxes.

This year, I was only a Canadian resident. I still paid Social Security up to the day I landed, but income taxes were paid entirely to Canada.

 

[links18]

CRA has some rather byzantine rules for determining who is a resident of Canada for tax purposes and who isn't. If you are not a resident under their rules, you aren't supposed to file a Canadian tax return even if you want to--unless you have Canadian source income--you may have to file a non-resident return. Also, there is a US-Canada tax treaty--the provisions of which may trump CRA rules regarding residency.

 

[kateg]

Also, there is a US-Canada tax treaty--the provisions of which may trump CRA rules regarding residency.

It does. If you can make a case under it, things get a lot simpler.

Filing taxes in Canada (particularly if little is owed) is a good thing, from a documentation standpoint. If I had to live outside Canada for a year or two, I'd make sure to leave enough in an account to get Canadian sourced income.

Until you are a citizen, having Canadian taxes is a good thing.

 

[rahu22]

Reviving this thread since it has lot of information for taxation on income in US and Canada.

I am in a similar situation and plan to move to Canada this summer. When I file my taxes next year, I will have to report both US and Canada income earned this year.

I read about the Canada-US tax treaty and understood that the I can claim the US taxes (that I paid to US govt. on my income in USA) as foreign tax credit(FTC) on my Canadian return. However, I see that FTC that I can claim in Canada is lower of a. the amount paid in taxes in US and tax that I will pay in Canada for US income. Given the given Canadian tax rates are higher, I will likely have to pay an incremental amount to the Canadian government on my US income after paying taxes in US.

However, some articles suggest that since US Canada have tax treaty, you are not eligible for a tax credit. See this post


Can someone share what is the correct strategy for filing taxes in Canada with both US and Canadian income. Is it advised to file taxes in US and claim FTC on Canada tax return, or vice-versa?

 

[keesio]

To avoid double taxation, you have two options:
-Claim the FEIE (Foreign Earned Income Exclusion). This allows you exclude foreign earned income from US taxes, up to a certain amount (~100K USD).
-Use FTC (Foreign Tax Credit). As you mentioned, you can get a credit for every tax dollar you paid to CRA that you can use for your US taxes.

In situations where you are in a country where the taxes are generally higher (like Canada), the second option is usually the better one. This is because you will often have more than enough tax credits to offset the taxes owed to the IRS. Note that not all income is covered by the FTC. There are some cases where the IRS has first dibs on the income tax. In those cases, you pay the IRS first and then get a tax credit to use for CRA. It sounds like you already know most of this

The other benefit of the FTC is that any unused credit can roll over to following years for up to 10(?) years.

Most residents of Canada in our situation use the FTC.

Can someone share what is the correct strategy for filing taxes in Canada with both US and Canadian income. Is it advised to file taxes in US and claim FTC on Canada tax return, or vice-versa?

Get a reputable crossborder accountant. This is key. The accountant can file both Canadian and US taxes. the accountant will first prep your Canadian taxes (assuming you reside in Canada and your income is mostly Canadian based), figure out how much tax credits you have, and then use it to prep you US taxes. The accountant also see which income must be taxed by the US first and then update your US return and Canadian return appropriately.

Note that there are a LOT of tax traps to be aware of that can really complicate things. For example, you need to keep in mind there is a sweet spot in regards to the amount you can contribute to your RRSP. Stay away from TFSA and RESP. Stay away from any mutual funds and ETFs outside the US that is not in a recognized registered account (like RRSP). If you own your own business in Canada... yikes.

 

[rahu22]

To avoid double taxation, you have two options:
-Claim the FEIE (Foreign Earned Income Exclusion). This allows you exclude foreign earned income from US taxes, up to a certain amount (~100K USD).
-Use FTC (Foreign Tax Credit). As you mentioned, you can get a credit for every tax dollar you paid to CRA that you can use for your US taxes.

In situations where you are in a country where the taxes are generally higher (like Canada), the second option is usually the better one. This is because you will often have more than enough tax credits to offset the taxes owed to the IRS. Note that not all income is covered by the FTC. There are some cases where the IRS has first dibs on the income tax. In those cases, you pay the IRS first and then get a tax credit to use for CRA. It sounds like you already know most of this

The other benefit of the FTC is that any unused credit can roll over to following years for up to 10(?) years.

Most residents of Canada in our situation use the FTC.



Get a reputable crossborder accountant. This is key. The accountant can file both Canadian and US taxes. the accountant will first prep your Canadian taxes (assuming you reside in Canada and your income is mostly Canadian based), figure out how much tax credits you have, and then use it to prep you US taxes. The accountant also see which income must be taxed by the US first and then update your US return and Canadian return appropriately.

Note that there are a LOT of tax traps to be aware of that can really complicate things. For example, you need to keep in mind there is a sweet spot in regards to the amount you can contribute to your RRSP. Stay away from TFSA and RESP. Stay away from any mutual funds and ETFs outside the US that is not in a recognized registered account (like RRSP). If you own your own business in Canada... yikes.

Thanks kessio for the detailed post.

 

[Alex54321]

Thanks kessio for the detailed post.

Don't forget to take care of your US retirement accounts if you have ones (IRA, 401K ) before you move. I don't think you want to sell them and bite the tax and penalty. The US broker can ask you to liquidate something or could freeze the accounts as soon as you change your US address to Canadian.

 

[keesio]

Don't forget to take care of your US retirement accounts if you have ones (IRA, 401K ) before you move. I don't think you want to sell them and bite the tax and penalty. The US broker can ask you to liquidate something or could freeze the accounts as soon as you change your US address to Canadian.

Good point. When my wife moved over, she left her accounts alone. She doesn't contribute to them anymore. But she never updated her address (he parents address where she lived before she moved). I would imagine you get more hassles if you update your address.

 

[Alex54321]

Good point. When my wife moved over, she left her accounts alone. She doesn't contribute to them anymore. But she never updated her address (he parents address where she lived before she moved). I would imagine you get more hassles if you update your address.

Yes, here is reply from Fidelity on my question about Traditional IRA. I think other US brokerages ( like Vanguard or Etrade) could have a different policy. It's all about their licensing to operate in Canada.

"...Once we receive notification of your Canadian residency, your non-retirement account will be restricted to liquidating trades only and deposits no longer be accepted. After 60 days, all money movement features are discontinued.

Your retirement accounts will stay active and you can still invest in mutual funds; however, stocks and ETFs trades are not allowed. All other features will remain in the accounts..."