Exceptions For Americans Who Pay Taxes in Canada

If what this suggests is true then there is a loophole, a legal loophole that would allow American spouses living with their Canadian husbands / wives to avoid being double taxed...


Foreign Earned Income Exclusion


If you have your full time residence abroad for a full calendar year, or live there for 330 days out of any consecutive 12 month period, you can exclude up to $82,400 of earned income from U.S. Income Taxation for 2006 and $80,000 in 2005. If you are married, and both of you earn income and reside and work abroad, you can also exclude up to another $82,400 of your spouses income from taxation. These exclusions can only be claimed on a filed tax return and is not automatic if you fail to file your Form 1040 for the year it applies as well as the appropriate forms claiming this exclusion. This is a fantastic advantage for people who live and work outside of the U.S. Earned income is that paid you for your work or services and does not apply to rental income, dividend or interest income, or other types of income that is not paid for your own personal efforts.


You can also claim an additional exclusion from your U.S. taxes in excess of the $82,400, if the rent, utilities, etc. you pay on your residence abroad and other living expenses exceed a standard amount (which is currently approx $13,000 per year) established by the IRS. This exclusion only comes into play when your earnings are in excess of the $82,400 foreign income exclusion and is limited by new laws enacted in 2006 to a maximum of approximately $13,000.


U.S. Self Employment Tax


If you are a bonafide employee of your foreign employer (which can mean your own foreign corporation) and have foreign social security and other payroll taxes withheld from your wages, you do not have to worry about paying any social security taxes to the U.S. However, if you are self employed, and no foreign social security is being withheld from your earnings ( in other words an independent contractor) you must file a Schedule C with your U.S. tax return and pay U.S. self employment tax (social security taxes by the self employed) on your net earnings ( after deducting your expenses). The self employment tax rate is 15.3% and is not reduced by the previously mentioned foreign earned income exclusion or foreign tax credits..

http://www.taxmeless.com/page4.html

Canada and the US have a tax treaty, so you will not be taxed twice. However, US citizens and spouses of US citizens if they are foreigners are required to file a tax return to the IRS every year, and declare foreign income, whether or not you will have to pay depends on the amount made.

Most of us I'd guess don't make enough that we'd have to pay taxes to both countries.

So this tax treaty applies to income that a American citizen makes with another company? Does it apply to contract workers?

And you only pay if the income you derive in Canada as a American working there is derived from a company you own, rental property you own or lottery winnings?

I realize you may not be a tax specialist but if you or someone can confirm this for me I'd be much appreciative.