Working in the U.S. and Living in Canada: A Quick Guide for Canadian Residents, and Dual Citizens.

Written by Tiffany Woodfield, TEP, Associate Portfolio Manager, CRPC®, CIM® and John Woodfield Portfolio Manager, CFP®, CIM®

Working in the U.S. and Living in Canada: A Quick Guide for Canadian Residents, and Dual Citizens.

If you're working in the U.S. but living in Canada, it's essential to make sure you don't run into trouble with the Canada Revenue Agency (CRA) or the IRS.

Canadian residents who work for a Canadian employer have a much simpler situation than Canadian residents whose employers are stateside. In addition, if you are a Dual Canadian-U.S. citizen this can further add to the complexity of your tax situation.

If you are living in Canada permanently (and not simply visiting on a travel visa), you will likely be considered a Canadian tax resident and have a Canadian tax return filing obligation. However, you may also have U.S. Federal and State tax filing obligations if you worked for a U.S. based employer. Dual Canadian-U.S. Citizens who are Canadian tax residents must file in both jurisdictions regardless of where they work. Keep reading to learn more about how to navigate the complexities of working in the U.S. while living in Canada.

While we are financial advisors, we are not accountants. The guidelines in this post are for general information only. We recommend that you seek the advice of a cross-border accountant and cross-border financial advisor.

Table of Contents

1. Canadian Tax Residency Explained
2. Canadians Working Remotely for a U.S. Company
3. Crossing the Border to Work in the U.S.
4. What to Watch Out for as a Canadian Working in the U.S.
5. Taxation of Dual U.S.-Canadian citizens working in Canada
6. How to Report U.S. Income on Your Tax Return as a Canadian
7. How Canadian Residents Receiving U.S. Income Can Avoid Double Taxation
8. What to Do with a 401k in Canada
9. Common Questions

Canadian Tax Residency Explained

As a Canadian working for a U.S. employer, the most important factors that will determine how your income will be taxed include where you are considered a tax resident as well as where you physically perform your work. You are generally considered Canadian Tax Resident if you live in Canada and have significant ties such as a home or family members living with you. As a Canadian tax resident, you are taxable on your worldwide income and must report any income earned from a U.S. employer. If your work involves travelling to and physically working in the U.S., the income related to U.S. workdays would be considered U.S. source income and potentially also require filing a U.S. Federal and State tax return to report any income derived while working in the U.S.

Care should be taken to track the amount of any U.S. workdays you have, as you may be considered a U.S. tax resident if you meet the U.S. Substantial Prescence Test. If you are considered a U.S. tax resident, this could significantly increase the complexity of your tax filings.

It is possible that you may be considered a tax resident in both Canada and the U.S. depending on the amount of workdays in each jurisdiction as well as your ties to each country. In addition, if you are a U.S. citizen you will have a U.S. tax return filing requirement in Canada regardless of how many days you spend in the U.S. due to the IRS citizenship-based taxation system. In this case, it is important that you speak with a cross-border tax advisor to discuss the potential tax implications.

Canadians Working Remotely for a U.S. Company

There are many situations in which a person might live in Canada and work for a U.S. company. In this post, we'll cover the basic information for the following situations:

• Remote Workers - Full-time Employees of a U.S. company
• Independent Contractor working for U.S. based company

Please note that this only a general guide is not intended cover all possible situations, such as individuals working for a Canadian based employer with U.S. workdays. If you fall into these categories, please let us know and we can provide further guidance.

Canadian Remote Workers Employed by a U.S. Company

Embracing the remote work revolution offers Canadian residents a unique opportunity to work for U.S. companies while enjoying the comfort of their homes in Canada. However, it's important to consider the legal requirements and tax implications of working remotely for our employer.

Legal Requirements

Regarding legal requirements, it's essential to understand that working remotely for a U.S. company typically does not necessitate obtaining a U.S. work visa. However, roles requiring occasional travel to the U.S. may require securing a B1 visa for business visits. Speak with a U.S. immigration lawyer if you need to obtain a U.S. work visa and understand what the requirements are to ensure you are working in the U.S. legally.

