Are you a Canadian working for a US company? Then you are probably wondering how you manage and navigate your tax obligations. When you begin working with a company based in the US, you may find yourself asking questions such as:
- Do I need to pay US taxes?
- How are my Canadian taxes impacted?
- Should I be charging Canadian sales tax to my US clients?
- Where and how exactly do I pay taxes if I am a Canadian citizen working and living in the US?
As a Canadian employee working remotely with US companies, all of these questions are important and probably have crossed your mind at some point. Never fear! Knit is here to help demystify and equip you with payroll and HR information. Read on to learn more.
If you are an employer looking for information around hiring a contractor from Canada, find that information and more in this article.
Canadians working for a US Company
First things first: can a Canadian legally work for a US company? Yes, they can. Traditionally, Canadians and Americans have worked together with no issue. Indeed, it's a bit unavoidable as we do have the world's longest land border! Many US companies may decide to employ Canadian workers for a myriad of reasons. One such reason could be that the US company is looking to take advantage of the change rate, capitalizing on the lower cost of hiring Canadian workers. In other cases, there could be specific services or education specializations that only a Canadian can provide, leading the US firm to seek out the individual for employment.
To legally live and work in the US, Canadians must obtain a work visa unless they have dual citizenship with both countries. There is one nuance here: if you work remotely, you do not need a work visa to work in the US.
How to report US income on your tax return
As a Canadian freelancer or business owner in Canada, you are required to report any and all income you earn throughout the year to the Canada Revenue Agency (CRA), regardless of the source, which means that no matter where you earn money: through contracts or full-time employment, you must report it to the CRA on your income taxes. Don’t forget! You must report this in Canadian dollars when submitting your T1.
For US tax reporting, if a US company employs you, you will receive a W-2 form at the end of the year that outlines all your earned income in USD.
As a Canadian, you must take these figures and convert them into CAD from USD to report them to the CRA. When filling out your T1 return, make sure to document all foreign income on line 104. We suggest using an accredited bank's exchange rate, such as the Bank of Canada. Exchange rates fluctuate and change depending on the day, but using an accredited institution can help you feel secure in the amounts that you report.
Have you received various amounts of US income throughout the year? No problem. You can use this list of annual average exchange rates when converting multiple amounts you've earned from throughout the year.
Sometimes the W-2 form you are provided from your US employer includes information around deductions such as US taxes, benefits, or retirement plans. If this is the case, ensure that you have this information on line 207 of your CRA tax return, as you may be able to deduct these contributions under the Federal Foreign Tax Credit.
If my US employer did not send me a W-2 form, do I still need to report my foreign income?
Yes, you must report any and all income to the CRA. No matter if your employer does not send you a W-2 or if they do, you still have obligations to fulfill. You must always report and pay taxes on all income earned. If your employer fails to send you information or report any income on their end, you want to ensure that you protect yourself from any potential liability.
You may be tempted to forego reporting your foreign income to the CRA. Still, if they find out that you have failed to report any amount of income on your taxes, you will not only be liable for paying back taxes, but you may be subject to paying a penalty as well! To put some form to these penalties, in Canada, the minimum penalty for neglecting to declare income is CAD 100.00. Any income over $100 earned and not reported to the CRA can result in you paying 50 percent of the omitted tax related to your false statement or omission.
Further, if you continually fail to report income earned to the CRA, you could incur federal and provincial penalties. It's best to stay on the right side of things and report all income accurately. You'll sleep better at night, we assure you!
Are you an employer looking to ensure compliance while hiring from abroad? Use our tips to stay above board with tax and labour laws.
Do I pay Canadian tax on US income?
Canadian freelancers or independent contractors with an American client/work with a US company are exempt from paying US taxes.
As you are a self-employed worker in the eyes of the CRA, you still must report all income in your tax return no matter where your clients are located.
Are you a self-employed worker? Classification is paramount here.
Start off by being clear. Knowing what your status is with the company employing or contracting you before you begin work will be helpful to avoid future issues. For example, if you commute to work for a company located in the US, or if your company provides you with benefits and work equipment and controls specific aspects of your day-to-day, you are most likely a full-time employee of the company and cannot classify yourself as self-employed. Need more information? We dive deep into employee/employer relationship classification in this helpful blog from Knit Payroll.
US companies must automatically withhold tax on all payments made to their employees, which means that as a Canadian employee, freelancer or contractor, you could find yourself in a position of being taxed twice: in both Canada and the US. This is where the W-8BEN form comes in. Canadians who work for US employers should make sure to fill out this form to avoid double taxation from the CRA and the IRS.
Charging US clients Canadian sales tax
When your business begins to make more than $30,000 per year in revenue in Canada, you must collect either GST or a combination of GST and PST or HST from your clients. Your client pays the applicable sales tax from their specific region, province or territory in most cases.
What if you are selling goods or services to clients outside of Canada?
Freelancers or contractors selling to clients who reside outside of Canada must not charge Canadian sales tax. As long as the goods and services remain outside of Canada, this CRA-enforced rule holds.
What about Canadians who live and work in the US?
Did you know that you live and work outside of Canada for more than 183 days per year, the CRA considers you a non-resident of Canada for tax purposes?
Under these rules, as a non-resident Canadian citizen, you will only be required to pay taxes on the income you receive specifically from Canadian sources.
An example of this would be if you are engaged with a US company but have a rental property in your home province. In this case, you will only be required to pay Canadian income tax on the rental income you earned throughout the year. If all of your income has come from sources, not within Canada, and you have no income earned within Canada, you do not need to file a Canadian tax return.
Managing these taxes can be confusing - if you are part of a team and have your own small business, Knit payroll can help. We offer online payroll services and can connect with our dedicated accounting experts to help you remain compliant.
Still a Canadian Resident but Receiving US Pay? Avoid double-taxation with the Federal Foreign Tax Credit.
In the case of Canadian residents living and working in the US for under 183 days out of the year and had US taxes withheld from their pay, you are eligible for the Federal Foreign Tax Credit, which can help you obtain a credit for any taxes collected by the IRS in the US and ensures that the appropriate amounts are given to the CRA.
Navigate this process easily by filling out Form T2209, Federal Foreign Tax Credits, on the CRA site. From there, enter the amount from line 12 of Form T2209 on line 405 of your T1 tax return.
Wondering what other tax credits you could qualify for? Knit Payroll can help you navigate Canadian compliance, keep you up-to-date on tax filings, T4s, and changing employment legislation. Learn more here.
Navigating Compliance Shouldn't be Difficult
Canadians earning income from US sources should always look to protect themselves from any potential liability and error. Ultimately, being aware of your options helps you stay on the right side of both the CRA and the IRS and avoid being taxed twice on your income as a sole proprietor or even a small business owner.
Residents of Canada must pay taxes to the CRA, and if you are residing in the United States, you will pay taxes to the IRS. Remember that there is nuance, such as the relationship to your employer and more.
If you need more information or help navigate this space, connect with Knit today - we can help make this process as seamless as possible, saving you time and money. Try Knit Payroll free for 30 days today - sign up here.