Cross border tax compliance

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

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alfiecan
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Joined: Tue Feb 23, 2021 10:17 pm

Cross border tax compliance

Post by alfiecan »

Hello, I'm looking to try and get clarification on how to correctly file my 2020 taxes in both USA and Canada.
I joined a USA based company on a TN Status with the intention of relocating to the states. However due to Covid and working from home I ended up spending the majority of 2020 in Canada where I still maintain a residence and will be splitting time when feasible. Throughout this time I was paid and taxed as normal to the IRS.
It's unclear if I should be filing as a US Non-resident which tools like https://www.sprintax.com/ (are there other tools I can use?) would indicate I would pro-rate my time in the US vs Canada which would mean a refund from the IRS and then pay the equivalent to CRA. Or do I just claim the paid tax as a foreign tax credit to the CRA and pay the remaining Canadian taxes? But I'm not sure if that is still a 1040NR or normal 1040

Thanks!
nelsona
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Re: Cross border tax compliance

Post by nelsona »

Since you shaven't moved to US, you are still a CDn tax resident and must report all your income in Canada. On the 1040NR you would report the portion of income that was earned in US, and be taxed on that. You may have state tax as well.

In canada you would claim a credit for the US and state tax (and fica) that you calculate.
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OntFA
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Joined: Wed Feb 24, 2021 11:54 am

Re: Cross border tax compliance

Post by OntFA »

Nelson, what's not clear is whether the tax filer has an obligation to file 1040NR/T1 differently this year. For instance, a page on your website suggests that normally CRA requires U.S. employers to withhold Canadian income tax for employees doing their work in Canada. But this requirement was seemingly waived this year.
https://serbinski.com/covid-19-and-tax-residence-rules

What some accountants are suggesting is that this obligation now falls on the tax filer. Using the example of a daily cross border commuter, suppose I was paid $100k USD from my U.S. employer but worked only 25 of 250 work days at my usual U.S. workplace. Some suggest that I have to claim $10k USD of income on my 1040NR - resulting in a huge refund (because tax was withheld based on $100k salary and paid to IRS).

But I'll have to file my T1 return before I get my IRS refund. In the meantime, I'll claim all $100k USD on my T1 (as usual, taxed on CAD equivalent of worldwide income). But I won't have much of a foreign tax credit because of the big IRS refund. So I'll have to pay nearly a year's worth of income tax on April 30 to CRA.

You might say this is a wash, but a big timing difference as I'd bet the IRS won't easily let go of that much money. Yet, CRA would be hungry for its share.

Thoughts?
alfiecan
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Joined: Tue Feb 23, 2021 10:17 pm

Re: Cross border tax compliance

Post by alfiecan »

Thanks Nelsona. The example that OntFA illustrates is what is throwing me a bit, whether the IRS should only tax the 10k vs full 100k and claiming a huge refund to then pay to the CRA instead.
nelsona
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Re: Cross border tax compliance

Post by nelsona »

There are two issues here: Tax residency of the employee, and tax compliance for the employer.

Our poster has NEVER established US residency, so cannot claim that he has was non-resident in canada, returned to Canada and is stuck. So T1 filing should continue as before.

But for the firm, they are not obliged to create a Cdn payroll for the employee because he cannot go to US.

Slight difference, so the taxapayer should file as you and I desciribed.

The issue of needing the IRS refund before paying CRA, is ALWAYS an issue for crossborder types, and one that CRA does not really have any sympathy towards. File early in US, and as late a s possible in canada is the solution.

I received my IRS refund today, and will file my CRA return on the 30th of April.
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nelsona
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Re: Cross border tax compliance

Post by nelsona »

btw, if one ends up owing a large tax bill to CRA, regardless of the reason, they will be placed on mandatory quarterly payments.

There is nothing in the regs that prevents one from submitting a W-4 with reduced withholding, as long as one does not end up owing in the US. So for 2021, it might be worth reviewing the W-4 that your firm has for you. Reduce withholding until you return to US.
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OntFA
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Joined: Wed Feb 24, 2021 11:54 am

Re: Cross border tax compliance

Post by OntFA »

nelsona wrote:
> Our poster has NEVER established US residency, so cannot claim that he has
> was non-resident in canada, returned to Canada and is stuck. So T1 filing
> should continue as before.
>
> But for the firm, they are not obliged to create a Cdn payroll for the
> employee because he cannot go to US.
>
> Slight difference, so the taxapayer should file as you and I desciribed.

Thank you Nelson. I understand that the U.S. employer has no obligation to establish Canadian payroll deductions. Normally, the scenario I presented involves a Cdn resident cross the border daily to work in the U.S. But COVID caused many to work from home (in Canada) for their U.S. employers.

So when you say "file as you and I describe" are you referring to filing the 1040NR with only a prorated amount based on days worked in the U.S. (i.e., $10k on 1040NR with big refund; then $100K on T1 with big amt owing)?
nelsona
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Re: Cross border tax compliance

Post by nelsona »

Yes. The relief provided by CRA for non-residents 'trapped' in Canada applies to residency, not sourcing of income. Employment income is sourced in the country where the work is performed.
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OntFA
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Re: Cross border tax compliance

Post by OntFA »

Thanks very much Nelson.
alfiecan
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Joined: Tue Feb 23, 2021 10:17 pm

Re: Cross border tax compliance

Post by alfiecan »

Thanks, this has been helpful!
bellemoj
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Joined: Tue Apr 23, 2019 12:54 pm

Re: Cross border tax compliance

Post by bellemoj »

Hello Nelsona. My tax situation is very similar to alfiecan, where I worked from home in Canada for most of the year (whereas in normal years I would commute to the states daily). My employer adjusted the amount in Box 1 of my W-2 (to represent my U.S. source employment income), but they didn't do this for the FICA applicable boxes 4 and 6. In order to complete my Canadian taxes, I would normally include both the social security tax withheld and the medicare tax withheld from my W-2 to the Foreign Tax Credit (FTC). In order to calculate what portion of the FICA I can include in the FTC, would I have to use time basis compensation sourcing? I read online that the calculation for this is the ratio of "working days in Canada" to the "total working days in the year." Am I supposed to exclude vacation and holidays from both of these numbers?
nelsona
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Re: Cross border tax compliance

Post by nelsona »

In determining working days, you use working days, not vacations, etc.

You can claim the entire FICA towards your US tax credit. You should not have to pay CPP or EI on any this income, even thogh technically it was earned in canada.
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bellemoj
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Joined: Tue Apr 23, 2019 12:54 pm

Re: Cross border tax compliance

Post by bellemoj »

Thanks for the info! Do you know if the way we used our 401k as a deduction on Form RC268 is still the same as in past years even though we worked more in Canada last year?
nelsona
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Re: Cross border tax compliance

Post by nelsona »

Yoiu may have to use both forms: the one for commuters as well as the one for those who live in Canada.
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nelsona
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Re: Cross border tax compliance

Post by nelsona »

live and work temporarily in Canada. RC267
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