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

Canadian flag waving in the sky, representing the concept of moving to Canada from US.

We live in an era where moving to Canada is a dream come true for many Americans. From remote employees looking for a different type of scenery to retirees on the hunt for a lifestyle with advertisement-free healthcare, many citizens of the U.S. tend to migrate to Canada. Moving is, of course, the easiest part. It is the taxes that come with moving that completely change the scenario.

Relocating south of the border means having to deal with the IRS in the U.S. and the CRA in Canada. A tax system in sountry for sountry scenario. If anything is left unchecked, double taxation, penalties, and missed obligations all come into play. This is a guide for U.S. citizens moving to Canada with an aim of taxation compliance.

Residency for Tax Purposes

When it comes to tax residency, Canada is more flexible compared to other countries. Factors that Canada considers include the following:

  • Acquiring a dwelling in Canada

  • Accompanying your spouse and children

  • Opening Canadian bank accounts or licenses

All Canadian tax residents are required to report global income irrespective of limited tax connections. If your tax connections are limited, you will be considered a non-resident and will only be obliged to pay taxes on income earned in Canada.

U.S. Tax Obligations After Moving

Moving to another country does not relieve you of tax obligations to the United States. Because the United States taxes its citizens regardless of where they reside, you are still required to file a tax return every year to the IRS. Applicable forms include:

  • Form 1040 – U.S. income tax return

  • FBAR (FinCEN 114) – foreign bank accounts rule for foreign accounts over $10,000

  • Form 8938 (FATCA) – for foreign assets above specified thresholds

One of the most common issues is that persons living overseas do not file FBAR and FATCA, thus attracting huge penalties which can be more than $10,000.

Canadian Tax Filing Requirements

A resident of Canada is required to submit a T1 tax return yearly. For most individuals, the deadline for submission is by the end of April.

The rest of the world has a combined federal and provincial tax rate system which includes various tax credits such as the GST/HST credit as well as medical and charitable credits.

Every country has a source of income, which is the reason as to why both the United States and Canada tax every resident for their global income.

Tax Treaties & Credits

The Tax Treaty is designed to prevent double taxation on the same income a person earns. There are two major protection, such as:

  • The Foreign Tax Credit lets you use Canadian income tax as a credit against U.S. tax liability.

  • The Tie-breaker rules allows for certain adjustments to be made so that only one of the two countries is able to claim you as a tax resident.

For instance, if you’re in Canada and paying tax, you are still able to claim the payment and file to the IRS.

Impact on Retirement & Investments

Having a 401k and Social Security is simpler, as the tax is only on the withdrawn money.

RRSPs and TFSAs are both recognized in Canada and abroad; however, TFSAs are not recognized by the IRS, which can make reporting them tedious. Due to the fact the IRS does not recognize TFSAs, it elongates the reporting process. 

Getting the structure right can prevent your retirement savings from being eroded by double taxation. 

Estate & Gift Taxes

Unlike Canada, the United States does not recognize tax residents, which applies estate and gift tax rules to citizens no matter the country of residence. Canada, on the other hand, has no estate tax, but does impose a capital gains tax at death. Without laying out a plan, families who have a sizable estate are bound to face tax issues in both Canada and the United States.

Common Mistakes to Avoid

  • Failing to cut connections to a state: Some, like California and New York, may consider someone a resident of the state even when no ties are present.

  • Failing to Report Foreign Assets: If certain requirements are met, the IRS must be disclosed to the Canadian Bank Account holder.

  • Treaty Elections: Underreporting of cross-border pensions could result in double taxation that could have been avoided. Misreporting dividends or other investments from the US can also be a factor.

When to Consult a Tax Professional

You probably fall into the following categories. In these cases, your situation definitely requires professional help:

  • Having business relations in both countries

  • Entrepreneurs who are expanding into international markets

  • Families who have large estates or investment portfolios

  • People who are retired and have access to retirement funds both in the US and in Canada

A cross border tax advisor like Dimov Partners will arrange your assets to lower the tax burden and avoid the illegal tax evasion from IRS and CRA regulations. Contact us today for financial clarity.

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?

George Dimov