Of all the areas to consider in your move (or living in Canada as a US citizen or Green Card holder), Canadian taxes are by far the most complex yet potentially beneficial area. Nothing seems to be as confusing as the taxation of Americans moving to Canada. Let’s dispel one myth right off the bat . . . US citizens and Green Card holders are required to file US tax returns annually and declare their worldwide income. Since they live in Canada, they are considered tax residents of Canada as well which requires you to declare your worldwide income on a return for Canadian taxes. This leads you to the mine field of double taxation and without competent help, you could end up paying more than your fair share. The typical situation we see is someone moves to Canada and gets their Canadian taxes done by their local CA and their US return done by their “good ole CPA” in the US and then take comfort in the fact they have made it through another tax season.
Unfortunately, this is a false sense of security because the truth of the matter is very few people know how to properly prepare these returns and more importantly, coordinate the two returns, properly apply the Canada/US Tax Treaty and ensure the necessary compliance issues are fulfilled to your benefit. Besides paying more US and Canadian taxes than you should, it is only a matter of time before one of the taxing authorities catches a compliance issue and the “hate mail” starts filling your mailbox.
Given this requirement to continue filing US tax returns, some folks think they will simply renounce their US citizenship to get out of this requirement. Unfortunately, Congress is one step ahead of you and in 2004, brought in the new “expatriation rules.” Basically, if your net worth is in excess of $2M or your average tax bill over the past 5 years has averaged $139k or more, you fall under the alternative tax regime. This means you file Form 8854 – Initial and Annual Expatriation Information Statement annually for a period of 10 years. Further, you are barred from staying in the US for more than 30 days and if Senator Reed gets his way, you will not be allowed to spend anytime in the US at all, no matter what the reason. As a result, it is usually best to get right with the world and file the required returns and remain in compliance from this point forward.
US and Canadian taxes have several differences. One significant difference you will notice is you can file a joint return in the US but in Canada, you file separate returns. Canada acknowledges heterosexual and same-sex common-law relationships and marriages as a filing and immigration status in Canada. Further, your provincial tax return is filed with your federal tax return unless you live in Quebec where you file a separate return. You will find that the combined federal and provincial tax rates are higher than in the US and you have fewer deductions/credits. However, payroll taxes are lower so if you are working in Canada, you may have some offset with your Canadian taxes.
For expert Canada/US tax help in your local area, please contact us for a referral.