Laurie Samay is a client service associate with Palisades Hudson Financial Group in Scarsdale, N.Y. She can be reached at info@palisadehudson.com.
Many Americans own Canadian securities or earn wages in Canada. If you do, you’ll want to make sure that you’re not paying tax on the same income to both the Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA).
U.S. citizens and residents pay U.S. income tax on worldwide income, but those earning income in Canada may also be subject to Canadian income tax on certain types of income. That includes income earned from employment in Canada, income earned from business conducted in Canada and capital gains from taxable Canadian property.
Avoiding double taxation is possible. Some methods are simple and automatic under the U.S.-Canada Tax Treaty, while others can be complex. The U.S.-Canada Tax Treaty was designed to prevent or at least reduce double taxation for U.S. and Canadian residents. Under the treaty, any U.S resident with Canadian employment income under C$10,000 annually is exempt from Canadian income tax. You may also be exempt if you earn more than C$10,000, but are not physically present in Canada for 183 or more days in the year. In either case, the income will be subject only to U.S. income tax.
For Americans earning interest from Canadian bank accounts, bonds and money market funds, only U.S. income tax will be due. With dividends, it’s different: Americans receiving dividends from Canadian companies must pay both U.S. and Canadian income tax on that income, though the treaty caps the foreign tax at 15 percent for recipients who are also the dividends’ beneficial owner.
Under the treaty, capital gains from the sale of personal property located in Canada are generally exempt from Canadian income tax for U.S. residents if the seller does not have permanent establishment there. For example, if you sell shares of a Canadian company that does not principally derive its value from real property situated in Canada, you will only owe U.S. income tax on the resulting capital gain.
Smart Income-Tax Strategies
While the treaty relieves some instances of double taxation, individuals can take further steps to minimize any income-tax overlap. Qualified U.S. citizens and resident aliens can exclude some foreign earnings from income with the foreign earned income exclusion – up to $99,200 in the 2014 tax year. Alternatively, U.S. residents can claim a foreign tax credit on income taxes paid in Canada, or take an itemized deduction for eligible foreign taxes. It’s usually better to take a credit than a deduction because a credit reduces your U.S. income tax on a dollar-for-dollar basis.
Besides filing the usual Form 1040 with the IRS and a state tax return if required, Americans who are subject to Canadian income tax must file Form 5013-R with the CRA, otherwise known as the Income Tax and Benefit Return for Non-Residents and Deemed Residents of Canada.
Canada Taxes Income in Retirement Accounts Unless You Act
Income from Canadian securities are supposed to be exempt from Canadian income tax when they’re held in a retirement account such as an IRA, SEP IRA or Keogh plan. However, custodians may be required to withhold Canadian tax in retirement accounts, with the exception of IRAs. For non-IRA retirement accounts, you must apply to the CRA for an exemption. Once the CRA has approved your application, the withholding will cease going forward. In some cases, you may have to be very persistent with the CRA to get results.
Taxes on Death Are Complex, Possibly Onerous
Canada has no estate or inheritance taxes. Instead, it levies a capital gains tax on the deemed disposition of all capital assets when someone dies. The estate of an American with Canadian assets can thus face three or four levels of taxation: Canadian capital gains tax; U.S. and Canadian income tax on deferred compensation, retirement plans and annuities; federal estate tax; and state estate tax, if applicable. While only estates exceeding $5.34 million ($10.68 million for a married couple) are subject to U.S. estate tax, a number of states tax estates exceeding $1 million.
It’s complex enough to start. All of these concerns become more complicated when it is unclear whether an individual is deemed a resident of the United States, Canada, or both for tax purposes. If you own a significant amount of Canadian assets, it’s wise to consult a professional who’s knowledgeable about estates and taxes in both countries.
Laurie Samay is a client service associate with Palisades Hudson Financial Group in Scarsdale, N.Y. She can be reached at info@palisadehudson.com.
Palisades Hudson (www.palisadeshudson.com) is a fee-only financial planning firm and investment adviser based in Scarsdale, N.Y., with $1.3 billion under management. It offers investment management, estate planning, insurance consulting, retirement planning, cross-border planning, business valuation and appraisal, family-office and business management, tax preparation, and executive financial planning. Branch offices are in Atlanta, Fort Lauderdale, Fla., and Portland, Oregon. Read the firm’s daily column on personal finance, economics and other topics at http://palisadeshudson.com/current-commentary. Twitter: @palisadeshudson.
The post YOUR MONEY: Have Canadian Stocks or Wages? Make Sure You’re Not Getting Taxed Twice By LAURIE SAMAY appeared first on Yonkers Tribune.