U.S. Tax Obligations for Americans in Canada and Canadians with U.S. Ties

The United States taxes its citizens and permanent residents on worldwide income regardless of where they live. If you are a U.S. citizen or green card holder living in Canada, you are required to file a U.S. federal tax return each year — even if you have lived in Canada your entire working life, even if all of your income is Canadian, and even if you owe no U.S. tax.

This surprises many Americans in Canada, particularly those who have been living there for years or decades without filing. It is not a new requirement — the U.S. has always taxed on the basis of citizenship — but awareness of it has increased significantly in recent years as Canadian banks began asking clients to certify their U.S. person status under FATCA.

Green card holders face the same obligation as U.S. citizens. An expired green card does not end your U.S. tax filing obligation. You remain a U.S. tax resident until you formally abandon your permanent resident status by filing Form I-407 with USCIS and, for tax purposes, filing Form 8854. Until that process is complete, you are required to file U.S. returns.

Dual citizens — including Canadians born in the United States or born abroad to a U.S. citizen parent — are subject to the same rules. Holding a Canadian passport and never having lived in the United States does not exempt you from U.S. tax obligations if you hold U.S. citizenship.

U.S. citizens and green card holders must report worldwide income on their U.S. return — the same scope as a Canadian T1 General, but for U.S. purposes. This includes:

• Canadian employment income (T4)
• Self-employment income
• Investment income — interest, dividends, capital gains
• Rental income from Canadian or other foreign property
• Pension income including CPP, OAS, and employer pensions
• RRSP and RRIF withdrawals
• Income from any other source, wherever earned

The Canada-U.S. Tax Treaty and available credits — particularly the Foreign Tax Credit — prevent most Americans in Canada from owing U.S. tax on income that has already been taxed in Canada. Canada’s tax rates are generally comparable to or higher than U.S. rates, so for most filers the U.S. liability is zero or minimal after credits are applied. The obligation is primarily one of filing, not payment.

However, there are situations where U.S. and Canadian tax rules diverge in ways that create real U.S. liability — capital gains treatment, certain retirement account distributions, and stock compensation are common examples. These require careful planning.

This is one of the most important and most misunderstood areas of cross-border tax for Americans in Canada. Many accounts that are tax-advantaged in Canada receive no equivalent treatment under U.S. tax rules — and some trigger significant reporting obligations.

TFSA (Tax-Free Savings Account) In Canada, income earned inside a TFSA is completely tax-free. The U.S. does not recognize TFSAs as tax-advantaged accounts and treats them as foreign trusts. Income earned inside a TFSA is taxable in the U.S. in the year it is earned, and the account itself triggers foreign trust reporting obligations on Forms 3520 and 3520A. TFSAs are one of the most common sources of unexpected U.S. tax exposure for Americans in Canada.

RESP (Registered Education Savings Plan) Like TFSAs, RESPs are treated as foreign trusts for U.S. purposes. Income earned inside an RESP is reportable on the U.S. return, and Forms 3520 and 3520A are required. The government grants paid into RESPs (CESG) are also reportable as income in the U.S. in the year received.

RRSP and RRIF (Registered Retirement Savings Plan / Registered Retirement Income Fund) RRSPs and RRIFs receive more favorable treatment than TFSAs and RESPs under the Canada-U.S. Tax Treaty. An election can be made on the U.S. return to defer taxation of income earned inside an RRSP or RRIF until distributions are taken — mirroring the Canadian treatment. This election must be made on the return; it does not apply automatically. Without the election, income earned inside the RRSP is currently taxable in the U.S. RRSPs and RRIFs are also reportable on the FBAR and may be reportable on Form 8938.

RPP (Registered Pension Plan) and other employer benefit plans Many employer-sponsored pension and group benefit plans in Canada are treated as foreign trusts for U.S. purposes, depending on their structure. Whether a particular plan triggers Forms 3520 and 3520A depends on how the plan is organized. This is a fact-specific determination that should be addressed with a cross-border Tax Specialist.

RDSP (Registered Disability Savings Plan) RDSPs are also treated as foreign trusts for U.S. purposes and trigger the same Forms 3520 and 3520A reporting obligations.

Forms 3520 and 3520A are information returns — not tax forms in the traditional sense — but the penalties for non-filing are significant, starting at $10,000 per form per year.

Form 3520 is filed by the U.S. person and reports transactions with foreign trusts, including contributions to and distributions from the trust, as well as certain large gifts from foreign persons.

Form 3520A is the annual information return for the foreign trust itself. For individual account holders, the account holder files this on behalf of the trust.

Both forms are due on the same date as your tax return, including extensions. They are separate from the return itself and must be filed even in years where no contributions or distributions occurred, as long as the account remains open.

If you have a TFSA, RESP, or RDSP, assume that Forms 3520 and 3520A are required and confirm the specifics with your Tax Specialist.

Americans living in Canada with Canadian bank and financial accounts almost universally have FBAR filing obligations — the $10,000 aggregate threshold is low enough that ordinary chequing and savings accounts typically trigger it.

FBAR (FinCEN 114): Required if the aggregate value of all foreign financial accounts exceeded $10,000 USD at any point during the calendar year. Canadian accounts — including chequing, savings, investment accounts, RRSPs, RRIFs, TFSAs, RESPs, and cash value life insurance — all count toward this threshold. The FBAR is filed separately from your tax return, directly with FinCEN, and is due April 15 with an automatic extension to October 15.

Form 8938: Required if the total value of specified foreign financial assets exceeds the applicable threshold for your filing status and residency. For Americans living outside the U.S., the threshold is $200,000 at year end or $300,000 at any point during the year for single filers; $400,000 and $600,000 respectively for married filing jointly. Form 8938 is filed as part of your tax return.

For a full comparison of the two filings, see our Form 8938 vs. FBAR guide →

If you own 10% or more of a Canadian corporation — directly, indirectly, or constructively — you are likely required to file Form 5471, the information return for U.S. persons with interests in foreign corporations.

Constructive ownership rules are important here and often surprise people. Under IRS rules, close relatives — including spouses, parents, and children — are considered to own each other’s shares for constructive ownership purposes. If your Canadian spouse owns a Canadian corporation and you own even one share, you may be treated as owning 100% of the corporation for U.S. reporting purposes. This does not make the corporation’s income taxable to you — but it does trigger a Form 5471 filing obligation.

Form 5471 is one of the most complex information returns in the U.S. tax system. Penalties for non-filing start at $10,000 per form per year. If you have any ownership interest in a Canadian corporation, flag it with your Tax Specialist before assuming it doesn’t apply.

The Canada-U.S. Tax Treaty is one of the most comprehensive bilateral tax treaties in existence and provides significant relief for cross-border filers in several areas:

Prevention of double taxation: The treaty, combined with the Foreign Tax Credit, generally prevents Americans in Canada from being taxed twice on the same income. Canadian taxes paid on Canadian-source income can be credited against the U.S. tax liability on that same income.

RRSP and RRIF deferral: As noted above, the treaty allows an election to defer U.S. taxation of income earned inside an RRSP or RRIF until distributions are taken — consistent with Canadian treatment.

CPP and OAS: Canada Pension Plan and Old Age Security payments received by U.S. persons resident in Canada are taxable only in Canada under the treaty, not in the United States.

Social Security equivalence: U.S. Social Security benefits received by Canadian residents are taxable only in Canada under the treaty. Similarly, CPP benefits received by U.S. residents are taxable only in the United States.

Treaty positions and Form 8833: When a treaty position is taken on a U.S. return — meaning you are claiming treaty benefits to reduce or eliminate U.S. tax on a particular type of income — it must be disclosed on Form 8833. This is a disclosure requirement, not an election, and failure to file it when required can result in penalties.

The treaty is a powerful tool for cross-border filers but it does not eliminate the U.S. filing obligation. It reduces or reallocates tax liability; it does not exempt U.S. persons from filing.

If you are a U.S. citizen or green card holder living in Canada and have never filed U.S. returns, you are not alone — and there is a clear path to coming into compliance without facing the full penalties that would otherwise apply.

The Streamlined Foreign Offshore Procedures allow eligible filers to come into compliance by filing three years of back tax returns, three years of required information returns, and six years of FBARs — with all penalties waived — provided the non-compliance was non-willful. For most Americans in Canada who simply didn’t know they had U.S. filing obligations, the non-willful standard is met.

For a full guide to the Streamlined program, see our Streamlined Filing Compliance Procedures guide →

If you think you may need to come into compliance, a consultation with an AET Tax Specialist is the right first step. We will assess your situation, explain your options, and give you a clear picture of what the process involves before any work begins.

Not every Canadian with a connection to the United States has a U.S. filing obligation — but several common situations do create one.

Substantial presence in the United States Canadians who spend significant time in the United States may be treated as U.S. tax residents under the Substantial Presence Test. This is a day-counting formula: if you were present in the U.S. for 183 days or more in the current year, or meet a weighted three-year formula (all days in the current year, plus one-third of days in the prior year, plus one-sixth of days two years ago), you may be considered a U.S. tax resident and required to file a U.S. return on your worldwide income.

Snowbirds — Canadians who spend extended periods in the U.S. — are a common example. Many are unaware that their time in the U.S. could trigger a U.S. tax residency determination. The Canada-U.S. Tax Treaty provides a tie-breaker rule that can establish Canadian residency for treaty purposes even if you meet the Substantial Presence Test — but a treaty position must be formally claimed on a U.S. return.

U.S. source income Canadians who earn income from U.S. sources — including U.S. employment income, U.S. rental property, U.S. pension distributions, or U.S. investment income — may have U.S. filing obligations depending on the nature and amount of that income. Non-resident withholding tax is often applied at source, but filing a U.S. return may be required or beneficial to recover over-withheld amounts.

U.S. rental property Canadians who own rental property in the United States are generally required to file a U.S. non-resident return (Form 1040NR) reporting rental income. A net income election under Section 216 of the Income Tax Act may be relevant on the Canadian side, and both sides of the border need to be coordinated.

Sale of U.S. real property When a Canadian sells U.S. real property, FIRPTA (Foreign Investment in Real Property Tax Act) withholding applies — typically 15% of the gross sale price, withheld by the buyer. A U.S. return is required to report the sale and potentially recover over-withheld amounts. A Certificate of Compliance (Form 8288-B) filed before closing can reduce withholding based on actual expected tax liability.

U.S. retirement account distributions Canadians who hold U.S. retirement accounts — 401(k), IRA, or similar — and take distributions may have U.S. reporting and withholding obligations. The Canada-U.S. Tax Treaty affects how these distributions are taxed on both sides of the border.

Inheritance from a U.S. person Canadians who inherit more than $100,000 from a non-U.S. person — or any amount from a U.S. person — may have U.S. reporting obligations under Form 3520. This is an information return, not a tax form, but penalties for non-filing are significant.