Tax avoidance: Canadian or US charity?

Hi all,

I'm working in California under a TN, and this year will be my first for doing both taxes.

My understanding is that all the US federal/california state income taxes that I pay will be used as tax credits against my canadian/alberta provincial income taxes.

Also, my canadian/alberta taxes will be calculated based on my gross income for the year (based on a CRA interest rate to convert my USD income to a CAD equivalent).

So, I'm wondering if it would be more advantageous to donate to US charities, or should I donate to Canadian charities?

My income is around 60k USD. I'm thinking of donating around 5k.

I fear that if I donate to a US charity, it will lower my US taxes too much, and I will end up owing additional Canadian taxes (aka: I will not have enough US tax credits).

Any advice would be greatly appreciated!

Is there a particular reason why you feel you need to report the US income on a Cdn return? If you no longer live in canada, and live and work in US, you need only file a departure return for Canada, based on the date you left.

The tax rates for a cali resident and an alberta resident are pretty much equivalent, so it doesn't much matter which country you contribute in. However, if you need to report US income in canada (if you are still considered resident), the na US charity would majke sense, as it would reduce your taxes on BOTH sides.

If you are now in US, and no longer resident in canada, and you choose to file full-year 1040, which implies you report any Cdn income you made on your 1040 as well, then Cdn charity is best.

Whether you contribute to one or the other will have to do more with whether or not you are still Alta resident.

Awesome, thanks for the informative answer.

Since I'll only be working down here for a few years, my tax home continues to be Canada. I am continuing to maintain ties there, and I own a rental property in Alberta as well.
My understanding is that I must file both tax returns, and use the US tax credits against my owed Canadian taxes.

However, if you need to report US income in canada (if you are still considered resident), the na US charity would majke sense, as it would reduce your taxes on BOTH sides.

Why would the CRA care if I made a charitiable donation to a US charity? Wouldn't this only reduce my US taxes?

The CRA cares about my gross income, not my net income. I will owe Canadian taxes on my gross income for the year, and I will not be able to claim the US charity donation. Vice versa, the IRS will not care if I make a CAD charity donation.

Let me know what you think! Thanks!

Either way, I believe that I will only be able to claim my donation on one of the tax returns.

A few years?! Non-residency starts as soon as you leave and establish a home in US!

What "ties' do you have? A medical card is not a tie. A rental unit is not a tie. A parent is not a tie.

Just to clear up your misconception, Canada does recognize US charitable gifts and vise versa, as long as you also report income from that country. So, yes, a Cdn resident reproting US income on his return, gets to claim US charity on both his US and Cdn return.

But, truly, you should be ditching Cdn tax residency. You are a US resident.

First of all, I really appreciate your help.

As I am positive that I will return to Canada eventually, going through the trouble of changing my tax home to the US seems unnecessary, especially as the tax rates are about equal (Calif vs Alberta).

Additionally, I am continuing to contribute to my RRSP and TFSA (which would also increase my paperwork).

Perhaps I am missing a serious opportunity here. What would be the benefit of changing my tax home to the US?

Thanks for your help!

Well, since you live in US, you are already required to meet all the filing requirements related to RRSPs and TFSA. It's not like you can say that you are not resident of US; you are, and must file a 1040, and 8891 for the RRSP, and pay cali tax on the RRSP, and report TFSA income.

Canada can force you out, using the deemed non-resident regulations.

What you are missing is not having to file in canada at all, being able to collapse your RRSP at 25%. And you can contribute to a Roth which is better than RRSP if you are US resident.

Again, I really appreciate your feedback and help here!

Please correct me if I am wrong/confused:

I don't see how a Roth IRA is better, since when I am old and living in Canada, I will still end up being taxed when I withdrawal from it.

My understanding is that a Roth would only be beneficial if I end up retiring in the US (so I can make tax-free withdrawals).

My current plan is to continue making my RRSP contributions, but only claim the deductions up to the point where my taxes break even with my US tax credits (thereby owning nothing in Canadian taxes). Once I live in Canada again, I will use the rest of my unclaimed RRSP deductions.

Let me know if you can spot any major flaws in my plan...

Thanks again!

"I don't see how a Roth IRA is better, since when I am old and living in Canada, I will still end up being taxed when I withdrawal from it.

My understanding is that a Roth would only be beneficial if I end up retiring in the US (so I can make tax-free withdrawals)."

Incorrect. The major pension initiative of the last treaty protocol was to recognize Roths as they are in US -- but only if you fund them while non-resident of canada.

What "ties' do you have? A medical card is not a tie. A rental unit is not a tie. A parent is not a tie.

If he maintains access to health coverage in Canada, that's a residential tie because only residents can get it and the rental unit could be considered his principal residence if he claims it as such.

Anyway, basically to answer the question you have the choice of being resident or non-resident for tax purposes (although the CRA and the IRS can argue with that choice based on your ties to either country). Whether that's a good idea or not depends on your circumstances but the most usual situation where it is a good idea to be non-resident is if you plan on going back in the near future. If you plan on spending a complete calendar year or more in the US then generally it's simpler to file as a US resident. The only major exceptions are if there is some major Canadian tax downside if you move your tax home to the US, e.g. if you would end up paying a lot of departure tax or if you own a CCPC with significant assets (which is basically the same problem, departure tax).

So if you pay taxes in the US as a resident, obviously your charitable donations should be in the US.

"So if you pay taxes in the US as a resident, obviously your charitable donations should be in the US."

Not quite. If you have to file returns in voth US and canada and arer reporting Cdn income on your US return, it is actaully better to have Cdn caritable donations, as this will lower BOTH taxes.