How about thinking beyond COVID-19?
Let’s say you have lived and worked all your life in Canada and have an adventure presented to you.
What if you were to be offered a 12-month contract in the United States that requires you to move and live in the US while the project is underway, post COVID-19 of course?
Your spouse and kids will continue to live in Canada in your family home while you are in the US.
While living and working in the US you will be paid there and have US tax withheld.
Will you have to file a tax return in Canada and report your US earnings?
And what about tax paid to the US?
Normally the requirement to file a tax return in Canada is based on residency. Simply put, regardless of citizenship, if you live in Canada you typically have to file a tax return in Canada.
But when a person moves out of Canada to live abroad, that person may still be considered a “resident” of Canada for tax purposes and be required to file a tax return in Canada.
This tax policy is based on what Canada Revenue Agency (CRA) refers to as “residential ties” to Canada.
Things such as still having immediate family living in Canada, owning a home in Canada, having a Canadian postal address, bank account, service club affiliation, etc, may identify a person as a “resident” of Canada.
The basis for this rests within the tax treaty Canada has with the US and 90+ other countries, which defines the reciprocal agreements regarding where a person reports income and how taxation works.
The goal being to report fairly the economic activity within a country’s borders while preventing “double taxing” of individuals.
So to the question, will you have to file a tax return in Canada?
Given your residential ties to Canada, the answer is yes.
And you must also report your US income, in fact all your worldwide income from all sources must be reported to CRA since your residential ties identify you as a “resident” of Canada.
Fortunately if you pay tax to the US, you are able to claim the US federal tax paid as a foreign tax credit toward your Canadian tax payable. However this is not necessarily a dollar for dollar credit since there is a maximum to the foreign tax credit.
Additionally, if you paid more tax in the US than is actually due in Canada, CRA does not refund you for any US tax over payment. And as a final note, tax paid to US states does not qualify as a CRA foreign tax credit.
Would anything change if your contract were 24 months or 48 months, rather than the 12 months?
Assuming all your residential ties to Canada remain fully intact, likely not.
Having said this, arguably the longer a person lives away from “home”, the greater the likelihood residential ties weaken which may lead to re-classification of “residency” and the person would no longer be considered a resident of Canada.
To bring the story full circle, choosing to live in Canada right now may not be such a bad choice.
Ron Clarke has his MBA and is owner of JBS Business Services in Trail, providing accounting and tax services.
