Guide to U.S. Expat Taxes in Canada

Living in Canada as a U.S. citizen brings incredible new experiences, but it also means navigating unique tax obligations. Unlike most other countries, the U.S. requires its citizens to report worldwide income to the IRS, no matter where they live.

That means that, even while living in Canada, U.S. expats must continue filing U.S. tax returns.

On top of that, they may also need to comply with Canadian tax laws, which often means filing taxes in both countries.

U.S. federal tax obligations for expats

As a U.S. citizen residing in Canada, it’s essential to understand that the United States taxes its citizens on their worldwide income, regardless of where they live.

This means that even while living abroad, you’re required to file U.S. federal tax returns and report all income earned globally. Here’s a detailed overview of your obligations and the mechanisms available to mitigate potential double taxation.

Overview of worldwide income

The U.S. tax system mandates that citizens and resident aliens report all income from global sources. This includes:

• Employment Income: Salaries, wages, bonuses, and commissions earned in Canada or any other country.
• Self-Employment Income: Earnings from freelance work or business operations conducted abroad.
• Investment Income: Interest, dividends, capital gains, and rental income from both U.S. and foreign sources.

Regardless of where the income is earned or where you reside, it must be reported to the Internal Revenue Service (IRS).

Filing requirements and thresholds

The requirement to file a U.S. tax return depends on your filing status, age, and gross income. For the tax year 2024, the thresholds are as follows:

• Single Filers: Must file if gross income is at least $13,850.
• Married Filing Jointly: Must file if combined gross income is at least $27,700.
• Married Filing Separately: Must file if gross income is at least $5.
• Head of Household: Must file if gross income is at least $20,800.

These thresholds are subject to annual adjustments for inflation. It’s crucial to verify the current year’s thresholds to ensure compliance.

Key tax exclusions and credits

To alleviate the burden of double taxation, the IRS provides several provisions:

Foreign Earned Income Exclusion (FEIE)

The FEIE allows qualifying U.S. expats to exclude a certain amount of foreign-earned income from U.S. taxation.For 2023, this exclusion amount is up to $126,500.

To qualify, you must meet one of the following tests:

• Physical Presence Test: You were physically present in a foreign country for at least 330 full days during a 12-month period.
• Bona Fide Residence Test: You are a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.

To claim the FEIE, file Form 2555 with your U.S. tax return.

Foreign Tax Credit (FTC)

The FTC allows you to offset U.S. tax liability with income taxes paid to a foreign country. This is particularly beneficial if the foreign tax rate is higher than the U.S. rate. 

For instance, Canada’s federal income tax rates for 2024 are:

• 15% on the first $53,359 of taxable income.
• 20.5% on income over $53,359 up to $106,717.
• 26% on income over $106,717 up to $165,430.
• 29% on income over $165,430 up to $235,675.
• 33% on income over $235,675.

Additionally, provincial tax rates apply, varying by province. For example, Ontario’s provincial tax rates for 2024 are:

• 5.05% on the first $47,630 of taxable income.
• 9.15% on income over $47,630 up to $95,259.
• 11.16% on income over $95,259 up to $150,000.
• 12.16% on income over $150,000 up to $220,000.
• 13.16% on income over $220,000.

Given that Canadian tax rates can be higher than U.S. rates, the FTC can significantly reduce or eliminate your U.S. tax liability on the same income. To claim the FTC, file Form 1116 with your U.S. tax return.

Foreign Housing Exclusion

If you incur housing expenses while living abroad, you may qualify for the Foreign Housing Exclusion. This allows you to exclude certain housing costs from your income, provided they exceed a base amount. Eligible expenses include rent, utilities (excluding telephone), and residential parking.

The exclusion is subject to limitations based on the location and the number of qualifying days. To claim this exclusion, complete Form 2555 along with your tax return.

State tax obligations for the U.S. expats

Understanding state residency and domicile

Each U.S. state has unique criteria for determining residency and domicile. While you may no longer physically live in your former state, it may still consider you a tax resident if you haven’t made an official change of domicile. States with strict tax residency rules, like California, New York, and Virginia, may impose ongoing tax obligations on income earned anywhere in the world unless you have clearly cut legal ties and established a new state of residency.

