Navigating US Tax Laws as a Canadian Expat

Roughly one million Canadians live in the United States, according to estimates compiled by Global Affairs Canada, and the tax rules that apply to them sit at the intersection of three documents: the Internal Revenue Code, the Canadian Income Tax Act, and the Canada-United States Tax Convention. None of those documents is short, and the interaction between them is what trips up most filers in their first two or three years.

The starting question is residency. The IRS uses a Substantial Presence Test that adds together all the days a person spent in the United States in the current year, one-third of the days from the previous year, and one-sixth of the days from the year before that. If the total is 183 days or more, the IRS generally treats the individual as a US tax resident for that year and taxes them on worldwide income. The Canada Revenue Agency, for its part, looks at residential ties rather than a strict day count, which means it is possible to be a tax resident of both countries at once. The treaty's tie-breaker rules in Article IV are designed to resolve that overlap, but they have to be claimed on the return; they do not apply automatically.

Where double taxation actually happens

The convention does most of the heavy lifting on employment income, business profits, dividends, interest and pensions, generally giving primary taxing rights to the country of residence and a credit against tax paid in the other country. The mechanics are run through Form 1116 in the United States and the foreign tax credit on the T1 in Canada. In practice, the credits usually eliminate double tax on wages, but they do not necessarily produce a clean result on investment income, particularly when the two countries treat the same account in different ways.

The TFSA is the most common example. The Canada Revenue Agency treats it as tax-free; the IRS does not, and US persons living in Canada have generally had to report TFSA income each year and, depending on the holdings inside, file Form 3520 and 3520-A. A Canadian moving to the United States with a TFSA should expect that account to lose most of its appeal once US filing begins. The RRSP, by contrast, is recognised under Article XVIII of the convention, and US residents holding an RRSP can defer US tax on the internal income until withdrawal, although Form 8938 reporting still applies.

Reporting, not just filing

A separate layer of obligations covers reporting rather than tax. Any US person with foreign financial accounts whose aggregate value exceeded $10,000 at any point during the year must file FinCEN Form 114, the FBAR, with the Treasury. Form 8938, filed with the income tax return, applies above higher thresholds and overlaps with the FBAR rather than replacing it. On the Canadian side, residents with specified foreign property of more than CAD$100,000 in cost amount must file Form T1135. Penalties for non-filing in both regimes are substantial and have been the subject of repeated guidance from the IRS and the CRA.

FATCA, the regime enacted in IRC sections 1471 through 1474 and implemented in Canada through an intergovernmental agreement, requires Canadian financial institutions to report accounts held by US persons to the CRA, which forwards the data to the IRS. The practical effect is that the days of an undisclosed Canadian account belonging to a US citizen sitting unnoticed are over. Most filers who discover historical non-compliance can return to the system through the IRS Streamlined Filing Compliance Procedures, but eligibility depends on the failure being non-wilful and is worth confirming with a cross-border practitioner.

“Most cross-border problems are not tax problems. They are documentation problems that turn into tax problems three years later.”

When to bring in a specialist

Three situations are worth flagging to a cross-border accountant in advance rather than after filing. The first is a move in either direction, where departure tax under section 128.1 of the Canadian Income Tax Act or the US expatriation rules in IRC section 877A can apply. The second is the sale of a principal residence, where the Canadian exemption and the US section 121 exclusion line up imperfectly. The third is the year a child is born to a US citizen abroad, which can create a US filing obligation for the child from birth.

This article is general reporting based on publicly available guidance from the IRS, the CRA and the Department of Finance, and it should not be relied on as personal tax advice. Rules and thresholds change frequently; verify the current figures and forms with the relevant agency or a qualified adviser before filing.