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Using the United States-Canada Income Tax Treaty to Reduce Double Taxation

One of the main goals of the tax treaty between Canada and the United States is to prevent double taxation of Canadian taxpayers. Canadian residents who have income from the United States need to know the rules for filing taxes and how to lessen their U.S. withholding taxes.

Double Taxation

One of the aims of the United States-Canada Income Tax Treaty is to provide relief from taxation in both the United States and Canada for income earned by Canadians. U.S. citizens and Canadian residents are taxed on their world income. If not for the treaty, Canadians would pay the U.S. tax on their U.S. income to the Internal Revenue Service and pay again to the Canada Revenue Agency. Both U.S. citizens and Canadian residents report their foreign income no matter where they file a tax return, whether in Canada or in the United States.

Reducing Amounts Withheld for U.S. Taxes

Another way theUnited States-Canada Income Tax Treaty is beneficial to Canadians with income earned in the United States is to prevent amounts from being withheld for taxes. This is accomplished by providing a form, called a W-8BEN, to the income provider which you sign and in which you promise to declare the U.S. income on your Canadian tax return.

Taxes Paid in the United States

If taxes were deducted from your income, you can claim those taxes as if you paid them to the CRA. Because you have a duty to report all your U.S. income on your Canadian return, the income is deemed taxable as Canadian income. The usually lower U.S. income tax rate could leave you with an amount owing for the difference between the United States and Canadian income tax rates.

U.S. Canada Exchange of Your Financial Data

If you think the CRA does not have methods of finding out about U.S. income, think again. If an account held by a Canadian resident is recognized as a ‘reportable’ account by a U.S. financial institution, the information is sent by the financial institution to the IRS, which in turn transmits the information to the CRA. Tax evasion is a criminal offence in Canada and the United States.

Unincorporated Small Business

If your small Canadian unincorporated business earned income in the United States and that income is reported on your personal tax return, the same rules apply. You have to add the U.S. income to your Canadian tax return and pay Canadian tax on it. Unfortunately, since no U.S. taxes were withheld, there is not a tax credit to apply against the income. You have to pay the higher Canadian tax rate on the income in full.

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