Payroll Reporting Issues

Payroll reporting obligations must also be considered as U.S. companies with Canadian employees have an obligation to remit Canadian income tax, as well as CPP and EI. If your U.S. employer is not compliant with their Canadian payroll obligations, they could face penalties. In addition, if a U.S. employer decides to put you on U.S. payroll, this can result in a mismatch of your tax withholdings which can result in cashflow issues. For example, if a U.S. company is remitting tax to the IRS instead of the CRA, this would result in under withholding of Canadian tax with a large tax balance owing in Canada. Assuming all of your work is being performed in Canada, you would not have any U.S. tax payable and would need to file a U.S. return in order to obtain a refund of any U.S. tax withheld.

Some solutions to ensure a U.S. employer is compliant with their Canadian payroll reporting can include setting up an employee on Canadian payroll or working with a U.S. employer via a Canadian Professional Employer Organization (PEO). Your payroll reporting should be discussed with your U.S. employer prior to starting any U.S. employment to avoid any issues in terms of under withholding of Canadian income tax.

Tax Implications

Canadian tax residents must report their global income.

Global income includes earnings from U.S. entities, which must be reported on their Canadian tax return, converting their income to CAD using the Bank of Canada's average exchange rate for the tax year. To mitigate the issue of double taxation, Canadians can claim a foreign tax credit on their Canadian return for taxes paid to the U.S. relating to U.S. workdays.

In addition to reporting your U.S. income on your Canadian tax return, you may also have to file a U.S. Federal or State tax return to report any U.S. source income. Assuming you are not considered a U.S. tax resident as discussed earlier, you would likely need to file a Nonresident Alien Individual tax return (Form 1040NR) to report your income with the IRS. A U.S. state tax return may also need to be filed depending on which state you earned your employment income from. As filings can be complex, it is recommended you speak with a cross-border tax advisor to ensure you are compliant from a U.S. tax reporting perspective.

Retirement Benefits

Understanding the integration of retirement savings between the two countries is vital. Participation in a U.S. employer's 401(k) plan must be navigated with an understanding of its impact on Canadian tax laws, especially regarding RRSP contribution limits and tax implications.

Canadian Independent Contractor for U.S. Company

One potential workaround for U.S. employers seeking to use Canadian temporary workers or freelancers is to use self-employed contractors. This allows for U.S. companies to hire skilled Canadian workers without the need for additional payroll reporting obligations in both countries.

Although independent contractors don’t qualify for certain employee protections such as EI, CPP or vacation pay, they are also not subject to the associated payroll withholding obligations. Self-employed individuals can also claim employment related business expenses which can be deducted from their net income.

It is important to ensure that you meet the definition of a “Self-employed” worker in the eyes of the CRA (RC4110 Employee or Self-employed? - Canada.ca) as there are certain criteria the CRA looks at to determine if you are in fact a contractor and not an employee. If the CRA does audit your employment status and determines you are not self-employed, there is a risk you will be denied the ability to claim any business expenses and be subject to any required employee payroll withholding requirements. Speak with a cross-border tax advisor if you are unsure of your employment status.

Crossing the Border to Work in the USA

There are many professions where you might live in Canada and work across the border — even commuting five days per week to work.

This is particularly common for people living in border towns or the increasing amount of remote workers in this post-pandemic world. Whether you're a healthcare professional, executive, teacher, lawyer, consultant, athlete or other specialist whose expertise and abilities are valued across the border, you have unique tax planning and investment management challenges. Below are some of the main concerns and issues you may encounter if you're a cross-border professional.

Tax Planning Challenges

• Tax Residency: If you start spending a significant amount of days working in the U.S. and start living in the U.S. even temporarily, you may be at risk of establishing U.S. tax residency. It’s important to track the number of days you physically spend in the U.S. and work with a cross-border tax accountant to confirm your Canadian and U.S. tax residency status.
• Double Taxation: Although the U.S. and Canada have a tax treaty to prevent double taxation, you must understand how to apply it correctly to ensure you don't pay more tax than necessary. Seeking the help of a cross-border accountant may be wise.
• Tax Filing Requirements: You must ensure you file any required tax returns in both countries, complying with different tax laws, deadlines, and documentation requirements.
• Tax Deductions and Credits: Determine eligibility for and maximize tax deductions and credits available for cross-border workers, such as foreign tax credits.
• Social Security and Retirement Planning: Understand how working in the U.S. affects Canadian CPP/QPP and Old Age Security (OAS) benefits and U.S. Social Security benefits, and plan accordingly.

