Paying Canadian Income Tax on Foreign Earnings
 

just wondering if anyone here can help me.

monthly, union issued cheque comes with US federal and state income taxes deducted already. cheque is cashed into an american currency savings account at a canadian financial institution. has been for a few years.

in the past, these earnings were declared as income on my canadian tax return, and as such, taxed again by CRA. however, i am not an american citizen and therefore, do not file income tax in usa. do BOTH taxes REALLY have to be paid on this income? if so, why? and if not, which one is exempt/refundable?

Before I begin to assist you with your question, my caveat is that this information is provided on the basis that I did not do any research directly into the Income Tax Act and that I relied solely on the information that you provided. Accordingly, you are advised to seek paid-professional advice to suit your individual circumstances.

Canadians residents are taxed on their worldwide income. Yes, in some instances, you are subject to double-taxation if the two tax authorities do not have tax treaties. However, Canada and the US have tax treaties between them whereby a Canadian tax payer, having paid income taxes in the US on US earned income, are eligible to receive non-refundable tax credits on their Canadian T1 in an amount equal to the income taxes paid on their US Form 1040.

Therefore, if you've paid $1000 in income taxes in the US, you will (and should) receive $1000 non-refundable tax credit on your Canadian T1 to be applied against your taxes payable.

Bear in mind though that Canadian income tax rates are generally higher in Canada than in the US. For example, you earned $10,000 of income in the US and paid $1,000 (10%) of income taxes on that income. However, in Canada, the tax rate might be 20%; therefore, that same $10,000 of income earned in Canada would have cost you $2,000 in income taxes. Applying the $1,000 credit to the $2,000 that you would have paid in Canada means that you still owe the Canadian government another $1,000 in income taxes on the same source of income. Consequently, most people have the misperception that they are being double-taxed when in fact they're just getting taxed more by virtue of Canada's higher income tax rates.

Your tax preparer should be made aware that you earn US income so that they can claim the US paid income taxes as tax credits on your Canadian T1.

Hope that helps.



Jimmy

wow. jimmy that is a great help. my accountant is aware of the origin of the earnings, but for some reason it just seems like i'm paying an exorbitant amount of taxes on this income each year. that being said, i'm not sure if he's applied this tax credit. if not, can we go back to the start of these earnings and apply it (started midway through 2006)?

You can always complete a T1ADJ (ADJ = adjustment) for each year in which you would like to make adjustments to a previously filed and assessed tax return.



Jimmy

I spoke with my CA and what you suggested is exactly what he does, but like you said, the Canadian income taxes are higher so I'm still having to
pay on that income, even with the credits. thanks for all your help.
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no problem, I'm happy that I can be of assistance.



Jimmy
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