At Gedeon Law & CPA, we regularly work with clients from Canada who come to work in the U.S. on a temporary basis. By temporary, we mean a work assignment generally lasting 2 years or less.
A case in point, we recently started working with a journalist from a major Canadian news organization who was sent to Los Angeles to cover the celebrity beat. She remained an employee of her Canadian employer but relocated to Los Angeles to perform her job and escape the Manitoba winters.
How can our client save on her U.S. and Canadian taxes while also taking advantage of a great job opportunity?
First, she may be able to avoid paying U.S taxes all together. Generally, Canadian employees are subject to U.S. taxation if they work in the U.S. Nevertheless, Canadian residents working in the U.S. can take advantage of the following two provisions in the U.S.-Canada tax treaty to avoid paying U.S taxes:
If the Canadian employee earns less than U.S.$10,000 in the U.S. during a tax year, then the income will be exempt from U.S. income tax, or if earnings exceed $10,000, the income may be exempt if the Canadian employee is present in the U.S. for less than 183 days in any 12-month period and the remuneration is not borne by a U.S. employer nor by a U.S. taxable branch of a Canadian employer.
Second, our Canadian client could save taxes by severing her residential ties with Canada. Since the U.S. income tax rates are typically much lower than Canadian rates, it is generally advantageous to be taxable in the U.S. rather than in Canada. One problem our client could run into is that CRA presumes that an individual maintains Canadian tax residency if they leave Canada for less than two years.
Notwithstanding, our client can rely on the U.S.-Canada tax treaty for relief from Canadian taxation. In the event someone is considered a resident of both Canada and the U.S., the Treaty will determine which country the individual will be considered resident for purpose of taxation. Therefore, our client could be considered a U.S. tax resident, and nonresident of Canada, pursuant to the Treaty if she maintains a U.S. permanent home only, regardless of whether she maintains other residential ties to Canada.
Lastly, our client will want to take into account the social security taxes applicable in Canada and the U.S on her employment income. Social security taxes payable in Canada are significantly lower than the social security taxes payable in the U.S. on the same level of compensation. The Agreement on Social Security Between the U.S. and Canada (known as the Totalization agreement) may allow Canadian employees temporarily transferred to the U.S. to continue to be covered by the Canadian system, and avoid the higher U.S. contributions, for assignments up to 60 months. During that period, the employee would be exempt from U.S. Social Security and Medicare tax on the same income. While an employer cannot contribute to CPP on behalf of a nonresident employee, a Canadian employer can apply for an exemption that will allow the employee to utilize the benefits of the totalizationagreement and avoid the higher U.S. social security contributions.
At Gedeon Law & CPA, we are available to provide the professional tax advice needed by Canadians working temporarily in the U.S.