American Expat in Canada: Your US Tax Obligations

The US taxes its citizens on worldwide income regardless of where they live. An American living in Canada files both a Canadian T1 and a US Form 1040 every year, reporting the same worldwide income on both returns. The foreign tax credit prevents most double taxation, but it does not eliminate the filing obligation, and the FTC mechanics produce a net cost in some situations. Beyond the income tax, the US requires annual reporting of foreign financial accounts (FBAR), foreign financial assets (Form 8938), and, if you own a Canadian corporation, the CFC information returns (Form 5471). The compliance burden is the price of keeping your US citizenship while living in Canada.

What do I file every year?

Form 1040. Report worldwide income: Canadian employment income (from T4), Canadian investment income (from T3, T5), US-source income (from 1099s, if any), RRSP income (deferred under the treaty election), rental income from either country, and any other income. The filing deadline is June 15 for taxpayers living abroad (automatic 2-month extension under IRC 7508A), but interest on any tax owed runs from April 15.

• Form 1116. Claim the FTC for Canadian income tax paid. File one Form 1116 per income category (general category for employment/business income, passive category for investment/rental income). The credit is limited to the US tax on the foreign-source income.
• FBAR (FinCEN 114). Report all Canadian financial accounts (bank accounts, brokerage accounts, RRSP, RRIF, TFSA, RESP, FHSA) if the aggregate value exceeds $10,000 at any point during the year. Filed electronically through the BSA E-Filing system, due April 15 with automatic extension to October 15. The penalty for willful failure to file is the greater of $100,000 or 50% of the account balance.
• Form 8938. Report specified foreign financial assets above the threshold. For taxpayers living outside the US: $200,000 at year-end or $300,000 at any time during the year (doubled for married filing jointly). Filed with the Form 1040. The penalty for failure to file is $10,000, with additional penalties for continued failure after IRS notification.

Do I owe US tax after the FTC?

In most cases, no. Canadian tax rates exceed US rates at most income levels, so the FTC covers the US tax, and the excess credit carries forward. Situations where residual US tax arises:

• US-source income. If you have income from US sources (US rental property, US dividends, US retirement account withdrawals), the US taxes that income and the Canadian FTC may not fully cover the US tax on US-source income.
• GILTI/Subpart F. If you own a Canadian corporation, the GILTI and Subpart F inclusions may create US tax that the deemed-paid FTC does not fully offset.
• AMT. The alternative minimum tax can create US tax even when regular tax is fully covered by the FTC.
• Self-employment tax. US self-employment tax (SECA) may apply if you are self-employed in Canada and not exempt under the totalization agreement.
• Net investment income tax. The 3.8% NIIT under IRC 1411 applies to investment income above the threshold ($200,000 single, $250,000 married filing jointly) and is not offset by the FTC (the IRS position is that NIIT is not an income tax for FTC purposes).

What about the RRSP?

The RRSP is protected by the treaty. With the Article XVIII(7) election in effect (per Revenue Procedure 2014-55), the US defers tax on income accruing inside the RRSP until withdrawal. The election is made on the first US return that covers a period of US tax residency.

• RRSP contributions while living in Canada are deductible on the Canadian return. They are not deductible on the US return (the US does not recognize the RRSP deduction), but the treaty defers the tax on income inside the plan.
• When you withdraw from the RRSP, Canada withholds Part XIII tax (25% default, 15% treaty rate), and the withdrawal is included in US gross income. The Canadian withholding is credited on the US return via the FTC.

What about the TFSA?

The TFSA is not protected by the treaty. For a US person, it is a foreign trust. The annual income is taxable on the US return, and Forms 3520 and 3520-A are required each year. The compliance cost often exceeds the TFSA’s benefit. Most cross-border practitioners recommend that US citizens in Canada either not contribute to a TFSA or collapse an existing one.

Can I use the foreign earned income exclusion?

Yes, but it rarely helps. The Foreign Earned Income Exclusion (FEIE) under IRC 911 excludes up to $126,500 (2024) of foreign earned income from US tax. The problem: if you exclude the income, you cannot claim the FTC on the Canadian tax paid on that income. Since Canadian tax on $126,500 of employment income far exceeds the US tax on the same income, the FTC is more valuable than the exclusion. In almost all Canada-US cases, the FTC produces a better result than the FEIE.

• The FEIE may be useful in narrow situations: if you have very low Canadian income (below the point where Canadian tax exceeds US tax), or if the FTC limitation is binding in a way that the exclusion bypasses.

What about voting and Social Security?

Voting. US citizens living abroad can vote by absentee ballot in federal elections (registered in the last US state of residence).

Social Security. Under the totalization agreement, work credits earned in Canada (CPP) can be combined with US Social Security credits to qualify for benefits. If you work in Canada and pay CPP, you are generally exempt from US SECA/FICA on the same earnings. If you are self-employed in Canada and pay CPP, you need a Certificate of Coverage from the CRA to demonstrate the exemption to the IRS.

What should I do next?

If you are an American living in Canada, confirm that you are filing both the US return and the Canadian return each year. Confirm that you have filed FBARs for all years. If you have missed filings, the streamlined filing procedures may apply. If you hold a TFSA, evaluate whether to keep it open or collapse it based on the compliance cost.

• Form 1116 and the foreign tax credit, the FTC mechanics
• FTC limitation and carryover, when the excess credits pile up
• FBAR filing requirements, the foreign account reporting
• IRA and Roth IRA contributions for Americans in Canada, the contribution rules
• Renouncing US citizenship, the exit option (and its cost)
• US tax filing deadlines for Americans abroad, the full calendar

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.