Tax considerations: Americans living in Canada

James Smeaton, CPA, CA, Senior Wealth Consultant

Tax Considerations is a series of articles designed to help you navigate the complexities of cross-border taxes. See Tax considerations: Canadian tax treatment of U.S. retirement plans for information to help you understand the tax requirements of U.S. and Canadian tax systems.

Under U.S. tax law, U.S. citizens, Green Card holders, and U.S. residents are generally required to pay taxes on their worldwide income, regardless of whether or not they live in the U.S. In Canada, taxation is based on the concept of residency for tax purposes, not citizenship. If Canada considers you a resident for tax purposes, you'll be taxed by Canada on your global income. So, Americans (including Green Card holders) who are also Canadian tax residents will have to navigate both the U.S. and Canadian tax systems. This article presents some important challenges and considerations.

How do I know if I am a Canadian Tax Resident?

Tax residency in Canada is determined on a case-by-case basis. The more “ties” you have to Canada, the more likely you are to be considered a resident of Canada for tax purposes¹. Common primary and secondary ties the Canada Revenue Agency (CRA) looks at when determining tax residency, include:

1. Primary Ties
   1. A home in Canada
   2. A spouse or common-law partner in Canada
   3. Dependants in Canada
2. Secondary Ties
   1. Personal property in Canada, such as a car or furniture
   2. Social ties in Canada, such as memberships in Canadian recreational or religious organizations
   3. Economic ties in Canada, such as Canadian bank accounts or credit cards
   4. A Canadian driver’s licence
   5. A Canadian passport
   6. Health insurance with a Canadian province or territory

Please note, secondary ties on their own may not be sufficient to determine tax residency.

Canadian tax residency: An example

Let’s say you’re a U.S. citizen or Green Card holder that moves to Canada with your spouse and children for a new job on August 1, 2023. You could potentially be considered a Canadian tax resident as of August 1, 2023, and taxable by Canada on your worldwide income from this date. Under U.S. tax law, you would also be taxable on your worldwide income by the U.S. for the entire year regardless of where you live.

However, an American (including a Green Card holder) living in Canada may not be subject to double taxation. A foreign tax credit may generally be claimed on your U.S. tax return for Canadian taxes paid on Canadian income, or vice versa on the Canadian return for U.S. taxes paid on U.S. income earned after the date you moved to Canada. Tax treaty provisions may also provide relief.

Be cognizant that the rules for determining Canadian tax residency are separate from those governing residency when officially immigrating. You may be considered a non-resident under Canadian citizenship and immigration rules but still considered a Canadian tax resident.

How income taxes work in Canada

• Tax filing frequency: If you're considered a tax resident, you will be required to file a tax return with the CRA annually to report your global income. 
• Taxes due: For most taxpayers, the CRA tax filing due date is April 30, but if you, your spouse, or common-law partner are self-employed, your return is due by June 15. However, if you owe taxes, you are still required to submit payment by April 30^th to avoid penalties. 
• Tax year: The Canadian tax year aligns with the calendar year, starting on January 1^st and ending on December 31^st.
• Federal tax rates and income brackets: Federal tax rates and brackets for individuals are adjusted annually for inflation. For 2024 the rates and taxable income brackets are:
  • 15% on taxable income up to $55,867, plus
  • 20.5% on the portion of taxable income over $55,867 up to $111,733, plus
  • 26% on the portion of taxable income over $111,733 up to $173,205, plus
  • 29% on the portion of taxable income over $ 173,205 up to $246,752, plus
  • 33% on the portion of taxable income over $246,752
• Provincial and Territorial tax rates: In Canada, provincial and territorial income taxes are charged in addition to federal income taxes and the tax rates vary across Canada. And except for Quebec, all provinces share the Canadian governments definition of a taxable income and tax you based on where you fall within a tax bracket. It's also important to note that your provincial tax rate is determined by the province you live in at the end of the tax year, which is generally December 31.

What is the U.S./Canada Tax Treaty?

Canada and the U.S. have an income tax treaty (convention) to prevent double taxation for U.S. citizens working and living in Canada and Canadian tax residents with U.S. income. The treaty helps prevent individuals from being taxed twice, once by Canada and once by the U.S., on certain types of income.

Canadian taxation

If you’re an American with residential ties to Canada, we encourage you to be familiar with the tax implications of Canadian and U.S. retirement plans, savings accounts, and gains from your investments, including, notably, if you maintain a "principal residence" in Canada under Canadian tax law. We also encourage you to seek advice from a qualified tax and legal professional before acting on this information.

Deemed acquisition

Under Canadian tax law, upon becoming a Canadian tax resident, your capital assets are considered to be disposed of and then immediately re-acquired at their fair market value (FMV)². This establishes the cost base for your assets as of the date you became a Canadian tax resident and sets the Canadian basis for future tax calculations. This is not a taxable event.

As a U.S. citizen and Canadian tax resident, when you sell these assets, you may be required to report the disposition on both your U.S. and Canadian tax returns. Under U.S. tax rules, the cost basis of the asset generally doesn't change when you become a Canadian tax resident, requiring you to keep track of separate cost bases for U.S. and Canadian taxes.

Registered Retirement Savings Plan (RRSP)

Canadian RRSP contribution room is calculated as 18% of earned income reported on your previous year’s Canadian tax return, up to a maximum amount indexed for inflation ($30,780 for 2023 and $31,560 for 2024).

RRSPs are covered under the U.S. – Canada Tax Treaty³. After you have accumulated RRSP contribution room and contributed to an RRSP, its earnings should remain tax deferred for both U.S. and Canadian tax purposes until you make a withdrawal. When a withdrawal is made, the amount must be reported on your Canadian tax return. Unlike in Canada, RRSP contributions aren’t tax-deductible under U.S. tax law. This means for the U.S. you may need to only report the earnings portion of your RRSP, not the contribution amount. It’s recommended that you try to track your earnings separately from contributions to ensure accurate U.S. tax filing. Canadian taxes paid on RRSP withdrawals may also be claimed as a foreign tax credit on a U.S. tax return to avoid double taxation.

Traditional IRA, 401(K), and Roth IRA plans

Traditional IRA and 401(K) plans are considered foreign retirement arrangements in Canada and may be covered under the U.S. – Canada Tax Treaty⁴. This means funds in the IRA or 401(K) remain tax deferred under both Canadian and U.S. rules until withdrawn by the account holder.

A Roth IRA in the U.S. is similar (but not identical) to a TFSA in Canada. Under U.S. tax rules, contributions to a Roth IRA are not tax deductible, but earnings and gains are generally exempt from tax and distributions from a Roth IRA are not required to be included as income. That said, the Roth IRA does not automatically enjoy favourable treatment with Canadian tax rules, and income from a Roth IRA could be considered taxable in Canada in the year earned. A one-time election can be made to treat the Roth IRA as a pension under the U.S. – Canada Tax Treaty⁵. Once this is in place, no contributions can be made to the Roth IRA while a Canadian resident but earnings from the Roth IRA may not be subject to Canadian tax, provided they are not subject to tax in the U.S.

529 Education Plans

An IRC 529 Education Plan, or Qualified Tuition Program (QTP), is the U.S. equivalent of a Registered Education Savings Plan (RESP), providing a tax-efficient way to save for your children’s or grandchildren’s education. There is nothing under the Canadian Income Tax Act that provides for a tax-preferred status of 529 plans. Depending on how the plan is structured, it may be considered a deemed resident trust in Canada.

Tax-Free Savings Account (TFSA)

Canadian tax residents over the age of 18 can open a TFSA and are allowed to contribute the maximum amount each year. The annual contribution amount is not prorated in the year you become a tax resident of Canada, so, for example, if you moved to Canada in November 2023, you would still be allowed to make the full TFSA contribution ($6,500 for 2023 and $7,000 for 2024).

There is nothing under U.S. tax law or the U.S. – Canada Tax Treaty that extends the tax-free benefit of TFSAs for U.S. tax reporting. Additionally, the way some TFSAs are structured in Canada closely resembles the definition of a foreign trust under U.S. tax rules⁶. As a result, TFSA earnings may be taxable on your U.S. return. If it is considered to be a non-U.S. trust, there are additional compliance filings to be completed each year, which may be expensive to engage a professional to prepare. It’s important to note that failure to adhere to filing requirements can also result in large penalties.

If you depart Canada, and are no longer a tax-resident, any new TFSA contributions may be subject to a 1% penalty in Canada every month the new amount stays in your account. However, the previous contributions you made before leaving can remain in the TFSA without penalty and should not be subject to Canadian taxation.

First Home Savings Account (FHSA)

The FHSA is a new account available to Canadians to help Canadians save for their first home purchase. However, the FHSA is likely not considered a tax-advantaged account for U.S. purposes. So, Americans (including Green Card holders) who are residents of Canada and open an FHSA would not be able to claim a deduction for FHSA contributions on their U.S. income tax return. Plus, any income earned in the FHSA would be taxable in the U.S. even though it may be tax-free in Canada. Americans (including Green Card Holders) living in Canada should seek guidance prior to opening an FHSA.