In states like these, moving abroad isn’t always enough to sever residency ties. These states typically consider factors like where you hold a driver’s license, register to vote, own property, and maintain financial or family ties. Without formally establishing domicile in a different state, you could be subject to state income tax even while living abroad.

For U.S. expats residing in Canada, it’s essential to understand the tax policies of your last U.S. state of residence. Some states impose tax on worldwide income, making them less favorable for expats, while others have beneficial policies that either do not tax income or offer provisions to reduce the tax burden on expats. 

Here’s a breakdown of states by tax treatment:

States with no tax on worldwide income for non-residents

These states provide favorable tax treatment for expats, as they do not impose taxes on global income if you can establish non-resident status:

• Colorado
• Connecticut
• Delaware
• Massachusetts
• Minnesota
• Missouri
• North Dakota
• Oregon
• Pennsylvania
• Virginia
• West Virginia

Expats from these states may not need to take significant steps to maintain their non-resident status once they relocate. This group of states offers considerable savings by not taxing worldwide income, making them favorable options for expats.

States that tax worldwide income but offer FEIE

These states tax worldwide income but provide some relief to expats by allowing a Foreign Earned Income Exclusion (FEIE). For the 2024 tax year, the FEIE lets expats exclude up to $126,500 of foreign-earned income from state income tax.

• Arizona
• Georgia
• Idaho
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Maine
• Michigan
• Ohio
• Oklahoma
• Rhode Island
• South Carolina
• Utah
• Vermont

While these states tax global income, expats can reduce their tax liability with the FEIE, which allows them to exclude a significant portion of their foreign earnings.

States that tax worldwide income with no FEIE

These states tax worldwide income but do not provide a Foreign Earned Income Exclusion, resulting in higher potential tax burdens for expats, as there is no mechanism to offset foreign-earned income:

• Arkansas
• Indiana
• Kentucky
• Louisiana
• Maine
• Maryland
• Mississippi
• Montana
• Nebraska
• New Mexico
• North Carolina
• Wisconsin

Expats domiciled in these states face more significant tax liabilities on their global income due to the lack of FEIE, which makes establishing domicile elsewhere more appealing.

States with the highest tax burden for expats

Some states impose the most stringent tax policies on expats, including high income tax rates and no exclusions for foreign-earned income. If you’re domiciled in one of these states, relocating your domicile to a more tax-friendly state can lead to substantial savings.

• California
• Hawaii
• New Jersey
• New York

These states have high income tax rates and tax worldwide income with no exclusions, making them the least favorable for expats in terms of tax savings.

Steps to reduce state tax obligations

If you plan to avoid state tax obligations, especially from states that tax worldwide income without providing relief, consider these steps:

1. Establish domicile in a tax-friendly state: Moving your official residence to a state with no income tax, like Florida, Nevada, Texas, or South Dakota, can significantly reduce your tax burden.
2. Update official documents: Cancel voter registration, update your driver’s license, and transfer financial accounts to reflect your new domicile.
3. File a final tax return in your previous state: This signals the end of your tax residency and helps prevent future state tax liabilities.

Additional U.S. reporting requirements – FATCA and FBAR

For U.S. citizens living abroad, filing a tax return may not be the only reporting requirement. The IRS has additional rules that apply specifically to U.S. citizens with foreign bank accounts or significant financial assets abroad.

Two of the main forms to be aware of are related to the Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank Account Report (FBAR). While these forms may sound intimidating, they’re simply tools for the IRS to keep track of U.S. citizens’ overseas finances.

FATCA (Foreign Account Tax Compliance Act)

The Foreign Account Tax Compliance Act, or FATCA, was introduced to help the IRS prevent tax evasion by U.S. citizens using foreign accounts. FATCA requires U.S. taxpayers to report certain foreign assets to the IRS. Here’s what you need to know about FATCA and its requirements:

Who needs to file under FATCA? 

