The U.S.-Canada Income Tax Treaty, which was signed in 1980 and updated in 2007, addresses taxation issues for Americans living in Canada and Canadians living in the United States. However, the benefits of the treaty are limited for Americans living in Canada. This is because the treaty contains a so-called ‘Saving clause’ that allows the U.S. to tax Americans in Canada normally, regardless of the rest of the treaty.

U.S. filing rules for Americans living in Canada

The U.S. maintains a citizenship-based taxation system. This means that all U.S. citizens (and Green Card holders) have to file U.S. taxes every year, wherever they live, reporting their worldwide income.

This also includes dual citizens who are living outside the United States, and anyone with the right to U.S. citizenship (for example, a person who has a parent with U.S. citizenship).

American who reside outside the U.S. have until June 15 to file, to give them time to file foreign taxes first. Americans who spend at least 180 days per year in Canada have to file Canadian taxes, too, by April 30.

Americans in Canada also have to report any business interests to Uncle Sam, as well as Canadian-registered financial accounts such as bank, investment, and individual pension accounts, based on minimum aggregated balance thresholds per person.

The U.S. – Canada Tax treaty

While the U.S.-Canada Tax Treaty doesn’t stop Americans in Canada having to file both American and Canadian taxes, it does contain some significant provisions.

There are treaty clauses that may benefit some Americans in Canada with certain types of income, such as dividends, pensions, interest, and royalties. There are also provisions relating to students, entertainers, and athletes.

The treaty also specifies how Americans in Canada can avoid double taxation by claiming U.S. tax credits based on Canadian income taxes that they’ve paid. Because Canadian income tax rates are usually higher than U.S. rates, and both countries tax worldwide income, doing this is likely to greatly reduce or even eliminate your U.S. tax bill, and prevent double taxation.

To claim these tax credits, you have to file IRS Form 1116 within your U.S. tax return.

On Form 1116, you provide details of the Canadian income tax you’ve paid and use IRS conversion rates to calculate the value of U.S. tax credits you can claim in U.S. dollars.

If the value of U.S. tax credits you can claim exceeds how much U.S. tax you owe, as is most often the case, then you can carry forward (or back) your excess tax credits to reduce future or past U.S. tax bills.

There are other provisions you can claim to reduce your U.S. tax bill, too, such as the Foreign Earned Income Exclusion and the Foreign Housing Exclusion. American parents living in Canada can also claim the refundable U.S. Child Tax Credit.

The U.S. – Canada Tax Treaty also contains information sharing provisions, meaning the U.S. and Canadian governments share taxpayer and banking information, and there is also a mutual penalty enforcement mechanism.

The U.S. – Canada Totalization Treaty

A different tax treaty exists to prevent double social security taxation between the U.S. and Canada. Known as a Totalization Agreement, the treaty establishes the country to which Americans residing in Canada should pay social security taxes, depending on how long they plan to be residing in Canada. Furthermore, the treaty benefits Americans who have worked part of their lives in the U.S. and part in Canada, allowing them to sum the years of social security contributions made in both countries to a single entitlement in the country where they choose to retire.

Seek advice

Filing U.S. taxes as an American living in Canada is complex. To ensure that you successfully navigate the two countries’ tax systems to stay compliant in both and file to your maximum benefit, it’s always advisable to seek advice from an expat tax specialist with experience in cross-border taxes. If you’ve been living in  Canada for a while but not filing a U.S. tax return, seek advice regarding amnesty programs such as the IRS Streamlined Procedures.

Jeff Chaney is a Managing CPA at Bright!Tax, and a leading expert in US taxes for Americans living abroad. Bright!Tax is a multiple award-winning US tax services provider for American expats.

If you have any questions about or require assistance with U.S. taxes for Americans in Canada, fill out this form to get in touch with a representative from Bright!Tax: