Tax Tips for Canadians Who Work for U.S. Companies

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 ‚Äì 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.

What is a W-8BEN form?

Resident U.S. aliens and American citizens must fill out a W-9 form when they start working with a new employer. Non-resident U.S. aliens and foreign businesses that earn income from U.S. sources must fill out a W-8 form. You can download form W-8 for 2018 on the IRS website.  The W-8BEN form establishes your status as a foreign person working for an American employer. As a Canadian, the W-8BEN form exempts you from the thirty percent American withholding tax as the resident of a country with which the United States has an income tax treaty.  This means that, if your company doesn't have a branch or office in the U.S., you are exempt from paying U.S. taxes as long as you declare that income to the CRA.  So, the next time you get an enquiry from a prospective American client, remember form W-8BEN!

Should I charge Canadian sales tax to American clients?

If your business generates more than $30,000 per year in sales, you are required to collect either GST, a combination of GST and PST, or HST from your clients. Generally, the client pays whatever sales tax applies in their province or territory.  When you sell goods and/or services to clients outside of Canada, you must not charge Canadian sales tax. This rule remains true as long as the delivery of products and services remains outside of Canada.  To clarify, imagine you are a Canadian-based contractor who provides IT services to a U.S. company. As long as your services are not re-entering Canada in any way, your U.S. client would be exempt from paying Canadian sales tax.  However, if a person who is not a resident of Canada physically comes to Canada to purchase something from you, Canadian sales taxes will apply. As an example, tourists who buy goods and foreign companies who require services while they are visiting Canada.  In some cases, non-resident companies can apply for a GST/HST rebate under the Foreign Convention and Tour Incentive Program (FCTIP). This rebate applies to foreign professionals that paid sales taxes on eligible tour packages, convention facilities or related convention supplies in Canada.

What about Canadians who live and work in the U.S.?

If you live and work in the U.S. more than 183 days per year, you are considered a non-resident of Canada for tax purposes.  As a non-resident Canadian citizen, you only pay taxes on income you receive from Canadian sources. For example, if you work for a U.S. company but earn rental income from a Canadian property, you would be required to pay Canadian income tax on the rental income only.  If you have no Canadian income tax to pay and don't want to claim a refund, you do not need to file a Canadian tax return.

What if I lived and worked in the U.S. for less than 183 days during the year?

If you worked in the U.S. while retaining your Canadian residency and had U.S. taxes withheld from your paychecks, you can apply for the Federal Foreign Tax Credit on your CRA tax return. This credit makes it possible to get a credit for any taxes paid to the IRS while ensuring that the appropriate amounts go to the CRA.  To figure out the amount you can deduct under this credit, fill out Form T2209, Federal Foreign Tax Credits, and enter the amount from line 12 on line 405 of your T1 tax return.  All in all, if you are a Canadian who earns income from American sources, the main takeaway is that you should never be taxed twice on your income. If you are a resident of Canada, you will pay taxes to the CRA, and if you reside in the United States, you will pay taxes to the IRS. If you need further clarification on this topic, don't be shy to consult a tax professional!