How to report U.S. employment income in Canada

When a Canadian works in the U.S., their employment income may be exempt from U.S. taxation in some cases up to a $10,000 limit. In your son’s case, Arlene, it sounds like both federal and state withholding tax applied to his earnings from the Silicon Valley company in California.

What is an Individual Taxpayer Identification Number? When do you need it?

When Canadians earn U.S.-source income, like employment income, they are typically required to file U.S. federal and state tax returns. The U.S. equivalent of a Social Insurance Number (SIN) is a Social Security Number (SSN). SSNs are generally required for U.S. citizens and some non-citizen residents of the U.S. In your son’s case, his non-resident alien status in the U.S. means he needs an Individual Taxpayer Identification Number (ITIN) to file a federal return. It is a tax processing number for certain non-resident and resident aliens.

In order to apply for an ITIN, Arlene, a taxpayer must file a Form W-7, Application for IRS Individual Taxpayer Identification Number (ITIN) with their U.S. federal tax return.

Arlene, it sounds like your son had a federal and state tax filing requirement in the U.S. He should seek out advice from a U.S. tax professional who can help validate and assist with his tax filing requirements.

How to report foreign income in Canada

Canadian residents are taxed on their worldwide income. If your son spent a summer in the U.S. working, but otherwise maintained his Canadian ties, he likely remained a Canadian resident for tax purposes for all of 2022. That means his U.S. income should be reported on his Canadian tax return, converted to Canadian dollars.

To avoid double taxation, foreign tax withheld is generally eligible for a foreign tax credit on a Canadian tax return. However, in your son’s case, it is the net tax withheld that should be claimed, Arlene. It is not the tax withheld on his W-2, but the federal and state tax payable as calculated on his federal and state tax returns. So, for example, the California refund would reduce the claim for the state tax withheld on his W-2.

When do Canadians have to file a U.S. tax return?

Canadians must generally file a U.S. tax return with the Internal Revenue Service (IRS) for earning other U.S.-source income. This includes U.S. rental income. U.S. non-resident property owners who sell real estate in the U.S. are also generally required to complete a U.S. tax return.

Unfortunately, the processing times for non-residents filing U.S. tax returns can be slow. It is common for the Canada Revenue Agency to ask for documentation of foreign tax paid. A copy of a U.S. tax return may not be sufficient evidence, either. The CRA generally wants documentation of the U.S. tax assessment from the IRS and state tax authorities with the balance owing or refund.

In summary, Arlene, your son likely needs to apply for an ITIN and file a U.S. federal tax return with the IRS. He likely needs to report the foreign income on his Canadian tax return. The net federal and state tax paid in the U.S. can be claimed on his Canadian tax return as a foreign tax credit to avoid double taxation.

Read more from Jason Heath:

• Tax planning for Canadians who invest in the U.S.
• “Where do we pay income tax if we retire abroad?”
• Do non-residents pay tax on CPP? What if you live in the U.S.?

• What to know about withholding tax in retirement

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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