There are many reasons why over 10,000 Americans make the move north to Canada every year, with the most common being looking fora better quality of life, with Canada’s lower crime rates, affordable, high-quality healthcare and education. Canada is also a top retirement destination.
Americans who move to Canada don’t escape their obligations to the IRS though, and tax planning should be an integral part of planning your move.
In this article, we’ll look at the U.S. tax requirements for Americans moving to Canada, and how America’s and Canada’s tax systems intersect.
Tax filing and reporting for Americans living in Canada
Americans who are physically present in Canada for more than 182 days in a calendar year, or who have residential ties to Canada (such as a home, family, or employment), have to file Canadian taxes that year.
As an American citizen or Green Card Holder, they also have to file U.S. taxes. Both countries tax global income.
The U.S. – Canada Tax Treaty
The U.S. – Canada Tax Treaty doesn’t prevent Americans in Canada from filing U.S. taxes, however it allows them to claim tax credits to avoid double taxation.
Depending on your income types and where your income is sourced, because Canadian income taxes are generally higher, it normally makes sense to file Canadian Taxes first and then claim U.S. tax credits by filing IRS Form 1116 at the same time as Form 1040.
An alternative remedial provision is the Foreign Earned Income Exclusion, which can be claimed on IRS Form 2555.
The tax treaty also lets the two countries’ governments share Americans’ tax and banking information, and allows mutual enforcement of tax penalties.
There is a special provision in the treaty to prevent double taxation of students and trainees, which can be claimed on IRS Form 8833 if applicable.
If you have U.S. Roth IRAs, you can also claim a tax treaty provision to ensure that your withdrawals stay tax free in Canada.
Filing dates for U.S. and Canadian Taxes
The Canadian tax filing deadline is April 30 (or June 15 if you’re self-employed), with no extension, while Americans living in Canada receive an automatic extension until June 15 to file their U.S. taxes, and they can request a further extension to October 15 should they need to. This normally means that it makes sense to file your Canadian taxes first, although there are some circumstances where both returns should be filed simultaneously.
Some Americans in Canada may also have to continue filing U.S. State taxes in the State where they last lived if they retain ties there such as financial accounts, property, or dependents, depending on each State’s rules.
Account and asset reporting
Both Canada and the U.S. have foreign asset reporting requirements.
For the U.S., if you have a total of over $10,000 in accounts outside the U.S. at any time in a year, you have to file FinCEN Form 114 to report them, also known as an Foreign Bank Account Report, or FBAR. FBAR reporting includes all of your foreign registered bank, investment, and pension accounts, as well as business accounts and any other accounts you have signatory authority over.
If you have over $200,000 of foreign financial assets at the end of a year, or $300,000 at any time in a year, you also have to report them on IRS Form 8938.
If you do have financial assets in the U.S., it’s worth reviewing them for both American and Canadian tax considerations before you move to Canada.
You should also review your residential property in the U.S., as after two years not living in a property you lose the U.S. principal residence capital gain tax exemption if you sell it.
Also bear in mind that some Canadian pension plans and mutual funds, and significant investments in or ownership of Canadian companies, have onerous U.S. reporting requirements, even if there’s no additional tax implication (although there may be).
Before considering investing in mutual funds in Canada, always consult a U.S. expat tax specialist, as the reporting requirements can be prohibitive.
Lastly, note that U.S. LLCs aren’t treated as pass-through entities in Canada the way they are in the U.S., so they are liable to normal Canadian corporation reporting and tax requirements. As such, you should review any U.S. LLCs you have before you move.
Social security tax agreement
Americans working in Canada can benefit from the U.S. – Canada Totalization Agreement, a treaty that prevents double social security taxation.
This means that social security contributions made in either country count towards social security entitlement in whichever country you retire in. It also means that you won’t pay both U.S. and Canadian social security taxes after you move to Canada, which is welcome news for Americans who continue working for a U.S. employer in Canada, or those who are self-employed.
Everyone’s financial situation is slightly different, and because the U.S. taxes its citizens who live abroad and filing from abroad is typically more complex to avoid double taxation and report foreign income and accounts, always seek advice from a U.S. expat tax specialist before you move abroad, or, if too late, as soon as possible.
This will help you ensure you are compliant while minimizing your tax liability.
If you’ve been living in Canada for a while without filing U.S. taxes, you may be able to access an IRS amnesty program such as the Streamlined Procedure to catch up without facing penalties.
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: