Tax Guide for Dual Citizens of Canada and the U.S.

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Shifting to a new country has its advantages and disadvantages. You need to know their administrative, financial, and tax system. And if you are a dual citizen of the U.S. and Canada, the rules get a little more complicated. The U.S. follows a citizen-based taxation, while Canada follows a residence-based taxation. Thankfully, they both have the same tax year from January 1 to December 31, so no confusion there.

If you are an American citizen working in Canada, you fall under the tax ambit of both countries and have to file dual taxes. While you are required to file taxes in both the U.S. and Canada, you don’t have to pay taxes in both countries. The U.S.-Canada tax treaty has some tools to avoid double taxation.

This whole dual citizenship gets complicated. Hence, we have touched upon a few basic concepts on how taxation works for dual citizens.

Where do Dual Citizens File Taxes?

You may have been born in the U.S. but lived all your life in Canada. But your birthplace makes you a U.S. citizen, creating an obligation to file taxes in the U.S., even if you don’t stay or work there. Any worldwide income a U.S. citizen earns must be reported to the Internal Revenue Service (IRS).

Since you have been working and living in Canada, you must file taxes and report your Canadian and worldwide income to the Canada Revenue Agency (CRA). Canada requires residents to file taxes, irrespective of their citizenship.

Filing taxes in one country is tough. Filing them in two countries is a challenge. It is better to seek professional help from someone well-versed in both countries’ tax laws.

Financial Reporting Obligations of U.S. Dual Citizens Living in Canada

Now that we know that U.S. citizens residing in Canada must file taxes in both countries, the next question is what documents they must file. Americans living in Canada must file IRS Form 1040 annually on their worldwide income by April 15 if they owe U.S. tax and by June 15 if they don’t.

If you have a foreign bank account with a balance of $10,000 or more, you have to file two forms:

  • Foreign Account Tax Compliance Act (FATCA) Form 8938 to the IRS
  • Foreign Bank Account Report (FBAR) to the U.S. Treasury Department’s Financial Crimes and Enforcement Network.

These are mandatory filing requirements to prevent tax evasion. Failing to file or incorrectly filing FBAR could attract up to a $10,000 penalty. The filing deadline is April 15, which could be extended to October 15 if the IRS permits.

Tax Benefits for Most Dual Citizens

After you have completed your filing requirements, let’s come to the tax obligations. While you may be required to file taxes in both countries, you pay tax in only one country and exclude that income from your taxable income in another country. That is called the Foreign Earned Income Exclusion, or FEIE.

Like any tax benefit, it has an eligibility requirement and a maximum limit. If you have been earning and paying taxes in Canada, you can deduct up to $126,500 from your U.S. taxable income under FEIE for the 2024 tax year. To qualify for the exclusion, you should pass one of the two tests below:

  • Bona Fide Residency test determines you have a residence abroad and have no intention of returning to the U.S. The primary qualifier is you must have lived in a foreign country for the entire tax year.
  • The Physical Presence Test only looks at the number of days you lived outside the U.S. To pass this test, you should have lived overseas for 330 full days (full day = 24 hours starting from midnight), excluding the time in international air space. The eligibility can get tricky at times. Hence, it is best to get it confirmed with a tax consultant.

Foreign Tax Credit: You can use FEIE or the foreign tax credit (FTC) that helps U.S. citizens deduct their U.S. tax with any income tax paid in another country on a dollar-for-dollar basis. This tax can be on income, wages, dividends, interest, and royalties.

Your tax brackets in the U.S. and Canada could influence your decisions on how to file your U.S. taxes. A professional tax expert can help you optimize your dual citizenship for tax planning.

Tax Treatment of Canadian Tax-Free Investments in the U.S.

Apart from the active income, the CRA offers several tax-free savings accounts, which may be taxable in the U.S. In Canada, you can grow your investment in a Tax-Free Savings Account (TFSA) and withdraw the income tax-free without reporting it to the CRA. However, dual citizens must report their TFSA contribution and income in their FBAR filing as a foreign grantor trust with a U.S. owner. This income is subject to U.S. taxes. Similarly, you must report and pay tax on contributions and income in a Registered Education Savings Plan (RESP) or a Registered Disability Savings Plan (RDSP).

However, dual citizens can grow tax-free investments in a Canadian Registered Retirement Savings Plan (RRSP) or Canadian Registered Retirement Income Fund (RRIF). They only have to report the contributions in their FBAR filing. The RRSP withdrawals are taxable in Canada, but you can claim FTC if you paid tax on that income in Canada.

Tax laws are already complex, and cross-border adds another layer of complexity. You need to ensure you are tax-compliant in both countries to avoid penalties. At the same time, you need to prepare a tax plan according to your unique circumstances. What may be tax-free in Canada may not be in the U.S.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You File Your Taxes in the U.S. and Canada

A professional tax expert well-versed in both countries’ tax systems and laws could help you plan and file your taxes accurately. To learn how Edelkoort Smethurst CPAs LLP can provide you with the best cross-border tax expertise, contact us online or by telephone at 905-517-2297.