Common

Self-Employment in Both Countries

Self-employed individuals working in both Canada and the US face unique challenges including dual self-employment tax exposure, CPP and Social Security coordination, and proper income sourcing. The Totalization Agreement prevents double social security taxation, but income tax obligations in both countries must be carefully managed.

Key Points

  • Self-employment tax (15.3% US) and CPP contributions (11.9% Canada) can both apply without proper coordination.
  • The Totalization Agreement generally assigns social security to the country of residence.
  • Business income must be sourced based on where services are performed.
  • Schedule C (US) and T2125 (Canada) are the respective reporting forms.
  • GST/HST registration may be required in Canada if Canadian revenue exceeds $30,000.

Action Items

  1. 1.Obtain a certificate of coverage to avoid double social security taxation.
  2. 2.Source your income correctly between the two countries based on where work is performed.
  3. 3.File Schedule C on your US return and T2125 on your Canadian return as applicable.
  4. 4.Register for GST/HST if your Canadian self-employment revenue exceeds $30,000.
  5. 5.Claim foreign tax credits to prevent double income taxation on the same earnings.

Frequently Asked Questions

Do I pay both CPP and US self-employment tax?

No, if you obtain a certificate of coverage under the Totalization Agreement. You pay into only one system based on your country of residence.

How do I source my freelance income between the two countries?

Income for personal services is generally sourced to the country where the services are physically performed. Remote work complicates this analysis and may require professional guidance.

Related Scenarios

Critical

TFSA US Tax Trap

The Tax-Free Savings Account is tax-exempt in Canada but receives no treaty protection in the US. The IRS classifies a TFSA as a foreign grantor trust, requiring Forms 3520 and 3520-A annually. Failure to file can result in penalties starting at $10,000 per form per year.

Critical

FBAR Filing Requirements

The Report of Foreign Bank and Financial Accounts (FBAR) must be filed by any US person with foreign financial accounts exceeding $10,000 in aggregate at any point during the year. The FBAR is filed electronically with FinCEN, not the IRS, and has its own deadline and penalty regime.

Core

Substantial Presence Test

The Substantial Presence Test (SPT) uses a weighted formula across three years to determine if a foreign national is a US tax resident. If you meet the test, you are taxed on worldwide income. Understanding the SPT is essential for snowbirds and anyone splitting time between Canada and the US.

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