Investment Management Challenges

• Retirement Savings Plans: Navigating the complexities of contributing to and managing retirement savings accounts in both countries, such as RRSPs in Canada and 401(k)s or IRAs in the U.S., can be challenging.
• Investment Taxation: Understand the tax obligations you'll have when dealing with investments in both countries, including the treatment of capital gains, dividends, and interest income, to make informed investment decisions. The IRS and CRA also treat certain investment accounts differently in each jurisdiction such as TFSA accounts and Roth IRAs. It’s important to understand the taxation of such accounts on both sides of the border.
• Regulatory Differences: Dealing with the legal and regulatory differences in financial and investment products available in each country and ensuring compliance with both regulations can be complex.
• Estate Planning: Cross-border estate planning will ensure assets are protected and efficiently transferred to beneficiaries, considering the tax implications in both countries.

Addressing these challenges requires careful planning and often the assistance of professionals specializing in cross-border financial planning, tax advice, and investment management to ensure compliance with both countries' laws and optimize financial outcomes.

If you're already working in the U.S. while living in Canada, we recommend that you seek the advice of a cross-border accountant. In addition, if you have substantial assets on either side of the border, the guidance of a cross-border financial advisor may be invaluable.

What to Watch Out for as a Canadian Working in the U.S.

If you are a Canadian working in the U.S. and are also living in the U.S., you may face a departure tax if you become a non-resident of Canada.

This is because Canada bases taxation on residency and not citizenship. (Speak to your cross- border accountant to learn more about this). The CRA requires that you report certain assets held on your departure from Canada for tax purposes. Any investment held in non-registered accounts (i.e., outside of an RRSP or TFSA) would be subject to a deemed sale and potential capital gains tax.

There are withholding tax obligations on certain sources of Canadian income when you are a non-resident of Canada.

If you are earning Canadian investment income in the U.S. and a non-resident of Canada, there will be Canadian withholding taxes on certain sources of income such as Canadian dividends or rental income. The default withholding rate for such income is 25 per cent, however this can be reduced under the provisions of the Canada-U.S. tax treaty depending on the income source.

Certain Canadian investments are not treated the same by the IRS

If you are a Canadian working and living in the U.S., it is not ideal to keep your TFSA in Canada as any income earned within a TFSA account is not considered tax-free for U.S. purposes. You are also not allowed to contribute to as TFSA if you are a non-resident of Canada residing in the U.S. Any contributions made to a TFSA account as a non-resident of Canada would be subject to a 1 per cent per month penalty from the CRA.

Understand investment options with your existing and new financial institutions.

*These are just a few of the complications and planning ahead can make a significant difference. Speak to a cross-border professional about your particular situation.

Taxation of Dual U.S.-Canadian citizens working in Canada

As discussed earlier, a Canadian tax resident must report their worldwide income on their annual Canadian tax return regardless of where they physically work. If you are a U.S. citizen, you must also file an annual U.S. tax return to report the same income to the IRS. This creates added complexity when it comes time to file your taxes, especially if you worked both in Canada and the U.S. as income will need to be “sourced” on each tax return depending on where your services were physically performed. Additional tax implications what would need to be reviewed include U.S. state tax filings depending on if you worked in a state that has a filing requirement as well as the tax treatment of different types of employment income such as stock options or RSUs.

