Americans living in Canada: dealing with double taxation

[GreenQueen]

My SO and I are dealing with double taxes for our second year since we moved to Montreal (he is dual, I will become dual soon). I'm wondering if anyone has figured out strategies to leverage retirement funds, specifically RRSPs and IRAs, in both countries to lower taxes as much as possible. In general, Canadian taxes should be higher and offset the US taxes. However, we are both regarded as self-employed here (grantees, actually) and not in the US (just me, lower salary) so cannot write off all our expenses for the US taxes.

My idea is to have my SO max out his RRSP contributions to lower Canadian taxes, and I will continue to put money into my IRA to lower US taxes. I should add that we made around $55K USD in 2015. That is likely to increase going forward, which is why I'm trying to figure this out now.

Does this idea make sense? Open to any and all strategies and ideas. I would love to know what anyone else in this awkward, annoying position is doing to make this work. Thanks!

[SoftwareGoddess]

Do you file Form 2555 Foreign Earned Income? If I understand it correctly, the first US$100,800 of earned income that you make in Canada should be excluded from US taxation.

[GreenQueen]

That's useful for future Canadian earnings, but we're currently contractors/grantees from US foundations, and all our income is from the US. I many need Form 2555 next year though.

[nereo]

That's useful for future Canadian earnings, but we're currently contractors/grantees from US foundations, and all our income is from the US. I many need Form 2555 next year though.

I am confused here.  As I understand it, Canada does not tax money earned outside of Canada.  If all of your income is from the United States, your tax obligation for Canada should be $0.  If this is incorrect please tell me, as it could affect us too.

SoftwareGoddess is correct on the form 2555 - you and your husband will both be allowed an exemption of $100k (currently over $140k CAD each!) for all income earned outside of the United States.

[Cathy]

As I understand it, Canada does not tax money earned outside of Canada. ... If this is incorrect please tell me, as it could affect us too.

Unfortunately, you have been misinformed. As I previously explained to another poster back on October 5, 2015:

... Residents of Canada, within the meaning of the Income Tax Act, RSC 1985, c 1 (5th Supp) ("ITA"), are required to pay Canadian income tax on worldwide income, including income from sources both "inside or outside Canada". ITA § 3(a). For residents of Canada, there are generally no territorial restrictions on what is taxed by Canada. This also applies to the income tax laws of most or all provinces. For example, in Alberta, taxable income for provincial tax purposes includes, for residents, total worldwide income. Alberta Personal Income Tax Act, RSA 2000, c A-30, § 5. There are countries that have territorial tax systems (i.e. where the taxability of income is determined solely based on the source of that income), but Canada is not one of those countries.

To be sure, worldwide income taxation is only the general rule in Canada and there are certain exceptions (just like how it is only the general rule in the US tax system, and there are certain exceptions there as well). Readers will need to research the law to determine whether any of the exceptions may apply to their particular fact pattern.

[nereo]

Thanks Cathy, i stand corrected. 

[naners]

No specific advice, but I highly recommend the accountant I used to deal with my US/Canadian tax situation: Dean Paley, deanpaley.com. I messed up my taxes while living in the US and he sorted them out for a very reasonable price (I feel like around $250 for two years of Canadian tax returns). It's hard to say if he will be able to reduce your taxes enough to justify his fees, but sometimes expert knowledge is worth paying for.