The United States and Canada have a close economic and cultural ties due to proximity. It’s not surprising that citizens from both countries move to each other’s country to invest, study, conduct business, work or to retire. Both countries, the U.S. and Canada, have very unique system in taxation. Thus, they agreed on the US-Canada Tax Convention signed in 1980 or more commonly called as the Tax Treaty.
The Tax Treaty covers the foreign tax credits which are available in scenarios where each nation claims a right to tax the same income. Cross-border tax Canada-US, through the specific tax laws carried by the Tax Treaty, protects individuals from double taxation. Moreover, cross-border tax Canada-US navigates through tax requirements for both Canadian and US interest, earning and holdings. US taxes in Canada include personal and business taxes, income from sale of properties and estate taxes and rental income. All these require expert handling to ensure legal taxes are paid and penalties are avoided.
Apart from avoiding “double taxation”, the Tax Treaty and other amending protocols also enhances copper ration between the two countries. The 5th protocol to the Tax Treaty was designed to remove source-country “withholding” tax on cross-border interest payments. Carla Pehowski, senior tax counsel, U.S. Taxation, RBC, notes that, “The big benefit of eliminating withholding tax on cross-border interest payments is that cross-border businesses will have more flexibility in choosing and working with their bankers” She further adds, “Any attempt to centralize all lending in Canada would trigger a request by the bank for reimbursement of withholding tax on any interest due from the U.S. borrower. There’s a whole layer of complexity and potential expense that will disappear in the future cross-border loans.” The 5th Protocol also includes allowing taxpayers arbitration to otherwise insolvable double tax issues and ensuring that immigrant gains do not have double taxation.
In addition, here are a few things you need to know about taxes:
- Know which cross border forms you need to file to the Internal Revenue Service (IRS). US taxes in Canada is linked to the IRS through the Canada Revenue Agency (CRA). Errors in preparing these returns can result in penalties, tax costs and interest payments.
- Deadlines are important. Taxpayers who live abroad have different deadlines than U.S. Citizen living in the U.S. If you don’t meet these deadline, it can be quite costly.
- Make sure you have a competent cross border tax specialist.