US citizen Newly weds woriking and living in Canada

My_question_is: Applicable to both US and Canada
Subject: Newly weds, multi-nationals
Expert: [email protected]
Date: Sunday March 04, 2007
Time: 01:08 PM -0500


Hello, we are both US citizens, working/residing in Canada on Temporary Work Permits. We were married August 12 2006. For all of 2006, I lived and worked in Canada, working for an American company, paid in USD into my USA bank account. HRSDC is not involved in my pay becuase I do not want to be paid in CAD into a Canadian account because I have too many ACH's set up through my USA account (auto loan, insurance payments, etc). USA Federal, State and Local taxes were witheld from my paychecks; I maintain a USA address for my paystubs and taxes.

My wife moved to Canada and began work for a Canadian company August 28, 2006; she is paid in CAD into our TD account (obviously she will pay Canada taxes). She worked in the USA before we were married and also must file with USA for that time period.

We have several questions:
1. Do I pay USA or Canada taxes? Both?
2. Are we required to file joint taxes? How do we file joint if I am paying USA tax and she is paying Canada?
3. Do you prepare USA and Canada taxes?

david ingram replies;

1. I do not want to be rude BUT YOU have made a BIG mistake having US federal, state, FICA and Medicare taxres withheld. In fact, the Human Resources and Payroll people at your employer should be severely reprimanded for allowing you to continue in such a precarious position tax wise. If you don't or didn't know better, they should have. Canada is a soveriegn nation and when you got your work permit and worked in Canda you were subject to Canada's federal and provincial income tax laws first and should have been paying CPP and EI and federal and provincial income taxes, NOT US TAXES OF ANY KIND. YOUR EMPLOYER IS LIABLE FOR CANADIAN penalties for failing to make the dedcutions. In my opinion (and I have seen it many times) they should reverse it all now and file amended T4 slips for Canda and amended W2 slips for the US. I do not know what state you have had withheld but I assume that your payroll people are intelligent enough that they would deduct New York state tax if if you were living and working in New York and not Colorado or North Dakota taxes because you happened to have a mailing address there. Believe it or not, The same thing applies to Canada, even more so.

You do NOT owe any state tax, will not owe any Federal Taxes (because of foreign earned income exemptions and foreign tax credits) and should not be paying FICA and Medicare if you are not living and working in the US when you ARE living in and working in Canda which has both an Income Tax Treaty AND a Social Security Treaty with the US. The tax Treaty makes you taxable in Canada first and the Social Security Treaty makes you pay Social Security taxes in Canada FIRST unless your company wirtes to the Canada Pension Plan department, explains that you have been transferred to Canada temporarily (for five years or less) and get written permission from the Canada Pension Plan people to exempt you from CPP. .

YOU DO OWE CANADA INCOME TAX and will have to pay it before getting any refund from the US anbd therefore will likely have a cash flow problem.
Your wife also owes Canada its income tax first.

THEN, because you are US citizens you must report the income to the US again. You then have two choices with regard to calculating any US tax liability. You have been in Caanda for an entire year so you can exempt up to $82,400
on form 2555. That's the end of it at less than $82,400. If your income is over $82,400, you can either file form 1116 and claim a foreign tax credit which should be enough to wipe out any US tax or a combination of form 2555 and 1116 which is almost always enouhgh to wipe out every cent of US tax.

Ditto for your wife although if she has not been in Canda for the full year of 2006, she may want to file form 2350 first to extend her US filing date to Jan 2008 so that she can qualify for form 2555. OR, she might just file form 1116 and claim the foreign tax credit.

2. You are NOT paying US tax she Canadian. You are both paying Caandian Tax. You can file a joint return or individual returns as MFS (married filing separately). It is likley easier to file MFS for the purposes of claiming the exemptions and yours is a tough return because you will owe about $5,000 more overall if you cannot get the W2 reversed into a T4 slip. GOTO and read the Oct 95 newsletter in the top left hand box and the US/Canada Taxation section in teh second box down on the right hand side for 30 pages or so more information about what has to be done for your returns.

3. We do US Caanda Tax returns by fax, email (pdf files only), snail mail or courier.