Basic Guide to the US-Canada Income Tax Convention

Tax Treaty Basics for US and Canadian Citizens and Residents

Written by Tiffany Woodfield, Associate Portfolio Manager, CIM®, CRPC®, STEP Associate and John Woodfield, Portfolio Manager, CIM®CFP®

If you are considering moving across the border, this guide to the US-Canada Income Tax Convention outlines helpful information about the tax treaty.

Please keep in mind this is general in nature. We are not accountants or lawyers and we recommend you speak to your accountant about your particular situation.

I have worked with many clients who have tried to do their cross-border tax planning alone, only to fall into tax traps which resulted in steep penalties. At SWAN Wealth Management, we specialize in helping US citizens living in Canada or Canadians moving across the border.

We wrote this article because we have seen people make many costly mistakes. We aim to give you the basic information needed to understand your cross-border situation and show that you need to work with professionals if you want peace of mind. Doing this alone is risky.

Also, please remember that Americans must file a US income tax return regardless of residency. The US is one of the few countries that bases tax on citizenship rather than residency. So regardless of whether you are earning income in the US or not, if you're a US citizen or green card holder, you will have a tax filing obligation.

This article is general, and we recommend you speak to a qualified accountant about your situation. This article is not intended as tax advice.

TABLE OF CONTENTS

1. Is There a Tax Treaty Between the US and Canada?
2. What Does the US-Canada Income Tax Convention Cover?
3. Purpose of the Tax Treaty
4. Does Canada's Tax Treaty with the US Affect You?
5. US-Canada Tax Treaty Withholding Rates
6. How to File US Taxes in Canada
7. How to File Canadian Taxes in the US.
8. US Taxation of Canadian Retirement Plans
9. Get Help with Your Cross-Border Taxes and Investing
10. Common Questions about the US-Canada Tax Treaty

 

Is There an Income Tax Treaty Between the US and Canada?

Yes, the income tax treaty between the US and Canada is designed to prevent double taxation. This treaty is called the Convention between The United States of America and Canada with Respect to Taxes on Income and on Capital.

If you are a US citizen living in Canada, you will be filing to Canada and the US on the same worldwide income, which creates complications.

*It is essential to speak to a cross-border accountant about whether you are a Canadian resident. Please do not rely on general information and rules alone.

 

What Does the US-Canada Income Tax Convention Cover?

The US-Canada Income Tax Convention covers residents of Canada and the US who may be subject to double taxation. It attempts to resolve situations where double taxation may occur under each country’s domestic income tax rules.

 

Purpose of the Tax Treaty

The tax treaty between Canada and the US prevents people from being taxed twice on the same income. The tax treaty outlines how US citizens living in Canada and Canadian citizens living in the US should be taxed in certain situations.

However, working with a cross-border accountant is essential despite this tax treaty because they understand how to fully utilize foreign tax credits to offset the tax paid in both countries.

 

Does Canada's Tax Treaty with the US Affect You?

The US-Canada tax treaty affects whether you are a US citizen or a long-term US resident living in Canada. It also affects you if you are a Canadian living in the US.

As a Canadian resident, the Canadian Revenue Agency (CRA) usually has the first right to tax income earned in Canada. As a US citizen living in Canada, you will have to report your worldwide income to the IRS.

You may be subject to double taxation on the same income in the US if you don't apply the tax treaty and foreign tax credits. That's why it is essential to work with a cross-border accountant who understands how to utilize foreign tax credits fully.

Additional Resource for US Citizens:

US Citizens and Resident Aliens Abroad | Internal Revenue Service

WITHHOLDING TAXES

The US-Canada tax treaty can reduce the rate of withholding taxes applied. For example, suppose you are a Canadian and became a non-resident of Canada because you now live in the US. In that case, the Canadian financial institutions which hold your assets, such as an RRSP, will withhold tax on certain Canadian-source income to help pay your tax obligation to Canada. The tax treaty can reduce the withholding tax rate.

 

US-Canada Tax Treaty Withholding Rates

The US-Canada Income Tax Convention withholding rates aren't as simple as one might think because the rates depend on several factors. A withholding tax is when there is a tax deduction from the source. For example, imagine you moved from Canada to the US and had an RRIF in Canada when you moved. As a non-resident of Canada, your Canadian financial institution would withhold money to cover your tax obligation.