Passive Foreign Investment Companies (PFICs) and Canadian mutual funds and Canadian domiciled ETFs

The U.S. has special tax rules for PFICs, in part, to prevent Americans (including Green Card holders) from deferring tax on passive income earned through non-U.S. corporations. For U.S. reporting, a foreign corporation is considered a PFIC if⁷:

1. 75% or more of its annual income is passive (e.g., dividends, passive rental income, royalties), or;
2. The average percentage of its passive assets (like cash, stocks, bonds) is at least 50% its total assets.

Canadian mutual fund corporations, mutual fund trusts, pooled funds and Canadian domiciled ETFs may be considered PFICs as they primarily hold passive investments. If you're a U.S. citizen (or Green Card holder) who holds investments in PFICs, you could face punitive U.S. tax treatment on the earnings, and gains may be treated as an excess distribution. You may also have additional U.S. tax reporting even if no distribution was received or PFIC disposed of. Consider holding shares or bonds of corporations directly instead of mutual funds or Canadian-domiciled ETFs (U.S.-domiciled ETFs are not PFICs). Canadian mutual funds in TFSAs or RESPs are treated as owned directly, and PFIC reporting rules apply. There is an exception for PFICs in foreign retirement plans, like RRSPs, exempting them from PFIC reporting rules.

Registered Education Savings Plan (RESP)

Similar to TFSAs, RESP accounts don't get special treatment under U.S. tax law or the U.S. - Canada Tax Treaty. If you are a U.S. person and have an RESP for your children or grandchildren, it could be considered a grantor trust for U.S. purposes, which means it's not recognized as a separate entity for tax purposes. This means if a U.S. person contributed to the RESP (for example, you or your spouse) they would be treated as owning the assets and would need to report any income earned on their U.S. return. They'd also have to handle any required U.S. filings, like PFIC reporting. The IRS has recently provided relief from the non-U.S. trust reporting requirements for foreign non-retirement trusts such as RESPs provided the trust meets certain conditions such as contribution limits (U.S. $10,000 annually or U.S. $200,000 in a lifetime). RESPs are subject to lifetime contribution limits of CDN $50,000 per beneficiary so RESPs with more than four beneficiaries can exceed the $200,000 lifetime contribution threshold and may not be eligible for the trust reporting relief. Any income earned in an RESP would still need to be reported on a U.S tax return if a U.S. person contributed to the RESP⁸. However, if you have a spouse of another nationality, they could be the subscriber of the RESP and would not need to report the earnings until they are eventually distributed to your children or grandchildren.

Sale of principal residence

If, as a tax resident of Canada, you sell your home, generally any capital gain from the sale is excluded from your income and exempt from tax provided certain conditions are met⁹. The U.S. rules are different – only up to U.S. $250,000 can be excluded (up to U.S. $500,000 for married couples that file jointly) provided certain conditions are met¹⁰. This means as a Canadian tax resident and a U.S. citizen or Green Card holder, if you sell your home in Canada, you could still face U.S. income tax liability.

U.S. shareholders of foreign corporations

Americans (including Green Card holders) who own 10% or more of the total voting shares or value of a non-U.S. corporation (including a Canadian corporation) can be subject to additional U.S. reporting requirements¹¹. A non-U.S. corporation where more than 50% of the voting shares or value of the corporation is owned by U.S. shareholders is considered a Controlled Foreign Corporation (CFC). If the corporation is a CFC, some types of income may need to be included on the shareholder’s U.S. income tax return, even if the income has not been distributed from the corporation. You should consult with a qualified tax and legal professional before establishing a corporation in Canada.

Americans holding Canadian life insurance

Life insurance provides tax free funds to loved ones when we pass. However, there are many complications, and potential liabilities, when an American (including a Green Card holder) resident in Canada holds a Canadian-based or U.S.-based life insurance policy. The U.S. and Canada have different definitions of what a life insurance policy is and have complicated tests to determine if foreign policies meet these definitions. If the foreign life insurance policy does not meet Canadian criteria, the proceeds might not be tax exempt. In this case, some income from the policy may be taxable in Canada, and it can be a complicated calculation to determine how much. It’s recommended you seek appropriate guidance before purchasing a Canadian or U.S. life insurance policy while in Canada.

How we can help

If you’re an American living in Canada, be sure to seek advice from a qualified tax or legal professional before acting on the information in this article. Your financial advisor understands the complexity of your financial needs and goals and can work with you and your tax and legal professionals to help you build, maintain, and protect your financial strength throughout life.