Moving to Canada can offer an opportunity for new opportunities, new lifestyle, and a fresh start. But for Americans, one thing doesn’t change so much: taxes.
Many Americans are shocked to find that they don’t stop being taxable upon moving to Canada and start working there. While all income may be generated in Canada and taxes paid to the Canada Revenue Agency (CRA), the general rule is that U.S. citizens are still required to file taxes with their federal government.
This is where dual filing comes into play.
Getting through both Canadian and U.S. tax systems can be difficult, particularly because different reporting requirements, deadlines and disclosure requirements exist. Once you understand what you’re responsible for, you can avoid penalties and remain compliant on both sides of the border.
Dual filing is when some people, such as U.S. citizens residing in Canada, must complete tax returns in both countries.
In Canada, residents are taxed on their income. The CRA will assume that you are a Canadian resident for tax purposes and will expect you to report all your income to it worldwide.
The United States, however, bases its taxes on citizenship. It basically states that, for most individuals, citizenship to the United States means that they are required to generally file a U.S. tax return, even if they do not reside in the United States or earn income in the country.
Consequently, many Americans residing in Canada are required to file tax returns in both countries, although tax treaties and foreign tax credits often prevent double taxation.
Fortunately, there are a number of tax treaties, credits and exclusions to help prevent double taxation. But these provisions don’t remove filing requirements.
One of the more frequent misconceptions among Americans residing in Canada is that if they pay taxes in the country, they don’t need to file with the IRS.
Unfortunately, this is not the case.
U.S. citizens may have to:
Penalties can be imposed even if no U.S. tax is ultimately due for failure to comply.
The Canada-U.S. Tax Treaty also coordinates the tax rules of Canada and the U.S. and minimizes double taxation.
The Treaty includes articles on:
One of the most significant items available to Canadian expatriates who are U.S. taxpayers is the Foreign Tax Credit (FTC).
Many people can claim tax credit for the taxes already paid in Canada, as they are often paid at the same or higher rates as they are in the U.S.
This in many cases will help to minimize or eliminate any other U.S. taxes on the same income.
But proper reporting and documentation is required to claim foreign tax credit. Errors may result in the loss of tax-saving benefits or IRS investigation.
The Foreign Earned Income Exclusion (FEIE) is another provision that is available to some Americans who live overseas.
This means that for those who meet certain conditions, a certain amount of foreign earned income can be excluded from taxation in the United States.
The FEIE may be useful in some cases but not all for Canadians.
The Foreign Tax Credit will offer more long-term flexibility in many instances and may yield a better tax result.
Between the Foreign Tax Credit and FEIE, careful analysis may be required to choose between them, e.g., careful analysis of:
The future tax planning objectives
A professional review will aid in deciding which approach will be best.
Registered Retirement Savings Plans (RRSPs) are one of the most popular retirement plans in Canada.
The great news is that RRSPs are treated very well under the Canada/USA Tax Treaty.
In many ways, it’s a similar arrangement to the kind of treatment U.S. taxpayers receive for income earned in an RRSP, as it allows them to delay paying taxes on income generated within the plan.
But, at the same time, RRSP accounts could also be required to be disclosed on some U.S. reporting forms, depending on the individual cases.
Knowing how retirement accounts work with cross-border tax is a key component of compliance.
A Tax-Free Savings Account (TFSA) is a popular investment account in Canada because investments grow without taxes and are not taxed on withdrawal since the account is held by a Canadian resident. But the same benefits are not available to citizens of the U.S. and other U.S. persons residing in Canada.
TFSAs are not recognized as tax-free accounts by the IRS, nor are any of the tax treaties between the Canada and the U.S. recognized as having tax deferral for income earned within a TFSA. Thus, income and gains resulting from transactions made in the account could be taxable in the U.S.
Moreover, the IRS often considers a TFSA to be a “foreign grantor trust” that can complicate reporting the funds and force the filing of Form 3520 and Form 3520-A, which can be quite onerous and result in severe IRS penalties if they are not completed properly.
Tax returns represent just one aspect of compliance.
Many Americans residing in Canada are required to complete an FBAR (Report of Foreign Bank and Financial Accounts).
You must file an FBAR if the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the calendar year.
Accounts that will be reported are:
Some taxpayers may have additional reporting needs under the FATCA requirements, in addition to FBAR reporting.
Foreign Account Tax Compliance Act (FATCA) imposes a reporting obligation for certain foreign financial assets on U.S. taxpayers.
Taxpayers may be required to make other disclosures in addition to their U.S. tax returns, based on asset values and filing status.
There is a significant misunderstanding that many people have, that filing an FBAR automatically meets all foreign asset reporting requirements. In fact, there are two reporting systems, FBAR and FATCA, and they are subject to different rules and thresholds.
Canadian mutual funds and some exchange-traded funds (ETFs) are one of the most complex aspects of cross-border taxation.
These investments may be deemed to be a Passive Foreign Investment Company (PFIC) under U.S. tax law.
PFICs are reported on Form 8621 and can trigger complex reporting requirements, punitive taxation, and interest charges.
Every year, many Americans live in Canada without realizing they are investing in PFICs and then find out how much paperwork is required.
It is sometimes useful to know how the IRS views Canadian investment products prior to investing.
One of the common issues that typically come up with people that work in Canada are questions about contributions to pensions and social security requirements.
The Canada-U.S. Totalization Agreement is designed to avoid the payment of taxes on the same wages by both social security systems.
The agreement will specify the contribution to be paid to: (depending on the employment situation)
Professional cross-border tax advice helps ensure that you remain compliant with both CRA and IRS requirements while taking advantage of available tax credits and treaty benefits. An experienced advisor can also help navigate foreign asset reporting obligations, address past filing issues, and develop a long-term tax strategy that supports your financial goals. Most importantly, professional guidance can help you avoid costly mistakes, unexpected penalties, and compliance problems that may arise when dealing with two different tax systems.
Tax filing in both Canada and the U.S. can be daunting, particularly when you have to file more than just a tax return.
Online Accountant can assist you in understanding the intricacies of cross-border taxation, offering tailored and practical solutions.
From the day you move to Canada or are living here for decades, we can help you understand your responsibilities and help you stay compliant without worry.
