How do Americans in Canada file taxes in both countries?

Do you have to file in both countries?

Usually, yes. The US taxes citizens and green card holders on worldwide income wherever they live, and the filing rules are generally the same as for people living in the US (IRS). Canada taxes its residents on worldwide income too (CRA Folio S5-F1-C1).

The tax treaty does not change this. Its "saving clause" lets the US tax its citizens as if the treaty did not exist, apart from listed exceptions (IRS Pub 597). So the same income goes on both returns: in Canadian dollars on the Canadian one, in US dollars on the US one. The US credits and exclusions that prevent double tax are available only if you file (IRS).

You must file a US return if your worldwide gross income reaches the filing threshold for your filing status, counting income you will exclude as foreign earned income. If you are self-employed, you must also file once net self-employment earnings reach US$400 (IRS Pub 54).

Green card holders are US tax residents until the card is revoked or found abandoned (IRS Pub 915). One who is also a Canadian resident may be able to use the treaty's tie-breaker rule to file as a US nonresident, on Form 1040-NR with Form 8833 (IRS Pub 597). If you held the card in at least 8 of the last 15 years, doing so can count as ending your US residency under the expatriation rules, which means filing Form 8854 and possibly owing the expatriation tax (Form 8854 instructions). Claiming any treaty benefit as a Canadian resident to cut your US tax, such as the US Social Security exemption, counts as this choice. The IRS regulation also warns that filing as a nonresident may affect whether you keep the green card (26 CFR 301.7701(b)-7).

How does each country avoid taxing the same income twice?

Mostly with foreign tax credits. Which country gives way depends on where the income comes from.

On the Canadian return, the foreign tax credit for each country is the lower of the foreign income tax you paid and the Canadian tax on that income. The federal credit is figured on Form T2209 and the provincial one on Form T2036; Quebec has its own rules (CRA line 40500). The credit covers only income from outside Canada, so US tax on a Canadian salary gets no Canadian credit. The US gives way on that income instead.

The cap for US citizens. On US-source income, Canada's credit is limited to the US tax that a Canadian resident who is not a US citizen would pay. For US portfolio dividends, that is 15%. The US then credits the Canadian tax left after Canada's credit against the rest of its tax, and treats the income as Canadian-source as far as needed for that credit to work (treaty Article XXIV, paragraphs 4 to 6).

On the US return, Canadian federal and provincial income taxes both count toward the credit (treaty Article XXIV, paragraph 7). Wages go on a general-category Form 1116 and most interest and dividends on a passive-category one. Credit you cannot use carries back 1 year and forward 10 years (Form 1116 instructions).

Foreign tax credit or foreign earned income exclusion?

For earned income, the US return offers a choice: credit the Canadian tax, or exclude the income up to US$132,900 per qualifying person. You can exclude wages and claim the credit on other income, but not both on the same income (Form 2555 instructions).

Sources: IRS FEIE, IRS foreign earned income, IRS Pub 54, Form 2555 instructions.

Switching has a cost. Once chosen, the exclusion stays in force, and you must claim it again in each later year you have foreign earned income. Not claiming it, revoking it with a statement, or claiming the foreign tax credit for that income, the additional child tax credit or the earned income credit in a later year all count as revoking. After that, you cannot choose the exclusion again for 5 tax years without IRS approval (IRS Pub 54). Compare several years before you choose.

What changes if you are self-employed?

Canada. Report business income on Form T2125 (CRA) and pay the whole CPP contribution (QPP in Quebec), both the employee and employer shares (Canada.ca). You have until June 15 to file but must pay by April 30 (CRA).

US. Report the same business on Schedule C. Under the US–Canada Social Security agreement, a self-employed person who lives in Canada is covered only by the Canada or Quebec Pension Plan, not US Social Security. To prove it, request a certificate of coverage (form CPT56 from Canada, or form QUE/USA 101 from Retraite Québec) and attach a copy to your US return every year (SSA). The foreign earned income exclusion does not reduce self-employment tax, so it is the agreement that removes it (IRS Pub 54).

When are the returns due?

The automatic US extension applies if, on April 15, you live outside the US and Puerto Rico and your main place of work is outside them too. If you need time to meet the exclusion's residence or days test, Form 2350 can extend the date further (IRS Pub 54). Canada may require instalments when little or no tax is withheld, as with business income or US Social Security. They apply when your net tax owing is more than C$3,000 (C$1,800 for Quebec residents) this year and in either of the two years before (CRA). A CRA due date that falls on a weekend or public holiday moves to the next business day (CRA). FBAR dates: IRS.

Which reporting forms catch people?

These forms report assets and gifts, not tax, so they are easy to miss when no tax is owed.

• FBAR (FinCEN Form 114). Required when your accounts outside the US together exceed US$10,000 at any time in the year (FinCEN). RRSPs count (IRS Pub 597). Filed with FinCEN, not with the tax return. See Foreign account reporting.
• Form 8938. Filed with the US return when your tax home is in Canada, you pass a living-abroad test, and your foreign financial assets are more than US$200,000 at year-end or US$300,000 at any time if single or married filing separately; US$400,000 or US$600,000 on a joint return. The test is 330 full days outside the US in 12 months, or, for US citizens only, bona fide residence abroad for a full tax year. If you do not pass it, the thresholds for people living in the US apply: US$50,000 and US$75,000, or US$100,000 and US$150,000 on a joint return (Form 8938 instructions).
• RRSPs, RRIFs and other registered accounts. Income inside an RRSP or RRIF is taxable in the US each year unless you elect to defer it. If you have filed your US returns and never reported the plan's internal income, you are generally treated as having elected (IRS Pub 597). TFSAs, RESPs and the rest: see Canadian registered accounts on a US return.
• Canadian mutual funds and ETFs. A foreign corporation whose income or assets are mostly passive is a PFIC. A Canadian fund can meet that test, and each PFIC generally needs its own Form 8621 (Form 8621 instructions). Funds held inside an RRSP or RRIF generally need no Form 8621 while the treaty deferral applies (26 CFR 1.1298-1(c)(4)).
• Form 3520 (gifts and inheritances). Required when you receive more than US$100,000 in the year from someone who is not a US citizen or resident, or from a foreign estate, such as a Canadian parent's estate. Gifts from related givers are combined. It is filed separately from the return, and the penalty for missing it is a share of the gift's value (IRS).
• Form T1135 (Canada). Reports your US property, such as US bank and brokerage accounts and US shares, when its total cost is more than C$100,000 at any time in the year. It is not required for the year you first became a Canadian resident (CRA). See Foreign property and affiliate reporting.

What happens when you sell your Canadian home?

Canada does not tax the gain if the home was solely your principal residence for every year you owned it. You must still report the sale and designate the home on Schedule 3 and Form T2091(IND); a late designation may bring a penalty (CRA).

The US taxes the gain unless its exclusion covers it. If you owned the home and lived in it as your main home for at least 2 of the 5 years before the sale, you may be able to exclude up to US$250,000 of gain, or US$500,000 on a joint return that meets the joint rules. You must also meet the IRS's other tests, such as not having excluded gain on another home in the 2 years before and not being subject to the expatriation tax (IRS Pub 523). The law does not limit this to homes in the US (26 U.S.C. 121).

Figure the US gain in US dollars, converting each amount at the exchange rate when you paid or received it (IRS). If the Canadian dollar rose while you owned the home, the US-dollar gain is larger than the Canadian one; if it fell, smaller. When Canada exempts the sale, there is no Canadian tax to credit against a US gain above the exclusion.

How are Social Security, CPP and OAS taxed?

US Social Security paid to a Canadian resident is taxable only in Canada (treaty Article XVIII, paragraph 5). This rule is an exception to the saving clause, and the IRS confirms US citizens living in Canada are exempt from US tax on these benefits (IRS Pub 915). A green card holder gets the exemption only by claiming to be a treaty resident of Canada. That is the tie-breaker choice described above: all US tax is then figured as a nonresident, on Form 1040-NR with Form 8833, with the same expatriation risk (26 CFR 301.7701(b)-7). On the Canadian return, report the full amount on line 11500 and deduct 15% of it on line 25600. The deduction is 50% if you have lived in Canada and received the benefits continuously since before January 1, 1996 (CRA).

CPP and OAS are different. The treaty's Social Security rule covers benefits paid to a resident of the other country, so it does not reach Canadian benefits paid to you in Canada. Canada taxes them. The IRS treats foreign social security benefits as taxable like annuities unless a treaty exempts them or treats them as US Social Security (IRS Pub 915). The Canadian tax on them can count toward the US foreign tax credit.

Example

Illustrative figures only. Maya is a single US citizen who lives and works in Toronto. For the year she has:

• A salary of C$120,000 from a Canadian employer, about US$88,000 at an illustrative exchange rate
• Canadian bank accounts and an RRSP, together peaking at about US$51,000
• A US brokerage account with a cost of C$130,000, paying US$2,000 of US dividends

With Form 2555 instead, she could exclude the whole salary, since it is under the limit. She would then get no credit for the Canadian tax on it, and her dividends would be taxed at the rates that apply as if the salary were included.

Different for you?

• You have not filed US returns or FBARs for past years. See Catching up on missed US returns.
• You hold a TFSA, RESP or other registered plan. See Canadian registered accounts on a US return.
• Your accounts or assets are near the reporting thresholds. See Foreign account reporting and Foreign property and affiliate reporting.
• You run your business through a US company or LLC. The US rules for a US owner differ from those for a Canadian owner. See cross-border tax.
• Your spouse is not a US citizen or green card holder. You usually file as married filing separately. A return is then due on almost any gross income, and the single Form 8938 thresholds and home-sale exclusion apply. Head of household may be open if you support a qualifying child or relative. You can instead choose to treat your spouse as a US resident and file jointly, but their worldwide income then goes on the US return every year until the choice ends (IRS Pub 54). A common-law partner is generally not a spouse for US tax (IRS Pub 501). See cross-border tax.
• You work from Canada for a US employer. Your pay is still foreign earned income, because the work is done in Canada. Under the agreement your pay is generally covered only by the CPP or QPP, but the employer needs a certificate of coverage (form CPT56, or QUE/USA 101 in Quebec) to stop US Social Security (SSA). To cut US income tax withholding, a US citizen using the exclusion can give the employer Form 673; with the foreign tax credit, Form W-4 can be adjusted instead (IRS Pub 54). See cross-border tax.
• You have a US IRA, Roth IRA or 401(k). Canada does not tax income inside a traditional IRA until you withdraw it. It taxes a Roth IRA's income every year unless you file a one-time treaty election with the CRA. A new contribution while you live in Canada, or a conversion from a traditional IRA or 401(k), makes part of the Roth IRA taxable in Canada for good. Some 401(k), SEP and SIMPLE plans with no employer contributions may need the election too (CRA Folio S5-F3-C1). See cross-border tax.
• You moved to or left Canada during the year, or plan to give up US citizenship or a green card. These change what you file for that year. See cross-border tax.
• You live in Quebec. You file a separate Quebec return as well as the federal one (Revenu Québec), and Quebec has its own foreign tax credit. See cross-border tax.
• You hold a green card and are weighing the treaty tie-breaker, or you own a Canadian corporation. These need individual advice. See cross-border tax.