How To Avoid Double Taxation

Despite the US-Canada Treaty Convention, where citizens from each country are protected from double taxation when working at another country, there are still scenarios where you need to know how to avoid this “double taxation”. Finding a competent and efficient cross border tax specialist is essential in determining this situation.

The US Internal Revenue Service (IRS) has a complicated way of determining how long a Canadian stay in the US without paying US taxes. A cross border tax services can do a calculation using the IRS formula called the “substantial presence test”.

The “substantial presence test,” determines whether you have been in the US long enough to be considered a US resident for tax purposes. They calculate the sum as follows:

  • Each day in the US in the current calendar year counts as one day
  • Each day in the US prior year counts as one-third of a day
  • Each day in the US in the year before that counts as one-sixth of a day

The IRS determines the numbers of days a Canadian citizen have spent in the US over a three-year span, using this unusual formula. If the sum of those three numbers totals 183 or more, the IRS may insist that you file a US tax return.

Both US and Canada provide foreign tax credit to prevent double taxation. A US citizen who is subjected to US taxation and have paid tax to Canada, in general, can claim a foreign tax credit to offset his US tax on that income. His credit cannot be more than the tax he has paid in Canada. Investment income, however, is not eligible for foreign earned income exclusion. If a Canadian citizen receive income for personal services performed in both US and Canada, a cross border specialist advises that it is a good idea to keep a complete record of work days in each country.

When you are looking for cross border services, make sure that they can determine US and Canada foreign tax credit purposes. It is your responsibility to disclose specific details of treaty benefits on your US tax return if you want to use the US-Canada Treaty to reduce your US taxes.

A cross border tax specialist can assist you in avoiding double taxation. As long as you comply with the legal requirements and submit your documents in time.


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