Dear David Ingram,
I work for an aviation consulting firm in Washington D.C. that is working
for a group of approximately 90 U.S. resident Air Canada pilots. These
pilots are unhappy because Canada recently changed the way that it taxed
their income from international flights.
Before, their income from domestic flights was completely taxable in Canada
and their income from international flights was not taxable in Canada. Now
the domestic taxation remains the same, but the income for international
flights is now taxed in Canada for the portion of time that the flight is
over Canadian airspace.
Do you know how the United States treats a parallel situation where a
Canadian resident works for a U.S. airline?
==========================================
david ingram replies:
I have been doing these returns for pilots and air crew since 1969 and
Canada has always taxed the domestic portion of an international flight.
The change which was started three years ago and went back to 1985 returns
was more one of enforcement of detail than it was one of a change in the
law. I know this to be factual because the tax change for our clients
rarely exceeded $800 and one even got a small refund.
On the other hand other pilots were coming in with reassessments which went
from $20,000 to $100,000 because their accountants had been very aggressive.
And to justify the "pogram" run by the CCRA, they managed to find many, many
air crew who were not "really" living in the states or more often, not
really living in Costa Rica or other tax haven country.
The real beneficiaries of the audits which involved over 270 Air Canada
Personnel and over 170 Canadian Airlines Personnel (Before the merger) were
the provinces. With the audit, the CCRA insisted that provincial credits be
given.
This meant that if a pilot left Vancouver and flew to Calgary, one half of
the flight was credit to BC and the other half to Alberta. When he (or she)
took off from Alberta and landed in Winnipeg, Manitoba got credit for half
the flight and Alberta got the other half. When flying from Winnipeg to
Toronto, Ontario got half and Manitoba got half. If the pilot then flew to
Chicago, about 6% of the flight was credited to Ontario and the rest was
international and not taxable in Canada. When the pilot leaves Chicago for
Calgary, Alberta gets 5% and the other 95% is international. Leaving
Calgary to return to Vancouver would be divided between Alberta and British
Columbia. The pilot has to file a multi-jurisdictional tax return.
On the other hand, a pilot who regularly flies Vancouver <> Hawaii or
Toronto <> Miami and does no domestic flights will only pay tax to Canada on
about 5 to 8% of their earnings. If they are a resident of the US, All of
it is taxable to the US and he or she would get a dollar for dollar foreign
tax credit for the tax paid to Canada.
When these pilots or other air crew are re-assessed by Canada and have to
pay more, it will just increase the foreign tax credit to the US. AND, AND,
AND there is no three year limitation on claiming the foreign tax credit on
the US return. The US / Canada Tax treaty takes this type of "other
country" re-assessments into account and allows a change up to ten years.
Over the years, I have only had a handful of Canadian Residents who were
working for US Airlines while continuing to live in Canada. Every one was a
US citizen and US citizens are taxed on their world income no matter where
they live. When paid by the US Airline, they are paying full taxes to the
US first. Since no US airline is involved in the cross Canada transport of
passengers, the same set of facts does not arise.
Most US airlines (other than Air Alaska) only have a short part of any
flight over Canadian Air Space as they land. The Canadian resident pays full
tax to the US on all their earnings and then reports the earnings again in
Canada and claims a foreign tax credit for the Federal Taxes, Medicare and
Social Security paid to the US. The Canadian resident does not get credit
for the 401(K) deduction and ends up paying tax on this twice. Once now to
Canada and then again when they withdraw it as a pension in the future
(which has already come and gone for many retirees).
Hope this helps -- I have added your name to my US / Canada email list. If
it gets to be too much or you lose interest, just reply to one with remove
in the subject line.
You are also welcome to forward this to your pilots.
David Ingram's US/Canada Services
US / Canada / Mexico tax and working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Res (604) 980-3578 Cell (604) 657-8451
(604) 980-0321
New email to [email protected] <mailto:[email protected]>
www.centa.com <http://www.centa.com/> www.david-ingram.com
<http://www.david-ingram.com/>
Disclaimer: This question has been answered without detailed information or
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