As the Electoral College map turned red on Tuesday, many Americans saw red, too, and apparently had thoughts about moving to Canada. In fact, the official English version of the Canadian Citizenship and Immigration website went down more than once on Tuesday night through early Wednesday morning (it’s true, I checked it out), reportedly due to heavy traffic.
I get it. Canada sells itself pretty well. It is, after all, home to Celine Dion and Michael J. Fox, as well as the Ryans (Gosling and Reynolds, of course). Canadians are responsible for snow blowers, the pacemaker, Trivial Pursuit, the Wonder Bra, and the BlackBerry (which sounded like a much cooler accomplishment ten years ago). And arguably, we wouldn’t have basketball in America if not for Canada: James Naismith invented the sport in 1891 after moving to Massachusetts from Ontario.
Despite all of those cool people and amazing accomplishments, Canada is pretty sparsely populated for its size (it’s the second largest country in the world). About 35.16 million people call home. To put that into perspective, the population of California is 38.8 million – even though Canada is more than 20 times bigger.
Because of its size and relatively low population, Canada has long embraced those from outside of its borders. On Tuesday, Canada reminded the world of its stance on immigration by tweeting out a reminder that it welcomes people of all cultures, perhaps a little nod to those threatening to leave the United States if the election results weren’t in their favor.
If you’re one of those folks actually thinking about heading north over the border, I’m afraid I can’t help you figure out which hockey team to root for (though I can report that Montreal Canadiens are officially atop the National Hockey League standings) or find the best poutine (though this information is clearly important). But I can help you sort out what you need to know on the tax side.
First things first: if you’re a U.S. citizen or tax resident, moving across the border won’t change your U.S. filing requirements all that much. Fleeing the country isn’t the silver bullet that you might expect to avoid reporting and paying taxes. So long as you’re a U.S. citizen or tax resident, you’re still required to file your federal income tax return with the Internal Revenue Service (IRS) every year and report your worldwide income. Yes, worldwide. We have a global tax system which means that you file and pay taxes on income earned all over the world – though certain credits, exclusions, and deductions may apply.
One factor that can change your tax picture is the existence of a tax treaty. The U.S. has nearly 70 tax treaties with countries all around the world, and as you’d expect, one of those is with Canada (you’ll find it here as a pdf). It gets eyeballed so much that the IRS has a publication, Pub 597, Information on the United States – Canada Income Tax Treaty, explaining the highlights, which you can download here. The general idea of the treaty is to provide beneficial treatment for certain income items so that all income isn’t taxed in both countries. Here are a few highlights:
- Dividends. For Canadian source dividends received by U.S. residents, the Canadian income tax generally may not be more than 15%.
- Interest. Canadian source interest received by U.S. residents is typically exempt from Canadian income tax.
- Gains from the sale of property. Generally, gains from the sale of personal property by a U.S. resident having no permanent establishment in Canada are exempt from Canadian income tax.
- Royalties. Copyright royalties and other like payments for the production or reproduction of any literary, dramatic, musical, or artistic work (other than payments for motion pictures and works on film, videotape, or other means of reproduction for use in connection with television, which may be taxed at 10%) are typically exempt from Canadian tax.
- Personal Services. A U.S. citizen or resident who is temporarily present in Canada during the tax year is exempt from Canadian income taxes on pay for services performed, or remittances received from the United States if the citizen or resident qualifies under one of the treaty provisions. (If you become a resident, all bets are off.)
- Self-Employment Income. Income from services performed (other than those performed as an employee) is taxed in Canada if attributable to a permanent establishment in Canada.
- Pensions and Annuities. Pensions and annuities from Canadian sources paid to U.S. residents are subject to tax by Canada, but the tax is limited to 15% of the gross amount (if a periodic pension payment) or of the taxable amount (if an annuity). Canadian pensions and annuities paid to U.S. residents may be taxed by the United States, but the amount of any pension included in income for U.S. tax purposes may not be more than the amount that would be included in income in Canada if the recipient were a Canadian resident. Pensions do not include Social Security benefits.
- Charitable Contributions. You may deduct contributions to certain qualified Canadian charitable organizations on your U.S. income tax return.
Again, these are just some of the highlights. There are five pages of explanation written in tiny print to be found in Pub 597 (the treaty is much longer). And of course, this is tax law, so restrictions and exceptions apply. Check with your tax professional before heading to the immigration line.
But understand that your obligations don’t stop with income tax returns: those pesky Foreign Account Tax Compliance Act (FATCA) laws, including the Report of Foreign Bank and Financial Accounts (FBAR) rules, remain in effect, too, even if you’re across the border. Under the FBAR rules, each “US person” (including a citizen or resident of the United States) with an interest in, signature or other authority over, one or more bank, securities, or other financial accounts in any foreign country – yes, that also means Canada – must file an annual FBAR report if the total value of all of your foreign accounts at any point in a calendar year exceeds $10,000. That’s the rule even if you don’t have any tax due on those accounts.
(More on FBAR and FATCA here.)
Our federal estate and gift tax laws also still apply: if you’re a U.S. citizen, it doesn’t matter if you die in Canada, we’ll still tax you here.
By now, you’re probably wondering if it makes sense renounce your citizenship altogether to save on taxes. Not so fast. Notwithstanding that you’re giving up a lot of non-tax stuff by relinquishing your citizenship, you won’t necessarily save on taxes. Americans who expatriate are still subject to certain reporting and tax requirements. And our expatriation laws are a bit tricky if you plan to take your stuff with you: the basic rule is that, for purposes of the tax, any assets that you leave the country with are treated as though you had sold them on the date before you leave. Any gain which would have occurred had you actually sold those assets are subject to tax (with some exceptions).
Once you’re over the border, Canadian tax is typically based on residency, meaning the date on which you become a resident of Canada. Generally, that’s the date you physically step foot in the country, show up to work, buy a house or get married (if you’re contemplating making a move on Jason Priestley, you should know that you don’t automatically obtain citizenship in Canada by getting married – also, he’s already taken).
As in the U.S., you’ll need to get a tax identification number in Canada to file a tax return. Plus side? You’ll get a few extra days to file across the border: tax returns are typically due on April 30. Depending on your individual circumstances, there may also be fewer papers to fill out at tax time – remember, we really like tax paperwork in the U.S. That doesn’t mean the rules are necessarily more simple: for example, Canada has foreign reporting requirements, too.
All of this assumes, however, that you can just breeze right over the border. Not so. Canada isn’t the 51st state, and their immigration and visa rules are just are complicated and tricky as ours. Even if you’re ready to turn your back on American football and the likelihood you’ll step foot in a Target, do your homework before packing your bags – and not just on the U.S. side.
If you’ve ever met me, you know that I speak with a funny Pennsylvania-meets-North Carolina-meets-someone-who-watches-entirely-too-much-Premier-League accent. I do not sound Canadian. That’s because I’m not Canadian. That also means I don’t know all that much about Canadian tax law. This article focuses on U.S. tax law but laws on both sides of the border apply when you move – either temporarily or for good. Before you dig out your passport, be sure to consult with knowledgeable tax professionals who know the rules in both countries.