In order to ensure you correctly report your income in each jurisdiction, as well as avoid double taxation it is generally recommended to speak with a tax accountant the is experienced in cross-border tax planning. Please see the following link to our guide for additional issues and financial planning tips for U.S. citizens living in Canada: https://www.swanwealthcoaching.com/knowledge-centre/us-citizens-living-in-canada

How to Report U.S. Income on Your Tax Return as a Canadian Resident

Reporting U.S. income on a Canadian tax return is critical for Canadians working for U.S. companies. Make sure you follow these recommendations:

1. Report Worldwide Income

Include your U.S. source income as part of your worldwide income on your Canadian tax return. If you received a W-2 statement from your U.S. employer, this would typically be reported on Line 104000 as Other Employment Income. Use the Bank of Canada's average annual exchange rate to accurately convert your U.S. income into Canadian dollars or other exchange rate approved by the CRA Note that if your U.S. income reported on your W-2 statement has been reduced by contributions made to a 401(k) plan, you must add these contributions back to your employment income reported on line 104000. Any 401(k) contributions may then be deducted on line 207000 of your tax return.

3. Understand Tax Treaties

Familiarize yourself with the Canada-U.S. Tax Treaty to correctly report income and avoid double taxation. As these rules can be complex, consider hiring an accountant who can take care of this for you. Just ensure you're hiring a cross-border accountant with the necessary knowledge to help someone in your situation.

4. Keep Documentation

Maintain detailed records of your U.S. income, any taxes paid in the U.S., as well as the amount of any U.S. workdays to support any claims on your Canadian tax return.

How Canadian Residents Receiving U.S. Income Can Avoid Double Taxation

Double taxation may arise for Canadian residents receiving U.S. income, but claiming Foreign Tax Credit (FTC) can offer a solution.

Foreign tax credits are available to Canadian residents who have ave paid or accrued foreign taxes on foreign-sourced income. Canada has tax treaties with many countries. These tax treaties may affect a taxpayer's eligibility and the calculation of the credits. To claim the credits, a taxpayer must have supporting documents such as a foreign tax return, tax statements or other evidence of foreign taxes paid. (+)

Make sure you take the following steps:

1 - Claim the Credit

The FTC allows you to deduct the amount of tax you've paid to the U.S. from your Canadian tax obligation that relates to U.S. source income. Foreign Tax Credits are reported on CRA Federal Form T2209 as well as the provincial section of your tax return depending on which province you reside in.

2 - Keep Records

Keeping detailed records of the income earned in the U.S. and taxes paid there is critical. You will also likely need to provide the CRA with a copy of any U.S. tax return that is filed. These documents are necessary to claim the FTC.

3 - Understand Limits

The credit is limited to the amount of Canadian tax payable on the U.S. income, ensuring you don't get a larger credit than what you owe in Canada.

4 - Professional Advice

Due to the complexities of cross-border taxation, consulting with a tax professional experienced in U.S.-Canadian tax laws is highly recommended to navigate the FFTC correctly.

What to Do with a 401(k) in Canada

As a Canadian working for a U.S. company, you may end up with a 401(k) plan.

There are several benefits and pitfalls to be aware of with a 401(k) in Canada.

Tax-Free Growth and Taxation on Withdrawals

Since you reside in Canada, your 401(k) plan will be subject to U.S. and Canadian tax laws, which can be complex due to differing regulations and the potential for double taxation.

In Canada, the growth within your 401(k) plan is tax-deferred, similar to the U.S. under the provisions of the Canada-U.S. tax treaty. However, when it comes to withdrawals, they will be taxed in the U.S., and you will also have to report this income on your Canadian tax return.

When considering withdrawals from your 401(k), knowing both the U.S. penalties for early withdrawal and the Canadian tax implications is crucial.

Early withdrawals are subject to penalties and income tax in the U.S., and this income must also be reported in Canada, although claiming a foreign tax credit can mitigate the tax burden. The Canada-U.S. Tax Treaty is designed to prevent double taxation by allowing tax-free growth for Canadian residents as well as the ability to claim a foreign tax credit for the taxes paid to the U.S. on their Canadian tax return on any withdrawals. This helps to ensure that you are not taxed twice on the same income.

Maintaining a 401(k) in Canada

For Canadian residents, deciding whether to keep the 401(k) in the U.S. upon retirement, roll it over to an IRA, or even transfer it to a Canadian retirement savings vehicle like an RRSP involves navigating a complex set of tax rules and considerations. Such decisions should consider the tax implications in both countries, potential penalties, and the exchange rate between Canadian and U.S. dollars at the time of withdrawal or transfer.

