The Double Tax Burden
US citizens living in Canada face the most complex tax situation of any expat destination. You're taxed by both countries and must file returns in both, even as a Canadian resident.
The US taxes citizens on worldwide income regardless of where they live. Canada taxes residents on worldwide income. As a US citizen in Canada, you're in both systems simultaneously. The US-Canada Tax Treaty and Foreign Tax Credit prevent most double taxation, but not all, and compliance is complex.
Annual Filing Requirements
| Filing | To Whom | Deadline |
|---|---|---|
| Form 1040 (US Income Tax) | IRS | April 15 (auto-extended to June 15 for expats) |
| FBAR (FinCEN 114) | FinCEN | April 15 (auto-extended to October 15) |
| Form 8938 (FATCA) | IRS | With tax return |
| T1 (Canadian Income Tax) | CRA | April 30 (June 15 if self-employed) |
| Form 3520 (Foreign Trust) | IRS | With tax return (if RRSP/TFSA not properly elected) |
Canadian Tax Residency
Canadian tax liability depends on your residency status, which is determined by facts and circumstances, not just physical presence.
Residency Factors
- Residential ties: Home in Canada, spouse/dependents in Canada
- Secondary ties: Canadian driver's license, bank accounts, health coverage
- Physical presence: 183+ days generally indicates residency
- Social ties: Club memberships, professional associations
Residency Types
| Status | Tax Obligation | Typical Situation |
|---|---|---|
| Non-Resident | Canadian-source income only | Living in US, some Canadian investments |
| Deemed Resident | Worldwide income | Government employee posted abroad |
| Factual Resident | Worldwide income | Living and working in Canada |
| Part-Year Resident | Pro-rated | Year of arrival or departure |
If you qualify as a tax resident of both countries, the US-Canada Tax Treaty has tie-breaker rules to determine which country has primary taxing rights on specific income types. This doesn't eliminate filing requirements in either country.
Canadian Income Tax Rates
Canada has federal income tax plus provincial tax. Combined rates are generally higher than US rates.
2024 Federal Tax Brackets
| Income (CAD) | Federal Rate |
|---|---|
| Up to $55,867 | 15% |
| $55,867 - $111,733 | 20.5% |
| $111,733 - $173,205 | 26% |
| $173,205 - $246,752 | 29% |
| Over $246,752 | 33% |
Combined Top Marginal Rates by Province
| Province | Top Rate | Kicks in At (CAD) |
|---|---|---|
| Nova Scotia | 54.0% | $246,752 |
| Ontario | 53.5% | $246,752 |
| Quebec | 53.3% | $246,752 |
| British Columbia | 53.5% | $252,752 |
| Alberta | 48.0% | $355,845 |
| Saskatchewan | 47.5% | $246,752 |
Because Canadian rates often exceed US rates, you'll typically have excess Foreign Tax Credits on your US return. This is good (prevents double tax) but the excess credits have limited carryforward/carryback periods and category limitations.
The US-Canada Tax Treaty
The 1980 US-Canada Tax Treaty (as amended) is crucial for preventing double taxation. Understanding its provisions is essential.
Key Treaty Provisions
- Residence: Tie-breaker rules when both countries claim you
- Employment income: Generally taxed where work is performed
- Dividends: Reduced withholding (15% standard, 5% for substantial holdings)
- Interest: Generally 0% withholding
- Royalties: 0-10% depending on type
- Capital gains: Generally taxed by residence country (real property taxed where located)
- Pensions: Special rules for government pensions, CPP, Social Security
Saving Clause
The treaty includes a "saving clause" that preserves each country's right to tax its own citizens/residents. This means:
- US can tax US citizens on worldwide income regardless of treaty
- Treaty benefits reduce foreign tax, creating FTC opportunity
- Some treaty provisions override the saving clause (pensions, certain benefits)
Foreign Tax Credit Mechanics
The Foreign Tax Credit (FTC) is your primary tool for avoiding double taxation. Canadian taxes paid can offset US tax liability.
How FTC Works
- Calculate your US tax on worldwide income
- Calculate the portion attributable to foreign-source income
- Credit Canadian taxes paid against that portion
- Excess credits can be carried back 1 year or forward 10 years
FTC Categories
Foreign income is divided into categories (baskets). Credits from one category can't offset tax in another:
- General category: Most active income (wages, business)
- Passive category: Interest, dividends, royalties
- Foreign branch income: Branch operations
- GILTI: Global intangible low-taxed income (corporations)
Income taxed at rates significantly above US rates may be "kicked out" of passive category into general category, improving FTC utilization. This is particularly relevant for Canadian-source investment income.
