Are you a US citizen or green-card holder? While everyone's
been focusing on the "fiscal cliff", something else has
been going on that may actually raise your tax bill.
Effective January 1, 2013, to help fund "Obamacare",
the United States has brought in a tax – the "Net
Investment Income Tax". This tax is 3.8% of your investment
income if your total earnings are above:
For a married couple filing jointly, $250,000
For a married person filing separately, $125,000, and
For a single taxpayer, $200,000.
Investment income is, generally, interest, dividends, annuities,
rents, royalties, and most net gains. It includes income from
passive activities. It does not include distributions from
qualified retirement plans.
"So what", you may say. I live in Canada. Canada
effectively taxes me. "I don't pay US income
Not so fast. This is described as a "Medicare
Contribution", not an income tax.
"So what, if it's a Social Security tax, I'm
exempt, because I live in Canada. Shouldn't it be covered by
the Social Security Totalization Agreement?"
Well, it should, because it's the same kind of tax, but that
agreement doesn't specifically cover this tax. This tax is not
dedicated to the Medicare Trust Fund. It might not be covered.
"So what", you say again. "My income is subject
to Canadian tax. I get a foreign tax credit on my US return, and
it's just a paper filing exercise only.
Welcome to the new era, where the United States government is
desperate for money.
First of all, the investment income could be generated from U.S.
investments. One would think that if your Canadian tax rate is high
enough, then you'll get a full Canadian foreign tax credit, and
the problem goes away. But if you live in Alberta or a territory,
your Canadian tax rate may be lower than your US rate, and your
effective tax will now climb.
The problem can occur in other ways in the rest of Canada.
Sometimes you can have income that is exempt from Canadian tax, but
subject to US tax. For instance, the Canadian real estate market
has been good over the past number of years, and the Canadian
dollar has appreciated against the US dollar. When you sell your
house, you may have a gain (measured in US dollars) of over
$250,000 ($500,000 for a married couple). The excess is subject to
regular US tax and to this new tax even though it's exempt from
Finally, you could earn regular Canadian investment income. If
you're in a province other than Alberta, the income is probably
subject to Canadian tax at rates that are higher than the US rates,
even including this new tax. Under the Internal Revenue Code, there
is no foreign tax credit allowed against this new tax. It is
arguable that the tax treaty provides for a credit, but at this
point, this position is no sure thing.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
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