When you contemplate telecommuting for a job in a different country—known as cross-border telecommuting—consider differences in the way each country collects taxes. This applies to countries such as Canada and the United States, as well as between states and provinces.
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How Taxes Work in the U.S. and Canada
Under the Canadian system, taxes are based on residency, not citizenship. If you have been in Canada for more than 183 days, your income, no matter the source, is taxable in Canada. There are exceptions for government employees.
In the United States, taxes are based on citizenship and where you perform the work. So, based on citizenship, the U.S. can tax its citizens in Canada. Where you perform the work determines tax issues on the state level.
A tax treaty is in place between Canada and the United States. It sets out the circumstances for who has a claim on income taxes and who must pay the respective country. There are provisions to prevent double taxation.
Tax law is complex and rooted in domicile—the specific jurisdiction where you live. Always consult a tax professional in your community for advice relevant to your unique domicile and employment situation. Although guidance from trusted internet resources helps get you started, only your local certified public accountant or tax attorney can render authoritative guidance.
Q&A for Different Telecommuting Scenarios
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Under the United-Canada Income Tax Treaty, government employees are not required to pay taxes to Canada. Article XIX states that "remuneration, other than a pension, paid by a Contracting State or political subdivision or local authority thereof to a citizen of that State in respect of services rendered in the discharge of functions of a governmental nature shall be taxable only in that State."
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This person is not a government employee, so this situation is tricky. As Canadian taxes are based on residency, you need to prove that you are not a resident of Canada. One key is that you are making trips to the home office and that reinforces that you are not a resident. Keeping a residence in the U.S. and returning at regular intervals is also wise. You must complete a form that is used by Revenue Canada to determine your residency status. The form is "Determination of Residency NR 74," which you can download and review to see what is needed.
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No. Since the American tax system is based on where the work is performed, you do not pay any taxes in the U.S. However, be advised that if you ever travel to the U.S. for even one day for work-related matters, you may become liable for tax payment in the U.S. You should declare your income in Canada on your taxes, remembering to convert it to Canadian funds.
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Unless you intend to give up your Canadian citizenship, you still pay Canadian taxes on your income. You may also have to pay U.S. state income taxes. Check with the state where you reside, since not all states have income taxes.