Most countries in the world impose taxes only to citizens who are residents of the said country. Once the person leaves the country and work somewhere else, he or she is automatically exempted from paying taxes or even declaring their worldwide income to that country.
Oddly, however, U.S. has a different law on taxation. Regardless of where a US citizen is residing or working, he or she is still required to declare his or her annual worldwide income and will still pay U.S. taxes.
For countries with which the U.S. has a special taxation agreement, such as Canada, this is not the case. Without such agreement, a person can be subject to double taxation which is more of a burden than a responsibility.
In article XXIV of the Canada-U.S. The Income Tax Convention of 1980, rules governing taxation on various circumstances where Canada and US may claim their right to tax the same citizen or income are set out. These provisions exist solely from people being taxed twice.
When Filing US taxes in Canada, one should consider the following scenarios.
If you are a U.S. citizen and is residing in Canada, you may be exempted from earned from your work in Canada. In order to be a permanent resident of Canada, you have to live for at least five years in Canada. Although the term used is permanent, your Canadian residency status is not permanent. If you get out of Canada for a certain period of time, you will lose residency and you will have to reapply. In this case, you lose your U.S. tax exempted status. Worse, you could end up paying two taxes.
If you are a U.S. citizen and you reside outside Canada, you may or may not be exempted from paying Canadian taxes depending on the situation. If you are working within Canada and is earning from a Canadian company, then you are bound to pay Canadian taxes. However, if you are working for a U.S. company which is based in Canada, you can then be exempted from paying Canadian taxes.
The taxation rules that govern this have strict requirements and provisions. Failure to comply with the requirements can result in a person being taxed twice.
There are a lot of companies that offer assistance for filing US taxes in Canada. They employ lawyers and experts who are knowledgeable and experienced in the field. If in doubt, it is always a good idea to consult with these companies or enlist their services until you get a grasp of the whole process. The taxes each country can impose, when imposed at the same time, can be economically crippling. The taxation rules do not only involve taxes for income earned within Canada. It also involves business and establishments in Canada. Owning a business and being taxed twice is devastating.
Although the rules can pretty much be summed up to the conditions mentioned above, it may vary at a slight difference in certain details. Enlisting a reputable tax filing service is the best option for those without experience in filing US taxes in Canada yet.