The US and Canada determine your tax residency using very different criteria. While the CRA (Canada Revenue Agency) determines tax residency largely based on your residency ties, the US uses the Substantial Presence Test. Both countries can tax your income in the same year.
The US-Canada Tax Treaty
The US-Canada Tax Treaty contains provisions designed to help you if you move, including:
- Foreign tax credits you can claim to avoid being taxed by both the US and Canada on the same income
- Residency tie-breaker rules for dual residents to help determine whether you report your worldwide income to the CRA or IRS
- Continued tax-deferred status of Canadian Registered Retirement Savings Plans (RRSPs) and American Individual Retirement Accounts (IRAs)
Different Tax Treatment, Depending on Which Direction You Move: from Canada to the US, or from the US to Canada:
The table below shows you how you could be treated differently, depending on which country you move to.
Moving from Canada to the US: Know the US Tax Rules
If you move from Canada to the United States, you’ll need to know these tax rules:
- Canada departure tax is triggered the day you leave. The US and Canada share exit and entry data, so both countries will know if and when you move.
- When you move to the US, if you meet the requirements of the Substantial Presence Test, you’ll have to report your worldwide income and pay any US taxes due.
- You may need to report foreign accounts to the IRS on Form 8938, including bank accounts and investments like TFSAs and RRSPs.
- If you don’t report your foreign accounts by the IRS filing deadline, you may need to use the Streamlined Filing Compliance Procedures to catch up on your US taxes and try to minimize or eliminate penalties.
Moving from the US to Canada
If you move from the United States to Canada, you usually still have to file taxes with the IRS on your worldwide income.
If you have an LLC or S-corp in the US, you may need to consult with a cross-border tax services accountant to see if you should restructure prior to your move. Canada doesn’t recognize S-corps or LLCs.
If the CRA classifies your business as a corporation, you might not be able to claim foreign tax credits. Some US businesses benefit from changing to a C-corp or sole proprietorship.
Cross-Border Commuters and Dual Residents
If you’re a cross-border commuter living in Canada and working in the United States, you could receive a W-2 or T-4. The US often gets priority to tax you in these situations. Since Canada doesn’t withhold taxes from your pay, the CRA could try to claim withholding on your US paycheck, which can cause problems with your employer.
Keep in mind that some US states also levy state income taxes, and may not follow the US-Canada tax treaty at all. For example, California requires you to report your Canadian retirement accounts. This requirement is in addition to any federal filing requirements you may have with the IRS if you reside in Canada while working in the United States. The US-Canada tax treaty is only relevant to federal income taxes, not state income taxes you may owe an individual state.
If both Canada and the US decide to claim you as a tax resident while you work in the US, you could be liable for taxes in both countries. You’ll want to get help from a cross-border tax specialist to make sure you aren’t taxed twice on the same income.
How the US-Canada Tax Treaty Prevents Double Taxation
The US-Canada tax treaty includes provisions that may allow you to avoid double taxation by claiming foreign tax credits. If both countries consider you a tax resident, the treaty provides tie-breaker rules to keep you from falling victim to double taxation.
US-Canada Tax Treaty: Frequently Asked Questions
Do I Have to Pay Double Tax in both Canada and the US?
You do not have to pay double tax in both Canada and the US. But you may need to work with a cross-border tax services accountant to make sure you file the proper forms in order to avoid double taxation.
How Do Taxes Work if You Live in Canada and Work in the US?
If you live in Canada and work in the US, both countries may try to claim you as a resident. Canada will determine your residency based on your residential ties, and the US will use the Substantial Presence Test, including the 183-day rule, to determine if they can tax your income. The US-Canada tax treaty includes a tie-breaker rule that is designed to help determine your true residency.
Which States Do Not Follow the US-Canada Tax Treaty?
The following states do not follow the US-Canada tax treaty: Alabama, Arkansas, California,
Connecticut, Georgia, Hawaii, Kansas, Kentucky, Maryland, Mississippi, Montana, New Jersey, North Dakota, and Pennsylvania. If you work or reside in one of these states, you’ll want to learn the tax laws of that state, in addition to your federal filing requirements.
Does the Treaty Mean I Do Not Have to File in Both Countries?
The treaty does not mean you don’t have to file in both countries. It depends on your unique tax situation. For example, if you’re a US citizen or permanent resident, you may still have to report your worldwide income to the US, no matter where you live. In some circumstances, both Canada and the US could try to claim you as a tax resident.
Minimize Your Risk Before You Move Across Borders
Thinking about moving between the US and Canada this year? You can get FREE answers to all of your cross-border tax questions. Request a FREE consultation with cross-border accountant and Sr. Tax Manager Kelly Sheng to learn more about the US-Canada tax treaty and how you can avoid double taxation.