If you have foreign assets that exceed certain thresholds, you’ll need to report them on Form 8938, which is submitted along with your regular tax return. For single filers living abroad, the threshold is $200,000 on the last day of the tax year or $300,000 at any point during the year. For married couples filing jointly, the thresholds are doubled.

What needs to be reported? 

Reportable assets under FATCA include foreign bank accounts, investment accounts, foreign stocks, and even certain pensions. Generally, any financial assets held outside the U.S. should be reviewed to determine if they need to be reported.

How to file FATCA (form 8938? 

If you meet the reporting threshold, you’ll complete Form 8938 and submit it with your regular tax return (Form 1040). The form requires details like account numbers, maximum account values, and the financial institution’s location.

FBAR (Foreign Bank Account Report)

The Foreign Bank Account Report (FBAR) is another requirement for U.S. citizens with overseas accounts. While FATCA applies based on the value of financial assets, the FBAR requirement is specifically tied to foreign bank accounts. Here’s a breakdown:

Who needs to file FBAR? 

If the combined balance of all your foreign bank accounts exceeds $10,000 at any point during the year, you’re required to file an FBAR. This rule applies even if you just temporarily crossed the $10,000 threshold. For instance, if you have two accounts—one with $5,000 and another with $6,000—you would need to file an FBAR, as the combined balance is over $10,000.

How to file the FBAR (fincen form 114)? 

The FBAR is filed separately from your tax return and is submitted online through the Financial Crimes Enforcement Network (FinCEN). The form, FinCEN Form 114, requires you to report details about each foreign account, including the bank name, account number, and maximum balance during the year.

Important deadlines and penalties 

The FBAR filing deadline is April 15, but there is an automatic extension until October 15 for those who miss the initial deadline. Be mindful of FBAR filing, as the penalties for not reporting eligible accounts can be severe, with fines starting at $10,000 for each unreported account.

Understanding the difference between FATCA and FBAR

While FATCA and FBAR both aim to provide the IRS with information about foreign financial accounts, they have distinct differences:

• Different thresholds: FATCA requires reporting if your foreign assets exceed $200,000 as a single filer, while FBAR applies if the total balance in all foreign accounts exceeds $10,000.
• Different filing locations: FATCA reporting (Form 8938) is filed with your federal tax return, whereas the FBAR is filed separately through FinCEN.
• Types of assets reported: FATCA requires reporting a broader range of foreign financial assets, while FBAR focuses only on foreign bank accounts.

Why do FATCA and FBAR matter for U.S. expats?

Failing to file FATCA and FBAR can result in significant penalties, so it’s essential to understand whether you’re required to report these assets. While it may seem like an extra step, filing these forms can help ensure compliance with IRS regulations and avoid unnecessary fines. If you have foreign bank accounts or financial assets, it’s a good idea to consult a tax professional to ensure you’re meeting all reporting requirements.

U.S.-Canada tax treaty

The U.S.-Canada Tax Treaty, officially named the “Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital,” was initially signed in 1980 and has been amended multiple times. This treaty aims to provide relief from double taxation, clarify tax residency status, and prevent fiscal evasion for individuals who have financial ties in both countries. For U.S. expats residing in Canada, the treaty provides key mechanisms to ease the tax burden and ensure compliance.

Relief from double taxation

A primary goal of the U.S.-Canada Tax Treaty is to prevent double taxation. Through the treaty, U.S. expats in Canada can claim a foreign tax credit (FTC) on their U.S. tax return for taxes paid to Canada, reducing their U.S. tax liability on the same income. This provision helps prevent paying taxes twice on the same income to both countries.

Example of FTC Application:

• A U.S. citizen living in Canada can use the taxes paid to Canada to offset U.S. tax obligations on Canadian-sourced income.
• Conversely, a Canadian resident with U.S. income can reduce Canadian tax liability by claiming credits for U.S. taxes paid on U.S.-sourced income.

Residency and tie-breaker rules

For individuals who could qualify as residents in both the U.S. and Canada, the treaty has tie-breaker rules to resolve dual residency issues. These criteria help determine which country has primary taxing rights based on:

• Permanent home: Priority goes to the country where an individual maintains a primary residence.
• Center of vital interests: The country where personal and economic ties are strongest.
• Habitual abode: Where the individual spends the majority of their time.
• Nationality: In cases where other criteria are inconclusive, citizenship can play a role in determining residency.

These rules help U.S. expats in Canada avoid dual residency status, ensuring they are not taxed as residents in both countries.

Taxation of various types of income

The U.S.-Canada Tax Treaty provides guidance on how specific types of income are taxed, depending on residency and income source. Key types of income addressed by the treaty include:

• Employment income: Generally taxed in the country where the work is performed, though certain short-term assignments may qualify for tax exemptions.
• Dividends and interest: Reduced withholding tax rates apply. For example, dividends paid by U.S. corporations to Canadian residents may be taxed at a reduced rate of 5% if the Canadian shareholder is a corporation owning at least 10% of the voting stock of the U.S. corporation, or 15% for individuals.
• Pensions and Social Security: Special rules apply to pension and Social Security income:
  • U.S. Social Security: For a U.S. expat in Canada, U.S. Social Security benefits are generally only taxable in the U.S.
  • Canadian Old Age Security (OAS) and Canada Pension Plan (CPP): These benefits received by U.S. residents are taxable only in Canada.
• Capital gains: Generally taxed in the country of residence. However, gains from the sale of real property and certain other assets may have exceptions.

The savings clause

The savings clause is a critical part of the treaty that allows each country to maintain the right to tax its own citizens and residents on their worldwide income, as if the treaty did not exist. This clause means that U.S. citizens residing in Canada must still meet U.S. filing requirements and may be taxed by the U.S. on worldwide income, though they can use the treaty’s credits and exclusions to help mitigate their tax burden.

Exchange of information

To prevent tax evasion and promote transparency, the treaty includes an exchange of information provision that facilitates cooperation between the Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA). This agreement allows both tax authorities to share relevant information about taxpayers, helping ensure compliance with tax regulations and identify any discrepancies.

U.S.-Canada totalization agreement (social security agreement)

For U.S. expats living in Canada, the U.S.-Canada Totalization Agreement (also known as the Social Security Agreement) is crucial to understand, as it coordinates Social Security benefits and contributions between the two countries.

Established to prevent dual Social Security taxation, this agreement allows U.S. citizens working in Canada to avoid paying Social Security taxes in both countries, simplifies the contribution process, and ensures that individuals can qualify for benefits in either country based on combined work credits.

Purpose of the totalization agreement

The main purpose of the Totalization Agreement is to prevent dual Social Security contributions. Without this agreement, U.S. expats in Canada might be required to pay into both the U.S. Social Security system and the Canada Pension Plan (CPP), which could be costly and inefficient.

This agreement ensures that individuals only pay Social Security taxes to one country at a time, depending on their specific work situation.

Avoiding dual contributions

The Totalization Agreement determines which country’s Social Security system you’ll contribute to, based primarily on the location of employment:

Employees on temporary assignments:

• U.S. citizens temporarily assigned to work in Canada (up to five years) by a U.S.-based employer can continue paying into U.S. Social Security rather than Canada’s CPP.
• This rule helps short-term employees avoid the need to switch Social Security systems if they intend to return to the U.S. within a few years.

Permanent assignments or Canadian employers:

• If you’re working in Canada for a Canadian employer or are permanently assigned there, you’ll contribute to the CPP instead of U.S. Social Security.
• This applies to most expats who work locally in Canada, ensuring that they contribute to the Canadian system.

Self-employed individuals:

Self-employed U.S. citizens in Canada typically pay into the Social Security system of their country of residence. For example, if you’re self-employed and live in Canada, you’ll contribute to the CPP.