Given these complexities, consulting with a financial advisor or tax professional specializing in cross-border taxation is highly recommended. This professional guidance can help maximize your retirement savings growth while minimizing tax liabilities in both countries.

Read Our Guide: 401(k) in Canada: Everything You Need to Know

Common Questions

How do I deal with taxes if I live in Canada and work remotely for a U.S. company?

You must report your income in both countries when living in Canada and working remotely for a U.S. company. In Canada, you'll declare it as foreign income on your tax return. Depending on your status and income level, you may also need to file U.S. tax returns. Claim foreign tax credits for taxes paid to the U.S. which relate to U.S. workdays.

If my U.S. employer did not send me a W-2 form, do I still need to report my foreign income?

Yes. If you were on a U.S. payroll with your employer, then U.S. income tax should have been withheld and a W2 issued. You should contact your employer and request a copy. However, if instead your U.S. employer had a Canadian payroll set up, you should instead get a T4 for this income to report on your tax return. If you don’t have a W2 or T4 then perhaps you aren’t an employee but an independent consultant. This should be outlined in the terms of your employment agreement. Regardless, you would still need to report this income on your Canadian tax return as a Canadian tax resident.

Should a Canadian become an independent contractor for a U.S. company?

Becoming an independent contractor for a U.S. company can offer flexibility and potential tax advantages, such as deducting business expenses. However, it also means managing your taxes in the U.S. and Canada and potentially dealing with self-employment tax obligations. It’s advisable to consult with a tax professional to understand the implications fully and ensure compliance with tax laws in both countries.

Where do I pay taxes as a remote worker living in Canada?

As a remote worker living and working in Canada for a U.S. company, you'll primarily pay taxes in Canada, where you physically performed the services for your employer. You must report your worldwide income, including your U.S. earnings, on your Canadian tax return. Depending on your work arrangement, you might also have to file a U.S. tax return if you were required to physically work in the U.S. or received a U.S. W-2 tax slip to report your income with U.S. tax withholdings.

How are my Canadian taxes impacted by working in the U.S.?

Working in the U.S as a Canadian resident impacts your Canadian taxes by increasing your worldwide income, which is taxable in Canada. You must report U.S. earnings on your Canadian tax return, converting the income to Canadian dollars. Taxes paid in the U.S. may qualify for the foreign tax credit, reducing Canadian tax liability and preventing double taxation.

Next Steps

If you’re a Canadian resident or are planning on moving to Canada or the U.S. and need assistance with moving and optimizing your investments, estate planning, wealth management and portfolio management, please get in touch. At SWAN Wealth, we specialize in Canadian financial planning, cross-border financial planning, and cross-border wealth management.

Related Posts

Foreign Tax Credits for Canadians and Americans

Living in Canada as an American Citizen

Basic Guide to the US-Canada Income Tax Convention

About the Authors

Tiffany Woodfield is an Associate Portfolio Manager licensed in Canada and the USA, a Chartered Investment Manager (CIM), a Chartered Retirement Planning Counselor (CRPC) a Trust and Estate Practitioner (TEP) and the co-founder of SWAN Wealth Management, along with her husband, John Woodfield. Tiffany advises clients who live in Canada and the United States and want to simplify their cross-border financial plan, move their assets across the border, and optimize their investments to minimize their tax burden. Together, Tiffany and John Woodfield help their clients simplify their cross-border finances and create long-term revenue streams that will keep their assets safe whether they live in Canada or the U.S.

John Woodfield is a Financial Management Advisor (FMA), a Chartered Investment Manager (CIM), and a Certified Financial Planner (CFP), and in 2007 was inducted as a fellow of the Canadian Securities Institute (FCSI). As a portfolio manager and CFP®, he works with clients across Canada. John Woodfield’s clients are families, individuals, and business owners who understand the importance of comprehensive wealth and investment plans driven by the lifestyle they want to lead.

Schedule a Call

Schedule a 15-minute introductory call with SWAN Wealth Management. Click here to schedule a call.

  ▶️ Download the Cross-Border Guide