Canadian Tax Planning for U.S. Executives Working in Canada

How U.S. Executives Working in Canada Are Required To File Their Tax Returns

Many U.S. executives move to Canada, for both brief and prolonged periods, to manage Canadian head offices for multinational or parent companies. During their time in Canada, these executives become full time residents and are therefore required to file a Canadian tax return. Unlike Canada, the U.S. tax system is based on U.S. citizenship, and therefore the U.S. executive is burdened with the requirement to file both a U.S. tax return and a Canadian tax return.

When the Obligation to Pay Canadian Taxes Begins

The legal obligation to pay Canadian taxes begins the day an immigrant establishes ties in Canada, which is triggered by actions such as:

  • renting or purchasing a place of residence in Canada,
  • enrolling children into the Canadian education system, or
  • enrolling into the Canadian medical system.

Under Canadian tax laws, Canadian residents are taxable on worldwide income.

How the Obligation to Pay American Taxes Continues

The legal obligation to pay U.S. taxes does not end with the establishment of residential ties in Canada. The U.S. citizen is still required to file a U.S. tax return, which includes income from global sources, including the employment income earned in Canada.

The typical American executive likely has:

  • employment income earned in Canada,
  • a home in the U.S. being rented out while living and working in Canada,
  • an investment portfolio in the U.S. earning dividends and capital gains, and
  • dividends from employee stock options exercised.

All of the income from these multiple sources must be reported on both the Canadian and U.S. tax returns. Fortunately, under the current Canada-U.S. Tax Treaty, taxes paid to each country are treated as a foreign tax credit by the other country.

Differences Between American and Canadian Tax Systems

One difference to be aware of between the U.S. and the Canadian tax system is that the U.S. individual income tax return is based on the combined income of the couple, whereas in Canada, the personal tax return is based on each individual’s income.

Also, Canada requires its taxpayers to disclose their specified foreign asset holdings and income derived from these assets on information return Form T1135. This information return is due on the date the tax return is due, which for individuals is on April 30 following the tax year being reported. The penalty for late filing is $25 per day for up to 100 days (minimum $100 and maximum $2,500). This means that a couple would pay a maximum penalty of $5,000, as each is likely required to file a T1135 form.

For example, if you owned and rented out a family home in the U.S. valued at more than $200,000, you would automatically be required to complete Form T1135 for each spouse as each has a specified foreign asset valued at more than $100,000 (see blog post “Canadian Holding Corporations and Individuals:  Avoid Costly Foreign Asset Reporting Pitfalls”).

Penalties and the Voluntary Disclosure Program

For U.S. executives working in Canada whose tax filings are not complete or are outstanding, the Canada Revenue Agency (CRA) provides relief from penalties (and interest in some cases) under the Voluntary Disclosure Program (VPD). Under this program, the taxpayer(s) can seek relief from penalties by disclosing the nature of the non-compliance on an anonymous basis before providing CRA with the specific taxpayers’ details.

In order to qualify under VPD, the disclosure to CRA must be:

  • voluntary,
  • complete,
  • involve a penalty, and
  • one year past due.

Generally, as long as these four conditions are met, relief will be granted using the VPD program.

Your Personal Tax Planning Accountants in Vancouver B.C.

Of course, the best way to avoid the uncertainty, stress and cost is to understand your Canadian and U.S. filing obligations on the onset. Mew and Company, your Vancouver Chartered Accountants, can help you with your Canadian tax filings.

If you have any questions about your personal tax planning, or would like to know more about how we can help you, call us at 604-688-9198 or contact us anytime online.

Disclaimer: All Rights Reserved for Mew & Company. This blog post is designed for personal use only. Please consult your professional tax advisor for further information. Mew & Company is not responsible for any legal disputes resulting from the content of this blog post.