When you are a US citizen working in Canada, there are certain requirements that must be adhered to for paying tax.
It’s not very likely the task ‘come to terms with the Canadian tax system’ is anywhere to be seen on your list, but, by getting a handle on this topic early, you can actually save yourself a lot of hassle in the long run.
That’s why we’ve created this useful tax guide for US citizens, who are on a working holiday in Canada.
Let’s get into it.
Residency in Canada
The first step in immersing yourself in the world of Canadian tax, is to determine your residency status. You will need to know your residency status in order to file your tax return in compliance with Canadian tax law. Here’s how to figure out your status as a US citizen working in Canada.
You will be considered a non-resident for tax purposes if:
- You normally, customarily, or routinely live in another country and are not considered a resident of Canada; or
- You do not have significant residential ties in Canada; and
- You lived outside Canada throughout the tax year; or
- you stayed in Canada for less than 183 days in the tax year.
If you have never before filed a tax return in Canada, and you are on a Working Holiday Visa, with plans to leave Canada when your visa expires, we recommend that you file as a non-resident for tax purposes.
You’ll be considered an ordinary resident in Canada for tax purposes, if Canada is the place where you, in the settled routine of your life, regularly live. To be considered a resident you will need to have significant and secondary ties to the country.
Significant ties include:
- A spouse or common law partner
- A house or apartment (own or renting)
Secondary ties include:
- You are planning on staying in Canada past your Working Holiday Visa expiry and are applying for Permanent Residence
- Canada should be the place where you customarily live
If any of the above residential ties are unfamiliar to you, and you are on a Working Holiday Visa, you should file as a non-resident.
Still confused about your residency status? Don’t worry! If you’d like further information you can call the CRA directly to confirm your status. Alternatively, you could contact a tax agent like Taxback.com who specialize in offering various services to US citizens working in Canada.
- Jimmy is from Nevada. He has never lived outside the US until he moved to Calgary on a working holiday. He has no relations or significant ties in Canada and is not considered a citizen of Canada. When Jimmy files his annual Canadian tax return, he should file as a non-resident for tax purposes.
- Originally from Michigan, a number of years ago Hilary moved to Canada and successfully applied for permanent residency. Having bought an apartment in Toronto, Canada has become the place where Hilary resides in the settled routine of her life. She will be considered a resident for tax purposes.
Personal Tax Credits and the ‘90% rule’
Most US citizens working in Canada are entitled to a tax-free allowance (or personal tax credit), which allows an individual to earn up to $11,635 without paying tax. However, as a working holidaymaker there are some conditions you must meet in order to be entitled to the credits.
Your eligibility for personal tax credits is calculated on a form called TD1 (you fill this out when you start a new job in Canada).
If you earned income from outside Canada in the same tax year (January – December) that you earned income from Canadian sources, then you might not be entitled to claim the personal tax credits. This will be particularly relevant to you if, for example, you worked in the US in the same year that you came to Canada for a working holiday.
In cases such as these, it is important to keep the 90% rule in mind. This rule basically means that if you earned more than 10% (net) of your income outside Canada, you can’t avail of the personal tax credits. However, if you earned 90% of your income within Canada, then you can claim the credits.
You should factor this rule in when you’re filling in your TD1 form. In a case where you didn’t earn 90% of your income in Canada for that year, you should enter 0 in box 13 and tick ‘No’ on the non-resident question on the form.
If you are unsure about this, then it’s safer to not claim the credits. Even if you end up overpaying tax, you’ll get a refund of this when you file your tax return. But, if you don’t fill out your TD1 correctly, you could end up owing more tax to the Canadian authorities.
US taxpayers with employment income in Canada are liable to pay both Federal and Provincial tax on their earnings, as well as Canada Pension Plan and Employment Insurance.
The Federal Government collects personal income taxes on behalf of all provinces, except Quebec which has its own tax system.
There is a tax-free allowance of $11,635, which means you can earn up to this amount without paying federal tax on your income.
The more you earn over this figure, the more tax you’re obliged to pay. Federal tax rates start at 15% on the first $45,916 of taxable income, and provincial tax rates depend on the province where you work.
Federal tax rates and income brackets
Tax Rate Bracket 15% $11,474 - $45,916 20.5% $45,917 - $91,831 25% $91,832 - $142,353 29% $142,354 - $202,800 33% $202,801 and over
Provincial tax rates
Tax Rate Bracket 10% first $126,625 12% $126,625 - $151,950 13% $151,950 - $202,600 14% $202,600 - $303,900 15% over $303,900
Tax Rate Bracket 5.06% first $38,898 7.7% $38,898 - $77,797 10.5% $77,797 - $89,320 12.29% $89,320 - $108,460 14.7% over $108,460
Tax Rate Bracket 10.8% first $31,465 12.75% $31,465 - $68,005 17.4% over $68,005
Tax Rate Bracket 9.68% first $41,059 14.82% $41,059 - $82,119 16.52% $82,119 - $133,507 17.84% $133,507 - $152,100 20.3% over $152,100
Newfoundland and Labrador
Tax Rate Bracket 8.7% first $35,851 14.5% $35,851 - $71,701 15.8% $71,701 - $128,010 17.3% $128,010 - $179,214 18.3% over $179,214
Tax Rate Bracket 5.9% first $41,585 8.6% $41,585 - $83,172 12.2% $83,172 - $135,219 14.05% over $135,219
Tax Rate Bracket 8.79% first $29,590 14.95% $29,590 - $59,180 16.67% $59,180 - $93,000 17.5% $93,000 - $150,000 21% over $150,000
Tax Rate Bracket 4% first $43,780 7% $43,780 - $87,560 9% $87,560 - $142,353 11.5% over $142,353
Tax Rate Bracket 5.05% first $42,301 9.15% $42,201 - $84,404 11.16% $84,404 - $150,000 12.16% $150,000 - $220,000 13.16% over $220,000
Prince Edward Island
Tax Rate Bracket 9.8% first $31,984 13.8% $31,984 - $63,969 16.7% over $63,969
Tax Rate Bracket 15% first $42,705 20% $42,706 - $85,405 24% $85,405 - $103,915 25.75% over $103,915
Tax Rate Bracket 10.75% first $45,225 12.75% $45,225 - $129,214 14.75% over $129,214
Tax Rate Bracket 6.4% first $45,916 9% $45,916 - $91,831 10.9% $91,831 - $142,353 12.8% $142,353 - $500,000 15% over $500,000
Canada Pension Plan
The Canada Pension Plan (CPP), provides contributors and their families with partial replacement of earnings in the case of retirement, disability or death. Most workers are required to contribute 4.95% of gross pay in CPP for each pay period.
Employment Insurance (EI)
The EI program provides temporary income support to unemployed workers, while they look for employment or to upgrade their skills. Generally, all workers contribute 1.63% of gross pay in Employment Insurance (EI) for each pay period.