WITHHOLDING TAX RATES:

Below are some examples of common withholding tax rates.* Some financial institutions and situations may be different. Speak to your cross-border accountant about this.

• RRIF "periodic payment" usual withholding tax is 15%.**
• RRSP payment usual withholding tax rate as a non-resident is 25% for US residents.
• For US citizens living in Canada with a W9 form on file, the IRA withdrawal is usually 10% withholding tax from the financial institution holding your IRA.
• IRA withdrawal for a non-US person with a W8 form on file may be the treaty rate of 15% withholding tax.

*Some financial institutions and situations may be different. It is important to speak to your cross-border accountant about this.

**Under the tax treaty, payments are considered periodic payments when the total payments are less than the greater of two times the annual RRIF minimum or 10% of the market value of the RRIF at the beginning of the year for the calendar year. You will need to speak to your cross-border accountant to confirm your situation.

You can learn more about these rates here.

 

How to File US Taxes in Canada

Firstly, preparing cross-border tax returns requires a significant understanding of the Canadian and US tax systems and the US-Canada Income Tax Convention. I recommend seeking a professional CPA based in Canada with cross-border experience because the potential for mistakes and penalties is significant.

As a US citizen or green card holder living in Canada, unless below income thresholds, you will likely be required to file a 1040 tax return to the US and a T1 to Canada.

For information on filing US taxes in Canada, go to the IRS website, where you can learn about resident aliens abroad and get international taxpayer information.

COMMON CROSS-BORDER TAX TRAPS:

• There are many other additional income reporting forms you may need to file. It's easy to miss one of the forms.
• The tax return deadlines are different in Canada and the US.
• Incorrect calculation of US and Canadian capital gains is common.
• Understanding different income pools, such as general versus passive income, is critical. You must determine your foreign tax credits for each "pool" of income.

To prevent double taxation as an American in Canada, first, make sure you're working with a cross-border wealth management team who specializes in helping clients similar to you. There are many situations where you can fall into a tax trap.

A cross-border accountant understands how to fully utilize the foreign tax credits, a cross-border lawyer understands how to protect your assets as a US citizen living in Canada, and a cross-border financial advisor understands the investments that a US citizen can invest in that prevent costly compliance to the IRS.

A cross-border team that works together may be your most important asset in your cross-border transition because they can save you money and time.

As a US citizen or long-term resident of the US, you will have to report your worldwide income to the IRS even if you do not live in the US. You have a filing obligation, but that doesn't necessarily mean you will owe taxes. If you aren't familiar with reporting your worldwide income to Canada and the US, I recommend working with a cross-border accountant.

 

How to File Canadian Taxes in the US

Canada bases taxation on residency. Therefore, if you are no longer considered a resident by the CRA, it's unlikely that you'll have to continue filing a tax return. Before you think, "Great, I don't have to do anything," read on because there are exceptions to this. For example, if you are still receiving Canadian source income, you will have to file a tax return.

The need to file a tax return and the type of tax you pay depends on the type of income you receive, such as rental income or capital gains from the sale of Canadian real estate.

The CRA website covers many details about the different sources of Canadian income and taxes for international non-residents.

Speak to your accountant about your particular situation.

 

US Taxation of Canadian Retirement Plans

As a US citizen, you may receive benefits thanks to your work history in Canada, such as the Canadian Pension Plan (CPP) and Old Age Security (OAS). The US will tax these benefits the same way they tax social security.

The taxation of RRSPs in the US is complex. There are different rules whose application depends on the state in which you live. Some states tax the growth in an RRSP/RRIF, so you will need to speak to your accountant to confirm if you are in a state that does this. In addition, there may be federal taxes. And your taxation also depends on whether you are a US person with a Canadian retirement plan.

You should speak to your cross-border accountant about when it is the most tax efficient to take money out of an RRSP.

Regarding your Canadian tax liability, you fund an RRSP with pre-tax dollars; therefore, when you take the money out, it is taxed. This taxation is done through withholding taxes which have different rates depending on whether you have an RRSP or RRIF.

If you are living in the US, you will need to report this income in the US, and you will also need to cover the tax liability in Canada, where the money was earned.

