US/Canada Self Employed Cross Border Tax Situation

[taxtax]

1) I am a US citizen who recently moved to Canada on a permanent resident visa.

2) I am self employed and telecommute from my home in Canada to a few small companies in the US. I also telecommute to another small company for which I am a part time employee.

3) I also make frequent trips back to the US to meet with these companies and work face to face (Unfortunately, my work kept me in the US 200 days last year).

I understand that as a US citizen, I am required to file a tax return each year with the IRS and report my worldwide income. However, I do not know if I should report the income I make when telecommuting from Canada as:
1) US income (taking a deduction on line 256 on the T form in Canada),
2) Canadian income (taking a deduction using form 2555 in the US)
3) or should I file and pay 100% of what I owe to the US and take the tax credit in Canada (if this is the case, do I also get to write a tax credit on my US taxes for what I pay to Canada)?

Am I correct in understanding that as a telecommuter, I am really completing the work in the US, and since the companies are US only and I get paid in the US, it is best to report 100% of my income on my return to the IRS?

Also, do I need to worry about filing with the CRA? Is my income taxable in Canada if I am taxed on 100% of it in the USA? If not, do I still need to file a return and then write off all my income on line 256 of the T form as "foreign income?"

I've been through the US/Canadian Tax Treaty and it still does not make sense to me and cannot find any definite answers despite all my research.

I apologize for all of the questions; this is my first year worrying about cross border taxes and at the time cannot afford to see a tax professional. Any direction or help is appreciated beyond words.

[nelsona]

Since you are sef-employed and living in Canada, the income is taxable in Canada


As a resident, you are not entitled to exclude anything on 256: you owe taxes in Canada on world income from the date you moved. See the Newcomers guide from CRA; this is your primary guide for 2006.


By a quirk in the treaty, Canada will not give you any credit for any US tax that you owe on this income. But US will allow you to re-source this to Canada and claim on 1116. This move is -- in effect -- the US equivalent of line 256 in Canada.

[taxtax]

nelsona,

Just so that I understand correctly, it was to my understanding that line 256 was for excluding foreign income that is not taxable in Canada (similar to using form 2555 in the US). If “residentsâ€￾ are not allowed to exclude anything on line 256, what is the point? Isn’t the requirement to file Canadian taxes based on residency?

Again, I’m new to the Canadian tax system, so please excuse my ignorance. =(

Am I correct in my understanding that a person has two options when filing a return:
1) Exclude foreign earned income
2) Credit for taxes paid on foreign income to another country

I’ve apparently worked myself into a very unfavourable situation where a) all of my income is made in the USA and since I am a citizen, I am taxed on all of it in the USA and b) I am also a resident of Canada (rent a home, have a health card there) and thus owe 100% on my taxes there as well.

To remedy such a situation, it seems my only options are to:
1) Find a job in Canada and live/work solely in Canada
2) Keep my existing job in the USA and return to the USA

Thanks again,
An extremely depressed and distraught US/Canadian resident

[taxtax]

Also, I've asked a few tax professionals here in the USA who are saying I need to file my taxes in the USA as if I lived in the USA (since all of my income is USA source income) and then take a tax credit in Canada? Granted, they are not familiar with the Canadian tax system, but are they correct?

Thanks again and sorry for the additional comment,
Still depressed and distraught

[nelsona]

Line 256 is for -- among many other things -- income that is not taxable in Canad by treaty.

None of the income you have is not taxable in Canada by treaty.

I'm sure you will find that many of the lines in the tax form don't apply to you, but they leave them there for others ;0).

So, in Canada, one does not have the option of excluding foreign earned income. This is a US income tax rule. There is no equivalent to 2555. There is an overseas employment tax credit, but this still means working AWAY from Canada. which you do not.

Even in the US, one cannot exclude foreign income if they live in the US, they can only exclude foreign income when they live OUTSIDE US. This is because americans must report world income wherever they live.

A Cdn living outside canada doesn't have to report ANY foreign income to canada, so there is no need for foreign income exclusion.

As I explained, the treaty does not allow a credit to be given in Canada, but IRS permits this incvome to be treated like it was foreign (that is why they have the "re-sourced by treaty" category in Form 1116.) The result is that you will pay no tax in US.

So, your move to Canada means that you are taxed on your workld income as if it were earned in Canada. Why not?
Its the same if you work in New Hampshire and live in Massachussets: you pay Mass tax on your NH income.

Your US tax pros are incorrect: because the treaty specifically denies US citizens living in Canada a credit for US tax they would pay only because they are US citizens. Thus the remedy I mentionned above.

[taxtax]

Thank you kindly for the clarification.

So does this mean that it basically comes down to the question “of which country am I a resident for tax purposes?â€￾

I maintain a place of residence in both countries, work solely in the United States for US companies (if I spent 200 days in the US, does this have anything to do with the over 183 days rule?), I maintain bank accounts in both countries, vehicle is registered in the US, have health insurance from Canada, the list is long and it makes me even more confused as to which country I am truly a resident for tax purposes. How does one correctly determine their residency?

[nelsona]

The 183 day rule does not enter into the picture, because, as you said at the outset: You moved to canada. You work IN canada. You are not merely visiting Canada for an extended period.

So you became a Cdn resident on some date in 2006, and you report your world income to canada after that date.

Besides, if you are doing work in Canada, it doesn't matter who is paying you, this will be taxed in Canada.