Canadian Remote Workers with US Income: Who Taxes What, and What You Have to File

The question arrives in roughly this form: “I live in Ottawa, I work for a company in Texas, they pay me in US dollars. Do I file in the United States?”

For most people in that position the answer is no, and the reason is worth understanding, because the same reasoning tells you what happens when the facts shift even slightly.

Start with the two rules that decide almost everything

Rule one: Canada taxes residents on worldwide income. Where your employer is incorporated, what currency you are paid in, and which country the money is wired from are all irrelevant to that. If you are a Canadian resident, the income is reportable in Canada in Canadian dollars.

Rule two: employment income is generally sourced to the place where the work is physically performed. If you are sitting in your spare room in Ottawa, the work is performed in Canada.

That second rule, as it applies to United States taxation, is a matter of United States law. It is not something that can be confirmed on a Canadian government source, and this article does not attempt to. The US sourcing rules and the filing obligations that flow from them are published by the IRS, and a US position should be confirmed with a US preparer rather than inferred from a Canadian one. What can be said from the Canadian side is that Canada asserts full taxing rights over work performed in Canada by its residents, and that the Canada-US treaty allocates rights between the two countries rather than creating a second, overlapping tax bill by default.

Four situations, four answers

The fourth row is a genuinely different regime, because the United States taxes on citizenship rather than residency. It is covered separately in dual Canada-US citizen tax compliance and nothing in this article should be read as a substitute for that.

The treaty article that matters: dependent personal services

The moment you spend working days physically in the United States, Article XV of the Canada-United States tax convention becomes relevant. It provides that remuneration for employment exercised in the other country is taxable only in your country of residence if either:

• the remuneration for that work does not exceed ten thousand dollars in the currency of that other state, or
• you are present in that other country for not more than 183 days in any twelve-month period beginning or ending in the fiscal year concerned, and the remuneration is not paid by an employer resident there, and not borne by a permanent establishment there.

The second test has three conditions and all of them must hold. This is the trap. A Canadian resident employed directly by a US company who spends occasional days working in the US fails the “not paid by an employer resident there” condition, so the 183-day shelter does not apply and only the monetary threshold can help.

Two more points about the day count that surprise people: it counts any part of a day physically present, and it counts days present rather than days worked, so a family holiday in Florida is inside the count.

No Canadian payroll means no withholding, and that is your problem

A US employer with no Canadian presence generally does not run Canadian payroll. Nothing is deducted at source. The full amount arrives and the tax on it is still owing.

Instalments and CPP

Two things follow.

You will probably have to pay tax by instalments. The CRA requires instalments where your net tax owing exceeds $3,000 ($1,800 for Quebec) in the current year and in either of the two preceding years. The rule and the calculation options are on the CRA’s who has to pay instalments page, and the mechanics are set out in tax instalments for individuals. Missing them produces instalment interest, which is charged at the prescribed rate and is not deductible.

Your CPP position may not be what you assume. Employment in Canada by an employer who is not resident in Canada, has no establishment in Canada, and has not undertaken to cover the employment is excepted employment for CPP purposes. No contributions are required, which sounds like a saving and is actually a gap: you accrue no CPP credits for those years. The employer can elect coverage by filing Form CPT13, and the CRA sets out the options on its foreign employees and employers page. If you expect to work this way for a decade, this is worth raising with the employer early rather than discovering the gap at retirement.

The social security agreement

On the social security side, Canada and the United States operate an agreement whose general territoriality rule is that work performed in one country’s territory is covered by that country’s system only. The CRA’s guidance on international social security agreements explains the certificates of coverage that evidence this, which matter when a US employer has started deducting US social security from a Canadian resident.

Where the same income really is taxed twice

Where the United States does tax something, Canada relieves the double tax through the foreign tax credit, claimed on Form T2209 and reported at line 40500.

Three constraints decide how much relief you actually get:

• The credit is computed country by country, not as one pooled number.
• It is capped at the Canadian tax otherwise payable on that same foreign income. Where the US rate is higher, the excess is not refunded to you.
• Only tax you were legally required to pay counts. Tax over-withheld because you never filed a W-8BEN is recoverable from the IRS, not creditable in Canada. The foreign tax credit mechanics matter more than most people expect.

State tax is a separate question again. US state income taxes are imposed under the law of individual states, are not something a Canadian source can speak to, and are not necessarily relieved by the federal Canada-US treaty on the same terms. If a state is withholding from you, that needs a US answer.

Employee or contractor is not the employer’s call

Many US companies engage Canadians as independent contractors because it avoids their payroll complexity. That characterization does not bind the CRA, which applies its own test based on control, ownership of tools, chance of profit and risk of loss. The employee versus contractor analysis is worth reading before you accept the label, because being genuinely self-employed changes your deductions, your CPP obligation (both halves) and your GST/HST position.

On GST/HST specifically: services supplied to a non-resident are frequently zero-rated, meaning you charge tax at 0%. Zero-rated is not the same as exempt. Zero-rated supplies are still taxable supplies and they still count toward the $30,000 small supplier threshold over four consecutive calendar quarters, so a contractor billing a US client can be required to register even while charging no tax. See GST/HST registration for small business.

Working it through

Where do you PHYSICALLY perform the work?
│
├── Entirely in Canada
│   ├── Are you a US citizen or green card holder?
│   │   ├── Yes ──► US return every year + Canadian return.
│   │   │           Treaty and credits resolve the overlap.
│   │   └── No  ──► Canadian return only, in most cases.
│   │               Give the payer a W-8BEN. Check CPP status.
│   └── Employee or contractor?
│       ├── Employee ──► No withholding, so set up instalments.
│       │                Ask about CPT13 coverage.
│       └── Contractor ─► Business income, GST/HST registration
│                         test, own CPP at both rates.
│
└── Some days in the United States
    ├── US remuneration at or under US$10,000 for the year?
    │   └── Yes ──► Treaty Article XV, first test. Exempt in the US.
    └── No
        ├── Under 183 days present in a 12-month period AND
        │   not paid by a US-resident employer AND not borne
        │   by a US permanent establishment?
        │   ├── All three ──► Treaty Article XV, second test.
        │   └── Any one fails ──► US may tax those workdays.
        │                          Claim a foreign tax credit
        │                          in Canada on Form T2209.

Six things to set up: US days, W-8BEN, instalments, CPP

1. Track your US days. A calendar of physical presence is the single most valuable record in this whole area, and it is impossible to reconstruct.
2. File a W-8BEN with the payer if you are not a US person, so US withholding does not start.
3. Convert to Canadian dollars properly, using the Bank of Canada rate on the day of receipt, or the annual average where income was received throughout the year.
4. Set up instalments before the first reminder arrives.
5. Settle your CPP position in writing with the employer.
6. Keep the contract. Whether the arrangement is employment or a service contract is decided on the facts, and the agreement is the starting point.

Working from Canada for a foreign employer has more moving parts than either country’s forms suggest, and the general pattern is covered further in working remotely for a foreign employer. If you have taken a US role and want the instalment, CPP and treaty positions set up correctly in your first year rather than corrected in your third, that is a straightforward conversation.