Moving to Canada from the U.S.: Tax Guide for Expats

Trading in your US driver’s license for a Canadian depends on the person but let us tell you that you are not the only one. Every year, immigrants from all over the US travel to Canada for a job, to retire, or just for a different way of living. With its universal healthcare, high quality of life, and proximity to the US, Canada is a prime spot for relocating.

But before you put your bags on the plane. you need to understand that the US and Canada do not share a border tax. US citizens moving to Canada need to strategize carefully to avoid dual filing requirements, complicated residency rules, and possible double taxation. This guide helps you understand the major tax consequences of moving to Canada and helps you remain compliant with the Canada Revenue Agency (CRA) and the IRS.

Residency for Tax Purposes

Canada: Tax residency does not depend on immigration status but on where you are most anchored. The CRA considers:

• The location of your home and family

• Canadian financial accounts and driver’s licence

• Time dwelling in Canada

Depending on your situation, you could be:

• Resident: subject to tax on global income

• Non-resident: subject to tax on income sourced in Canada

• Deemed resident or non-resident: subject to special treaty rule provisions

U.S: Unlike Canada, the U.S. does not base tax obligations on residency. You are required to file a U.S. tax return for every year of your residency, regardless of where you live.

U.S. Tax Obligations After Moving

Moving does not mean you are free from U.S. taxes obligations, and you are required to file:

• Form 1040: a yearly income tax return from the U.S.

• FBAR (FinCEN 114) if at any point in the year your foreign bank accounts have a balance of $10,000 or more.

• FATCA (form 8938) for foreign assets above specified thresholds set by the IRS.

The most commonly seen, and most easily, missed forms in the eyes of expats are foreign assets, and the punishments for not declaring them are severe.

Canadian Tax Filing Requirements

Every year, and for each year of your residency, you are required to submit a T1 Income Tax Return and account for the global income you received. Some important pointers are:

• The accounting year for Canada coincides with that of the US, meaning it begins on January 1 and ends on December 31

• All provinces and territories continue to have a federal and provincial tax system, and the combined rates for some provinces may exceed rates in the US

• Canada tax credits and deductions such as the medical expense credit, and the GST/HST credit may be more advantageous than in the US

Tax Treaties & Credits

Tax treaties with Canada are designed to keep individuals, businesses, and income from being taxed in both the US and Canada. Some of the more important provisions of the U.S.-Canada Tax Treaty are:

• Foreign Tax Credit (Form 1116) – provides a means to reduce U.S. tax by the amount of Canadian taxes paid

• Tax Treaty Benefits – covers pension plans, Social Security, and investment income

• Tie-breaker rules – are the rules that determine your single country of tax residence when both countries consider you a tax resident

By planning ahead, you can be sure to avoid paying tax on the same income in both countries.

Impact on Retirement & Investments

Moving across borders can get quite complicated, especially when it comes to retirement accounts:

• 401k and IRA - While you can retain them, there are provisions within the treaty that may subject them to different withdrawal taxation.

• Social Security - Although taxable in Canada, the treaty coordinates the problem of double taxation.

• Canadian Accounts - RRSP is recognized by the IRS as a tax-deferred account. TFSA is ignored and generates USD reporting requirements.

Estates and Gift Taxes

While Canada does not impose estate and gift taxes, the U.S does. Citizenship comes with the burden of estate tax that is applicable to U.S. citizens. In Canada, the death of a person prompts a triggering of deemed capital gains that could lead to taxation as well. For families with considerable wealth, estate planning is of utmost importance.

Common Mistakes to Avoid

• Not closing U.S. state residency is one of the blunders that can be made. As an example, California state, having a US residency will continue to tax you until you completely detach.

• Overlooked reporting of the FBAR and FATCA is another mistake that is acceptable. Even minor Canadian accounts are considered having an account abroad.

• Lack of attention to the tax treaty is the biggest mistake of them all. Inaccurately reporting pensions or investments runs the risk of excessive taxation being applied.

When to Consult a Tax Professional

Professional advice should be obtained when one has:

• Dual citizenship

• Complex investments or business ventures

• Significant retirement or estate holdings

• Intent to spend time in the United States and Canada

Cross border tax advisors can assist with structuring finances to reduce tax exposure in both jurisdictions.

FAQs

• Do I have to pay U.S. taxes if I live in Canada?

• How do I become a tax resident of Canada?

• Will moving to Canada affect my Social Security?

• Can I keep my 401(k) or IRA after moving to Canada?

• Do I have to pay taxes twice if I move to Canada?