Combining social security credits

The Totalization Agreement allows you to combine work credits from both the U.S. and Canada if you need additional credits to qualify for Social Security benefits. This is particularly helpful for individuals who have split their working years between both countries:

• Qualifying for U.S. Social Security Benefits: If you haven’t worked enough years in the U.S. to qualify for Social Security benefits, credits earned in Canada can help meet the eligibility requirements.
• Qualifying for Canadian CPP Benefits: Similarly, if you lack sufficient Canadian credits to qualify for CPP, U.S. credits can be applied to meet Canadian requirements.

However, while credits can be combined for eligibility purposes, the benefit amounts will be based on actual contributions to each system, meaning you’ll receive separate benefits from each country rather than a combined payment.

Claiming social security benefits

If you qualify for Social Security benefits in both countries, you can claim benefits from each country independently. Each country will pay benefits based on the contributions made within its system. Here’s how it works:

• U.S. Social Security Benefits: You’ll receive payments based on your contributions to the U.S. Social Security system.
• Canadian CPP and Old Age Security (OAS): Benefits from Canada will be based on contributions to the CPP, with additional eligibility for OAS based on residency.

How to apply for benefits

To apply for benefits under the Totalization Agreement, U.S. citizens in Canada can start the process by contacting either the U.S. Social Security Administration (SSA) or Service Canada. Both agencies can provide information on eligibility, contributions, and applications for benefits, and they work together to help coordinate cross-border benefits.

Canadian tax obligations for the U.S. expats

As a U.S. expat residing in Canada, it’s essential to understand Canada’s tax obligations, as Canadian taxes apply to residents on worldwide income. Canada uses a progressive tax system, with both federal and provincial taxes that can vary depending on your province of residence. Here’s what U.S. expats in Canada need to know about Canadian tax obligations.

Determining Canadian tax residency

Canada’s tax residency is based on ties to Canada rather than citizenship. Even as a U.S. citizen, if you meet certain residency criteria, you’ll likely be considered a Canadian tax resident, meaning you’ll need to report and pay taxes on all global income. You’re generally a Canadian tax resident if:

• Primary residential ties: You have a home, a spouse or common-law partner, and/or dependents in Canada.
• Secondary residential ties: You have personal property (like cars or social ties), economic interests, or memberships in Canadian organizations.

Spending 183 days or more in Canada within a calendar year also usually results in being considered a resident for tax purposes. Canadian residents must file taxes annually and report worldwide income, regardless of where it’s earned.

Canadian income tax rates

Canada’s federal tax system is progressive, meaning tax rates increase with income. For the 2024 tax year, here are the federal income tax brackets, approximately converted into U.S. dollars:

In addition to federal taxes, each province and territory imposes its own tax rates. For example, here are the Ontario provincial tax rates for 2024:

• 5.05% on the first $51,446 of taxable income.
• 9.15% on the next $51,448 (from $51,447 to $102,894).
• 11.16% on the next $47,106 (from $102,895 to $150,000).
• 12.16% on the next $70,000 (from $150,001 to $220,000).
• 13.16% on income over $220,000.

Combined, federal and provincial tax rates can lead to marginal tax rates exceeding 50% for high-income earners, depending on the province, making Canadian taxes significant for U.S. expats.

Taxation of different types of income in Canada

Canadian taxes apply differently to various types of income:

• Employment income: Taxed progressively based on total annual income.
• Self-employment and business income: Taxed at progressive rates, with eligible deductions allowed for business expenses.
• Investment income:
  • Dividends: Dividends from Canadian companies receive a dividend tax credit, reducing the effective tax rate.
  • Capital gains: Only 50% of capital gains are taxable, resulting in a lower effective tax rate on these earnings.
• Pensions and retirement income: U.S. Social Security benefits are typically taxable only in the U.S., while Canadian pensions are taxable in Canada.

Tax filing requirements and deadlines

Canada’s tax year runs from January to December. Individual tax returns are due by April 30 of the following year, though self-employed individuals have until June 15 to file. However, any taxes owed are due by April 30 to avoid interest charges on unpaid amounts. Late filing may result in penalties and interest.