When considering a foreign assignment for your current employer, you might not be aware of the various taxes applicable in the country you would be assigned to. Depending on the country, there may be different tax obligation based on the different levels of government. In the US for example, some jurisdictions have local, state, and federal tax requirements. The total taxes may impact your income quite significantly depending upon your circumstances.
State and Local taxes
Canadians often accept projects in the United States without being aware of the US tax implications of such engagements. While the US-Canada Tax Treaty does provide relief in most situations, it is not always applicable at the state and local tax level. Local taxes are taxing authorities within states, such as certain cities. Canadians may not be aware of local income tax as this concept does not exist in Canada.
State and Local taxes – Often Different from Federal Tax Laws
As per the U.S Internal Revenue Service (IRS), you have to pay federal taxes on income effectively connected with a U.S trade or business irrespective of whether you are a U.S citizen or not. In some cases, Canadians may not need to pay the federal taxes in the US if they are eligible to make a treaty-based return. However, they would still need to file the return to report the treaty-based election. Each of the 50 states choose how to recognize the US-Canada tax treaty. This can make for complicated tax situations if a non-US taxpayer has worked in multiple tax jurisdictions within the US. Under certain circumstances, the combined state and local tax obligation may be surprisingly high, which is why it is important to consult an AG Tax cross border expert before doing business or going on assignment in the US.
That being said, there are nine states (Alaska, Florida, Nevada, South Dakota, New Hampshire, Texas, Tennessee, Washington, Wyoming) which do not levy state income taxes at all whether it is a domestic or a non-residential alien’s income (foreigner). On the other hand, states like California and New York aggressively pursue potential tax revenue by imposing state income taxes and only acknowledging certain portions of the US-Canada tax treaty.
AG Tax LLP Can Help
If you are thinking of doing business in the United States, please be sure to consult with an AG Tax professional. Each of the 50 states has different tax laws, and possibility of local tax obligations further complicates the issue. Filing positions should be revisited on a yearly basis to ensure they are appropriate with the ever changing US tax landscape composed of federal, state, and local tax laws. With proper planning you can either choose a state with low tax requirements to do business in, or at least do proper planning, and be prepared to meet your filing requirements in a more tax requirement intensive state.
AG Tax LLP has been handling cross border tax situations between Canada and the United States for years. With the right guidance, you can feel confident that you are compliant with the stringent US federal, state, and local tax obligations.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.