Retirement Account Nightmares
Canadian retirement accounts create significant US tax complexity.
RRSP (Registered Retirement Savings Plan)
- Contributions deductible for Canadian tax
- Not automatically deductible for US tax
- Must file Treaty Election (Form 8891 was eliminated; election now on Form 1040)
- Without election, RRSP income taxable annually to US
- Withdrawal taxed by Canada (withholding) and potentially US
TFSA (Tax-Free Savings Account)
The TFSA is a disaster for US citizens. The US doesn't recognize its tax-free status. All income earned in the TFSA is taxable annually on your US return. Worse, the TFSA may be considered a foreign trust, requiring Form 3520/3520-A with severe penalties for non-filing. Most advisors recommend US citizens NOT open TFSAs.
RESP (Education Savings)
- Similar issues to TFSAânot recognized by US
- Investment income taxable annually to US
- Potential foreign trust reporting
- Canadian Education Savings Grants complicate matters
FBAR and FATCA Reporting
US citizens must report foreign financial accounts above certain thresholds.
FBAR (FinCEN 114)
- Threshold: $10,000 aggregate in foreign accounts at any time
- What counts: Bank accounts, investment accounts, RRSPs, TFSAs, RESPs, life insurance with cash value
- Deadline: April 15 (auto-extended to October 15)
- Penalties: Up to $10,000 per account per year (non-willful); up to $100,000 or 50% of balance (willful)
FATCA (Form 8938)
- Threshold (living abroad): $200,000 end of year or $300,000 at any time
- What counts: Similar to FBAR plus some additional assets
- Filed with: Tax return (not separate like FBAR)
- Penalties: $10,000+ per year for failure to file
These are separate requirements with different thresholds and different filing procedures. You may need to file one, both, or neither depending on your account balances. When in doubt, file both.
Departure Tax (Leaving Canada)
When you cease to be a Canadian tax resident, Canada imposes a "departure tax" on unrealized capital gains.
How It Works
- Deemed disposition of most assets at fair market value on departure date
- Capital gains tax owed even though you haven't sold
- Can post security and defer payment until actual sale
- Certain assets exempt (real property, retirement accounts, employment stock options)
Exempt Property
- Canadian real property (taxed when actually sold)
- Registered retirement accounts (RRSP, RRIF, TFSA)
- Employee stock options (special rules)
- Property used in Canadian business you continue operating
If you plan to leave Canada eventually, consider the departure tax implications when making investments. Realizing gains while resident (and claiming FTC) may be better than facing deemed disposition. Timing of departure can significantly affect tax liability.
Snowbird Tax Rules
Americans who split time between Canada and the US ("snowbirds") must carefully manage tax residency.
US Substantial Presence Test
You're a US tax resident if you meet the substantial presence test:
- 31+ days in current year, AND
- 183+ days over 3 years using weighted formula:
- All days current year
- 1/3 of days prior year
- 1/6 of days two years prior
Closer Connection Exception
If you meet the substantial presence test but have a closer connection to Canada:
- File Form 8840 to claim the exception
- Document your Canadian tax home
- Maintain Canadian ties (home, family, car, etc.)
- Must file annually to preserve the position
Canadian Residency Risks
- 183+ days in Canada generally triggers Canadian residency
- Significant residential ties can trigger residency with fewer days
- Maintaining a Canadian home while "snowbirding" is risky
Both countries count days of presence. Keep a calendar and travel records. Partial days generally count as full days. Border crossing records are increasingly shared between countriesâdon't assume either government doesn't know where you've been.
Social Security Totalization
The US-Canada Social Security Agreement prevents double contributions and protects benefits.
Key Provisions
- Contributions to CPP may count toward US Social Security eligibility
- Contributions to Social Security may count toward CPP eligibility
- Generally pay into only one system based on where you work
- Detached workers (sent by US employer) may stay in US system for 5 years
Benefit Coordination
- Can receive both CPP and Social Security if eligible
- Windfall Elimination Provision (WEP) may reduce Social Security
- Government Pension Offset may affect spousal benefits
Professional Help is Essential
Canada-US cross-border taxation is among the most complex in the world. DIY tax preparation is not recommended.
What to Look For
- CPA or EA licensed in the US
- Experience with Canadian tax (ideally CPA Canada as well)
- Familiarity with treaty provisions
- Understanding of FBAR, FATCA, PFIC issues
- Experience with your specific situation (employees, business owners, retirees)
Expect to pay $1,500-$5,000+ annually for proper cross-border tax preparation, depending on complexity. This is significantly more than domestic-only returns but reflects the genuine complexity. Cutting corners can result in penalties that dwarf the preparation fees.