US-Canada Tax Treaty

Published on June 13, 2024
by Clark Stott

Clark Stott has been with Expat Tax Online since 2015. Being a dual national based in the UK, Clark has unique experience helping US citizens (and Accidental Americans) become tax compliant via the Streamlined Tax Amnesty program. Clark likes to help Americans in the UK keep their tax situations as simple as possible to avoid harsh IRS treatment.

Why was the tax treaty between the US and Canada established?

The US-Canada tax treaty was created to prevent double taxation for individuals and businesses operating in both countries. This agreement ensures income earned in one country by residents of the other is not taxed by both jurisdictions, reducing the tax burden for cross-border workers and enterprises. You can explore the detailed provisions of this treaty on the official IRS website: Canada Tax Treaty Documents

How can I claim benefits under the US/Canada income tax treaty?

  • Understand Applicable Provisions: Learn which treaty provisions apply to your situation, including those on dual residency, earned income, pensions, and investments.
  • Filing the Correct Forms: Use IRS Form 8833 to claim treaty benefits on your US tax return, detailing the treaty benefits you are applying for.
  • Maintain Documentation: Keep thorough records from Canada, such as proof of tax residency or income statements.
  • Seek Professional Advice: Consult with a tax professional who specializes in international tax laws to ensure the treaty is accurately applied to your taxes.

Do US dual citizens living in Canada have to pay taxes to both countries?

Yes, as a dual citizen, your global income is taxable by the US. However, the tax treaty allows you to mitigate double taxation. Both the US and Canada offer credits for taxes paid to the other country, reducing your tax obligations.

What are the mechanisms to prevent double taxation under the treaty?

  • Foreign Tax Credits (FTC): Allows taxes paid in one country to be credited against tax liability in the other.
  • Foreign Earned Income Exclusion (FEIE): US citizens and resident aliens can exclude up to $126,500 of foreign-earned income from their US taxable income for 2024.
  • Foreign Housing Exclusion (FHE): US expats can exclude or deduct certain foreign housing expenses from their taxable income, with amounts varying based on location and expenses.

What if there is a dispute over tax residency?

If tax residency is unclear, “tie-breaker” rules in the treaty help determine residency status for tax purposes. These rules resolve cases where a person might be considered a resident of both countries, ensuring fair taxation in line with the treaty.

How does the treaty address tax residency conflicts?

The US-Canada tax treaty includes “tie-breaker” rules for determining tax residency when someone qualifies as a resident in both countries:

  • Permanent Home: Priority is given to where you have a permanent home.
  • Center of Vital Interests: If you have homes in both countries, the decision is based on where your personal and economic ties are stronger.
  • Habitual Abode: If still unclear, it’s based on where you spend more time.
  • Nationality: If the above criteria do not resolve the issue, your nationality is considered.
  • Mutual Agreement Procedure: As a last resort, tax authorities from both countries will collaborate to decide.

Why am I subject to US taxes while living in Canada?

The US uses a citizen-based taxation system, meaning all US citizens and permanent residents must report and possibly pay taxes on their worldwide income, regardless of where they live.

Does the treaty provide specific benefits for retirement savings?

Yes, the treaty offers several benefits for retirement planning:

  • Tax-Deferred Growth: Investments within Canadian RRSPs grow tax-deferred for US taxpayers until distributions begin.
  • Deductions for Contributions: Contributions to recognized retirement plans can be deductible in the taxpayer’s resident country, including RRSP contributions for US citizens residing in Canada.

What is the 'Savings Clause' in the US-Canada tax treaty?

The ‘Savings Clause’ allows each country to tax its own citizens and residents as if the treaty didn’t exist, with some exceptions:

  • General Rule: US citizens living in Canada are subject to US tax on their global income per US laws.
  • Exceptions: Specific income types, like pensions and social security benefits, can still receive treaty benefits despite this clause.