It is a mandatory requirement that all US Citizens file their tax returns with the IRS regardless of their residential status. US Citizens who reside in Canada and are employed by a Canadian employer are issued with Form T4 or T4A-NR which are correspondents of Form W-2 in the US. The employer’s mailing must be before the end of February.
On Form T4 - Box 14 is reported as foreign employer compensation
On Form T4A-NR - Two amounts are to be reported:
- Report Box 18 Gross Income as foreign employer compensation
- Box 20 Travel Expenses - in the event that the reimbursement is more than the expenditure, the difference is reported as Other Income.
The other important amount that needs reporting on Form 1040 is the amount of income tax resulting from Revenue Canada. To determine this amount, complete the Revenue Canada Form T1, Income Tax and Benefit Return. The amount shown in Form T4 or T4A-NR Box 22 mirrors the amount withheld from wages.
Amounts in the tax return must all be in USD. A yearly average currency exchange rate is used to convert amounts to US Dollars. Alternatively, multiple exchange rates can be used in the event that the facts and circumstances demand so. For more information on currency exchange rates, click here.
To Enter Form T4 or T4A-NR in Taxx Savage ProWeb:
- Go to the Federal Section of a Tax Return
- Proceed to the Income Section
- Select Less Common Income
- Then Other Compensation
- Go on to Foreign Earned Compensation - For MFK filing, pick the owner of the income.
- Foreign Employer ID - This is optional (Form T4 Box 54 or T4A-NR “Payer’s account number”)
- Foreign Employer Name - This is mandatory.
- Check the box indicating that the work was done in the US if it was done in the US. If it wasn’t, from the dropdown menu, select Canada.
- Foreign Compensation - Key in the amount (US Dollars)of Employment Income (Form T4) or Gross Income (Form T4A-NR)
- Foreign Employer Address - Required
- Employee Address - Required
At this juncture, there are three options in place to help the taxpayer avoid double taxation:
- If itemizing, include the taxes paid on Schedule A
- Use Form 2555 Foreign Earned Income to claim an income exclusion. This is based on the assumption that all requirements are met
- On Form 1116 Foreign Tax Credit, claim a tax credit
It is advisable to try each option to arrive at the option that results in the greatest savings.
Caveats:
- A taxpayer must file their income tax return and receive an acceptance notification in the country in which they received the income so that the taxes paid in that country are not considered accrued.
- It is impossible for Taxpayers to claim both a tax credit and a deduction for taxes paid on the same income.
- A High-wage earner is able to use both Form 2555 and 1116 but are prohibited from entering the same income on both forms.
Note: This is not Tax Advice. It is a guide on how to enter Revenue Canada Forms T4 and T4A-NR into the Taxx Savage ProWeb.
Additional Information:
IRS: Publication 597 - Information on the United States–Canada Income Tax Treaty
IRS: Canada Tax Treaty Documents