Self Employed
If you are a Canadian citizen who works remotely for a U.S. company, you may be wondering what tax laws apply to you. For example, do you need to pay U.S. taxes? Should you charge Canadian sales tax to American clients? Where do you pay taxes if you are a Canadian who is living and working in the United States? Keep reading to find out what you need to know if you earn income from south of the border.
Can a Canadian work for a U.S. company?
Canadians and Americans have a long tradition of working together. Indeed, many U.S. companies may decide to work with Canadian vendors for a variety of reasons. For example, some companies may choose to work with Canadians to take advantage of the exchange rate. Others may need specific localization services that only a Canadian can provide. Most Canadians will need a work visa to live and work for a U.S. company unless they have dual citizenship. That being said, a work visa is not required if you are seeking to work for a U.S. company remotely.
How to report U.S. income on your tax return
As a Canadian freelancer or business owner living in Canada, you must report all of the income you earn during the tax year, regardless of your wage source. The most important thing to note is that you must report all income in Canadian dollars. At the end of the year, any American companies you work for should send you a W-2 form detailing the amounts you earned in U.S. dollars. To convert these amounts into Canadian dollars, use the Bank of Canada exchange rate applicable on the day you received the income. If you received various amounts throughout the year, you could use the Bank of Canada's annual average exchange rates. Report all foreign income on line 104 of your T1 return. If your W-2 form includes deductions for U.S. taxes, benefits, or retirement plans, make sure to include this information on line 207 of your tax return. These contributions may be tax deductible under the Federal Foreign Tax Credit.
I didn't get a W-2 form from my employer. Do I still need to report my foreign income?
The answer to this question is a resounding yes! As mentioned above, you are required to report and pay taxes on all income you earn during the tax year. Just because an employer fails to report income on their end, that doesn't mean you don't need to report it to the CRA. It can be tempting to omit reporting foreign income thinking that the CRA "won't notice." But, if the CRA discovers that you intentionally failed to report any part of your income on your taxes, you won't just be on the hook for paying the back taxes owing for these amounts – you could incur a gross negligence penalty as well. The minimum penalty for neglecting to declare income is $100. If you fail to report an amount higher than $100, you will also have to pay 50 percent of the understated tax and/or overstated credits related to your false statement or omission.
Repeated failure to report income
If you fail to report an amount of $500 or more two or more times in a four-year period, the consequences are even direr. In fact, this could cause you to incur a federal and provincial or territorial repeated failure to report income penalty. This penalty is equal to ten percent of the unreported income at the federal level, and ten percent of the unreported income at the provincial or territorial level. In other words, the penalty could be twenty percent of the unreported income, plus any taxes owing on that amount. Note that for Quebec residents, the provincial penalty may vary depending on Revenu Quebec's assessment. Non-residents of Canada will only incur the provincial or territorial penalty if the provincial or territorial tax is applicable. These penalties are each equal to the lesser of:
- 10% of whatever you failed to report on your income tax return; or
- 50% of the difference between the understated tax (and/or overstated credits) related to the amount you did not report and the tax withheld from the amount you did not report.
If you are still tempted to dodge the tax man, you should keep in mind that in extreme cases, tax evasion is considered a criminal offence in Canada.
Do I pay Canadian tax on U.S. income?
If you are a Canadian freelancer with an American client or even if you are an independent contractor who works remotely for a U.S. company, you are exempt from paying U.S. taxes. That being said, as a self-employed worker, you must report all income to the CRA regardless of where your clients are located. On the other hand, if you commute to work for an American company or if your employer provides you with work equipment and benefits and decides when and where you work, you are most likely not self-employed, but an employee. Because U.S. companies are required to withhold tax on all payments made to their employees, you could find yourself in a situation where you are being taxed twice: once in the U.S., and once in Canada. To avoid this, Canadians who work for American employers should make sure to fill out a W-8BEN form.
