Three Common Cross Border Tax Blunders

Plan Ahead to Save on Your Taxes

Cross Border tax is real and if you don’t plan for it, you will likely pay more taxes. When working across the border in Canada or the US most people do not think to learn about what they can do to minimize their cross border taxes before the April filing deadline.

Be proactive and learn what you can do ahead of time to save on your cross border taxes.

Learn the common mistakes tax mistakes so you can be sure to avoid them.

Blunder 1: The US and Canada are Foreign Countries

This might sound like an incredibly juvenile statement for a website read by professionals but when it comes to tax law, many cross border workers forget that they are dealing with an entirely different set of tax laws when they work in another country.

Additionally, neither is the US or Canada interested in subsidizing the taxes of the other and both zealously pursue tax revenue derived from the income of its residents. It is important to remember that if you maintain residential ties with Canada or the US, the Canada Revenue Agency (CRA) and the Internal Revenue Service (IRS) has the right to tax your worldwide income, not just the income that you earn within their respective countries.

By the same token, the federal and the state/provincial government in which you work have the right tax any income earned there. This is not the double tax quandary that it seems at first glance – it is completely by design.

For Canadians maintaining their residential times and working in the US, the CRA will allow a credit for the taxes that you pay to the US and its individual states against the Canadian tax that would otherwise be charged. This also holds true for Americans working in Canada and the tax they will pay in Canada.

This leads us to a second mistake to many cross-border workers make.

Blunder 2: Filing Cross Border Taxes Separately

Many cross-border workers do not recognize the impact that residency has on income tax. As mentioned earlier, the nation in which you maintain your residence has the primary right to tax all the income that you earn whether within its borders or outside of its borders.

In other words, every last penny that you earn abroad whether it comes from the United States, Canada, Portugal or even earned on a cruise ship in the middle of the ocean is taxable by your resident nation.

Many make the mistake of assuming that only Canadian income should be reported to the CRA and that only US income should be reported to the United States Internal Revenue Service (IRS). The Internal Revenue Service and Canada Revenue are allowed to exchange information upon request under the tax treaty between the nations.

The governments of Canada and the United States are well aware of the ease in which funds can cross the border and the flow of human talent through NAFTA TN Visas. To maintain the integrity of the tax systems, they will often provide assistance to the other nation to procure tax that is rightfully theirs (and vice versa).

Use a tax professional that is well-versed in international tax law will determine the residency status of the client and ensure that global income is reported on that nation’s tax return.

This brings us to the final common mistake that we will look at:

Blunder 3: Maintaining Proper Residency Status on Your Tax Return

Only a small number of US tax professionals regularly deal with cross border tax issues. The same can often be said for many Canadian tax professionals.

Since almost every individual a US tax professional encounters is a resident of the United States, by default, they will prepare returns on a form called a “1040” – the main tax form that is used for United States residents and citizens. A nonresident individual does not use this form. They use form 1040NR where “NR” stands for nonresident. The tax structure that applies to a resident versus that of a nonresident is significantly different. A resident with few deductions will normally have a lower income tax burden than a non-resident with minimal deductions.

Often, a US tax professional who infrequently handles cross border clients will simply look at the total refund to determine which form they will file. This might appear to be an immediate benefit to the client, but it is wrought with risks.

As we have mentioned, a resident is taxed on global income and any tax professional not accustomed to cross border tax situations will rarely ask about income earned outside of the US and many taxpayers will not think to supply it.

This results in a tax return that not only asserts a false US tax residency for a more beneficial refund, but also borders on unintended tax evasion. This can cause difficulties if the individual subsequently applies for permanent residency, green card status or even US/Canada citizenship. A compliant tax history is imperative for any advanced immigration status.

Cross Border Taxes: Your Next Steps

Find What You need to do to save on your Taxes.

Contact one of our trusted Cross Border Tax Professionals. It’s free to ask your questions.

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Eric Nghiem
Tax Specialist – U.S., Canada,
International