The Double Tax Conflict: Worldwide Income
Moving to Canada does not relieve U.S. citizens or green card holders of their U.S. tax obligations. The U.S. and Canada have different systems that overlap, creating a complex compliance situation:
- U.S. Citizenship-Based Taxation: The IRS taxes all U.S. citizens and green card holders on their **worldwide income**, regardless of where they reside or where the money is earned. You must file Form 1040 every year.
- Canadian Residence-Based Taxation: The Canada Revenue Agency (CRA) taxes tax residents on their **worldwide income**. Once you establish ties (a home, spouse, or employment) in Canada, you must report global earnings to the CRA.
- Double Taxation Relief: The **U.S.-Canada Tax Treaty** provides relief through the **Foreign Tax Credit (FTC)** and the **Foreign Earned Income Exclusion (FEIE)**. Since Canadian tax rates are generally higher than U.S. rates, most expats utilize the FTC to reduce their U.S. tax liability to $0.
The Tax-Free Savings Account (TFSA) is a tax-free vehicle in Canada, but the **IRS does not recognize its tax-exempt status**. To the IRS, a TFSA is treated as a taxable foreign trust or brokerage account. Any interest, dividends, or capital gains earned inside a TFSA are **taxable in the U.S. annually**. Furthermore, holding Canadian mutual funds or ETFs inside a TFSA triggers complex **PFIC (Passive Foreign Investment Company) reporting (Form 8621)**, costing hundreds in accounting fees. Avoid opening a TFSA if you are a U.S. taxpayer.
Treatment of 401(k), IRA, and RRSPs
The tax treaty defines clear protocols for retirement assets to prevent double taxation:
- 401(k) / Traditional IRA: Canada respects the tax-deferred status of your 401(k) or Traditional IRA. You do not pay Canadian taxes on the growth inside these accounts while you live in Canada. However, withdrawals are taxed as income in both countries (with Foreign Tax Credits offsetting double taxes).
- Roth IRA: To maintain its tax-free status in Canada, you **must file a one-time treaty election** with the CRA before April 30 of the year after you move. If you do not file this election, the growth inside your Roth IRA becomes taxable in Canada.
- RRSP (Registered Retirement Savings Plan): The IRS recognizes Canadian RRSPs as tax-deferred accounts. You do not need to file special forms (Form 8891 is obsolete) to defer U.S. tax on RRSP growth.
Filing Deadlines & Reporting Thresholds
Expats must coordinate filing schedules and report foreign financial assets when thresholds are breached:
| Form Name | Filing Threshold | Due Date |
|---|---|---|
| CRA T1 Return (Canada Income) | Establishing tax residency in Canada | April 30 / May 2 |
| IRS Form 1040 (US Income) | Standard IRS filing thresholds (worldwide) | June 15 (Automatic extension for expats) |
| FBAR (FinCEN Form 114) | Aggregate non-US accounts exceed $10,000 USD at any point | October 15 (Automatic extension from April 15) |
| FATCA Form 8938 | Foreign assets exceed $200,000 USD (single living abroad) | June 15 (filed with Form 1040) |
This guide compiles official double taxation treaty parameters and asset reporting requirements sourced directly from:
• Internal Revenue Service (IRS) Taxpayers Living Abroad Guide: irs.gov/expat-taxpayers
• Canada Revenue Agency (CRA) Newcomers to Canada Tax Guide: canada.ca/cra-newcomers-tax