As a Canadian expatriate working in the U.S., you will generally be subject to U.S. tax on employment income earned in the United States.

Are you employed by a Canadian business and working in the U.S.? Are you aware that this type of cross-border employment can trigger U.S. federal tax, state tax, and U.S. filing requirements?

If you answered yes to the first question, this article is highly relevant to you. Read on to better understand the tax implications of working in the United States as a Canadian expatriate.

How is my employment income taxed in the U.S.?

For tax purposes, employment income is generally attributed to the country where the services are performed. If you are physically working in the U.S., you will be subject to U.S. tax on the employment income earned there.

The amount of income subject to U.S. tax is determined by allocating your total salary based on the number of days worked in the U.S. versus Canada during the year. In addition to U.S. federal tax, you may also be liable for state income tax on income earned while working in a particular state.

To help illustrate this, consider the following example:

Joe earned $50,000 in 2012 while working as an IT support specialist for a Canadian IT company. Midway through the year, Joe was sent to his company’s U.S. location to provide consulting services to a client. In 2012, Joe worked a total of 200 days, including both his workdays in Canada and in the U.S. Out of those 200 days, he spent 20 days working at the company’s U.S. location.

In this example, a portion of Joe’s employment income would be subject to U.S. federal tax for 2012. As a result, he would need to file a U.S. tax return. The amount to be reported on the U.S. return would be calculated as follows:

Calculation: 20 days / 200 days = 10%
Therefore, 10% of Joe’s total employment income of $50,000, or $5,000, would be subject to U.S. tax.

Do Canadian expatriates working in the U.S. pay double tax?

“I heard that as a resident of Canada, I have to pay taxes on my worldwide income. Is this true?” This is a frequently asked question.

Under Canada’s tax system, your tax liability depends on whether you are considered a resident or a non-resident of Canada. If, after completing the residency test, you are determined to be a resident of Canada, then you are generally subject to Canadian tax on your worldwide income, including your U.S. employment income.

This means you would need to include your U.S. income on your Canadian tax return.

You may now wonder whether that means you must pay tax twice on the same employment income, once in the U.S. and again in Canada.

Not exactly. To help avoid double taxation, a Canadian citizen working in the U.S. may claim a foreign tax credit on their Canadian tax return for any U.S. federal and state taxes paid. This foreign tax credit can reduce the amount of Canadian tax otherwise payable.

Canada-U.S. Tax Treaty provides tax relief

In addition, the Canada-U.S. tax treaty may provide relief from U.S. federal tax for Canadians working in the U.S. As a Canadian resident, you may not be subject to U.S. tax if either of the following applies:

• You earned less than USD $10,000 from U.S. employment income.
• You spent fewer than 183 days in the U.S. during any 12-month period, and you were not paid by a corporation resident in the U.S.

Even if you qualify for an exemption from tax under the treaty, you are still generally required to file a U.S. income tax return, typically Form 1040NR, if you have U.S. source income. You may also need to file a U.S. state tax return to report income earned in that state.