The USA/Canada Tax Treaty Explained

The United States and Canada have historically had a great relationship, which extends to taxes within each other’s borders. The United States/Canada tax treaty specifies, among other things, how U.S. citizens in Canada and Canadian citizens in the United States should be taxed in certain situations, and it saves a lot of headaches in difficult tax scenarios.

The U.S. tax system is one of the most complex tax codes in the world. So figuring out your taxes in both Canada and the United States can be daunting.

Keep reading to find out more about the US/Canada tax treaty below, including why it exists, what it covers, and how to ensure you receive the benefits to which you are entitled.

What’s the difference between U.S. and Canadian tax rules?

The U.S tax is based on both your residence and citizenship status. This means that all Americans, regardless of where they live or work, must file a US tax return every year.

In Canada, your tax obligations are based on your residency status, which is determined by the Canada Revenue Agency (CRA). The general rule is that if you live and work in Canada, you must pay Canadian income tax regardless of your citizenship.

Why the tax treaty between the U.S. and Canada exists

The United States and Canada have a tax treaty in place to prevent double taxation for Canadian residents earning US income and US citizens working and living in Canada. While both US citizens and Canadian residents must report their foreign income regardless of where they file their tax returns, the treaty exempts US citizens from paying US taxes on income earned and taxed in Canada.

However, there is a catch. To be eligible for the exemption, you must file the U.S. 1040 federal tax return on time and accurately. Otherwise, you may face double taxation, denial of legitimate expenses, interest charges, or penalties for forms that are incomplete or incorrect.

Do you have to pay taxes in both the U.S. and Canada?

If you live and work in Canada as a U.S. citizen

As a US citizen living and working in Canada, you are subject to Canadian taxation on income earned in Canada. This includes income from working for a Canadian company as well as any interest earned from investing in Canadian stocks, bonds, or mutual funds.

As a Canadian resident, you are taxed on your worldwide income, regardless of where it comes from. This means you must report all foreign and domestic income on your personal tax return.

If you live and work in Canada for only part of the year as a U.S. citizen

If you only live in Canada part-time, the CRA will tax you based on your residency status, which is determined on a case-by-case basis.

To determine your residency status, the CRA looks at your residential ties to Canada, how long you’ve been in the country, where you normally live, and a number of other factors. For example, if you spent 183 days or more in Canada during the tax year, you are considered a deemed resident.

If you are unsure of your Canadian residency status, call the CRA at 1-800-959-828.

If you live in the U.S. and cross the border for work every day

Daily commuters crossing the border to work are common, so it is possible for a U.S. citizen to be a U.S. resident while earning income in Canada.

As a non-resident of Canada, you must pay Canadian tax only on income earned in Canada. However, under the income tax treaty between Canada and the United States, you may be exempt from Canadian taxation and may apply for withholding tax exemption from Canadian sources.

If you’re a dual resident

If you have a home in more than one country and are considered a resident of two countries, you are considered a dual resident.

As a dual U.S. and Canadian resident, you will almost certainly file both Canadian and U.S. tax returns, potentially resulting in double taxation. Fortunately, the tax treaty provides provisions and relief in these situations, so you will most likely pay taxes in one country and receive credit from the other.

If you work in Canada but for a U.S. company that pays you in USD, you will not have to pay Canadian taxes on that employment income as long as you do not live in Canada.

Even if you live outside of Canada and work for a Canadian company that pays you, you must pay Canadian tax on this income.

Working and living in both Canada and the US can bring on its challenges. You’re probably getting used to the many changes and curveballs that come with building a life in a new country. If your tax situation is one of them, IDM can help.
If you’d like more guidance, schedule a discovery call with us. At IDM, we take care of your taxes and help you find deductions and credits you’re eligible for, saving you money at tax time.