 

Get Help with Your Cross-Border Taxes and Investing

To make smart decisions, you need a team with experience working with clients in situations like yours. Having a cross-border team becomes essential if you are a US person living in Canada or a Canadian who has crossed the US/Canada border.

One major problem is that people haven't received proper advice on the implications of having a cross-border estate when setting up their estate plan. These mistakes in cross-border estate planning can result in additional costs and cause a lot of stress.

Get a team which includes a cross-border lawyer, cross-border accountant and cross-border financial team. Then you can relax knowing you are onside with Canada and the US, and you can prevent an unplanned taxable event.

 

Common Questions about the US-Canada Tax Treaty

How can a US Citizen living in Canada avoid double taxation?

The easiest way to avoid double taxation is to work with a cross-border accountant who will prepare your Canadian and US tax returns. They will understand how to utilize foreign tax credits to avoid double taxation. In addition, working with an investment advisor licensed in Canada and the US helps ensure you're not investing in the wrong things and paying more than you should.

Is my US income taxable in Canada?

If you are a US citizen living in Canada, you must report your worldwide income to Canada and the US. As a Canadian tax resident, it doesn't matter if your income is from the US or Canada, you need to report your worldwide income.

Do I have to pay double tax for Canada and the US?

No, you do not have to pay double tax for Canada and the US. You have to report and file your worldwide income to both countries. As a US person who is a resident of Canada, you will report to the Canadian Revenue Agency and the Internal Revenue Service in the US. The two tax systems are different, so I recommend working with a cross-border accountant who understands both sides.

How much of your income is tax-free in Canada?

(Speak to a tax accountant about your particular situation because this is general in nature.)

If you are a US person residing in Canada, you will have to report your total worldwide income to the Canada Revenue Agency, regardless of where it came from.

For 2023, the Federal Basic Personal Amount (BPA) is $15,000 if taxable income is below $165,430. This amount is the basic non-refundable tax credit. There is also a provincial BPA, so confirm with the province where you live.

*Please speak to a tax accountant about your situation.

Are Canadian taxes higher than US taxes?

In general, Canadian taxes are usually higher than US taxes. If you are planning a move from the US to Canada, taking advantage of certain opportunities you may have before you fall into a higher tax bracket is important.

 

Summary of Key Points:

• The US-Canada Income Tax Convention can help you avoid double tax on the same income.
• As a Canadian tax resident, you must report your worldwide income to Canada, including US-source income.
• Working with a cross-border team is essential to avoid falling into tax and investing traps that will cost you time and money.
• US taxes are based on citizenship and residency.
• Canadian taxes are based on residency.
• You will report to both countries as a US person living in Canada.

 

Next Steps

If you're a Canadian resident or are planning on moving to Canada and need assistance optimizing your investments, estate planning, wealth management and portfolio management, please get in touch. At SWAN Wealth Management, we specialize in Canadian financial planning, cross-border financial planning and wealth management.

 

More Canadian Financial Planning Articles & Guides

If you're planning a cross-border move, these articles and guides will help simplify your move and ensure you've covered everything.

🔹 Roth I.R.A. Canada: How to Manage Your Investments Across the Border

🔹 401k in Canada - How to Stay Onside with the IRS and Avoid a Large Tax Bill

🔹 Retiring to Canada - A Financial Planning Guide

🔹 Foreign Tax Credits in Canada and the US

 

About the Authors

Tiffany Woodfield is an Associate Portfolio Manager licensed in Canada and the USA, a Chartered Investment Manager (CIM), a Chartered Retirement Planning Counselor (CRPC), a STEP Associate and the co-founder of SWAN Wealth Management, along with her husband, John Woodfield. Tiffany advises clients who live in Canada and the United States and want to simplify their cross-border financial plan, move their assets across the border, and optimize their investments to minimize their tax burden. Together Tiffany and John Woodfield help their clients simplify their cross-border finances and create long-term revenue streams that will keep their assets safe whether they live in Canada or the US.

John Woodfield is a Financial Management Advisor (FMA), a Chartered Investment Manager (CIM), and a Certified Financial Planner (CFP), and in 2007 was inducted as a fellow of the Canadian Securities Institute (FCSI). As a portfolio manager and CFP®, he works with clients across Canada. John Woodfield's clients are families, individuals and business owners who understand the importance of comprehensive wealth and investment plans driven by the lifestyle they want to lead.

 

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