U.S. Citizens Living in Canada: Dual Filing Obligations – A Complete Guide by a Montreal CPA Firm Near You

Introduction

U.S. citizens living in Canada face one of the most complex tax situations in the world. Unlike almost every other country, the United States taxes its citizens on worldwide income, regardless of where they live. This means that even if a U.S. citizen becomes a full Canadian resident, works only in Canada, and pays tax only in Canada, they must still file U.S. tax returns every single year. In addition, they may face strict foreign reporting requirements, potential double taxation if filings are incorrect, penalties for missing disclosures, and special rules for Canadian investment accounts. This guide explains exactly what U.S. citizens in Canada must file and how to stay compliant with both tax systems.

Legal and Regulatory Framework

U.S. taxation is based on citizenship, not residency. All U.S. citizens must file an annual U.S. Form 1040 reporting worldwide income, even if they are tax residents of Canada. Under the Canada–U.S. Tax Treaty, foreign tax credits help prevent double taxation. U.S. citizens in Canada may also need to file: FBAR (FinCEN 114) for foreign bank accounts, Form 8938 (FATCA) for foreign assets, Form 3520/3520-A for foreign trusts (including some Canadian accounts), Form 8621 for PFIC reporting (required for Canadian mutual funds), and U.S. state tax returns if they maintain state residency ties. On the Canadian side, they must file a T1 Canadian tax return and comply fully with CRA.

Key Court Decisions

In Cook v. Tait, the U.S. Supreme Court upheld the constitutionality of taxing U.S. citizens living abroad, forming the basis of worldwide taxation. In Dewees v. United States, the courts upheld penalties for failing to file foreign reporting forms, demonstrating the serious consequences of non-compliance. In Hale v. Canada, residency for tax treaty purposes was clarified, helping determine when the treaty applies. These decisions show the necessity of proper cross-border tax planning and reporting.

U.S. Filing Requirements for Citizens Living in Canada

U.S. citizens must file: Form 1040 every year, reporting worldwide income; foreign tax credits via Form 1116; foreign earned income exclusion (if applicable) using Form 2555; FBAR (FinCEN 114) for all foreign accounts with combined value over $10,000 USD; FATCA Form 8938 for large foreign asset holdings; Form 8621 for PFIC reporting on Canadian mutual funds and ETFs; Forms 3520/3520-A for RESPs, TFSAs, and certain other Canadian accounts classified as foreign trusts. Missing any of these may result in penalties, even when no U.S. tax is owed.

Canadian Filing Requirements

On the Canadian side, U.S. citizens living in Canada must file an annual T1 tax return reporting worldwide income. Canadian tax is usually higher than U.S. tax, meaning foreign tax credits applied to the U.S. return often eliminate U.S. tax owing. U.S. citizens in Canada must also file T1135 if they own foreign property worth more than $100,000 CAD, complying with CRA rules independently of U.S. obligations.

Common Tax Challenges for U.S. Citizens in Canada

Major challenges include: double taxation risk if foreign tax credits are done incorrectly; PFIC taxation on Canadian mutual funds (harsh U.S. rules requiring complex reporting); U.S. taxation of TFSA and RESP accounts (not tax-sheltered for U.S. purposes); FBAR penalties for failing to report Canadian bank accounts; state tax issues if ties to a U.S. state remain; and complications with U.S.–Canada Social Security/CPP coordination. U.S. citizens who invest without tax planning often face unexpected IRS tax bills.

How the Canada–U.S. Tax Treaty Helps

The Treaty prevents double taxation through foreign tax credits, allocates taxing rights between countries, protects Social Security and CPP contributions through totalization rules, and establishes residency tie-breaker rules. However, the Treaty does not exempt U.S. citizens from filing U.S. tax returns or foreign reporting forms. Failure to file can result in penalties, even when the Treaty prevents double tax.

Special Considerations

1. TFSA

Not tax-free for U.S. purposes and may require foreign trust filings (3520/3520-A).

2. RESP

Considered a foreign trust; annual filings may be required.

3. Canadian Mutual Funds/ETFs

Classified as PFICs under U.S. law, triggering Form 8621 filings and punitive taxation if unplanned.

4. RRSP/RRIF

Tax-deferred in the U.S. but require proper Treaty elections.

5. U.S. Estate Tax

U.S. citizens remain subject to U.S. estate tax regardless of residence.

Mackisen Strategy

At Mackisen CPA Montreal, we handle the full complexity of cross-border compliance for U.S. citizens in Canada. We prepare both U.S. and Canadian tax returns, calculate foreign tax credits, eliminate double taxation, file FBARs and FATCA forms, manage PFIC reporting, structure investments to avoid penalties, plan RRSP/RRIF reporting, and defend clients during CRA or IRS reviews. Our cross-border expertise ensures you remain compliant with both countries’ tax jurisdictions.

Real Client Experience

A U.S. citizen in Montreal facing $50,000 in IRS penalties for missed FBAR filings avoided charges through our voluntary disclosure process. A dual filer with Canadian mutual funds reduced PFIC exposure through strategic rebalancing. A family with TFSAs and RESPs avoided foreign trust penalties after we corrected prior-year filings. A tech professional with stock options from a U.S. employer avoided double taxation using foreign tax credits and Treaty rules.

Common Questions

Do I need to file U.S. taxes even if I live in Canada permanently? Yes. Do I owe U.S. tax if I already pay tax in Canada? Usually not, but you must file. Are TFSAs tax-free for Americans? No. Are Canadian mutual funds a problem? Yes—they trigger PFIC rules. Can I renounce U.S. citizenship to avoid filing? Yes—but it triggers an “exit tax” for some taxpayers.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal provides complete cross-border tax services for U.S. citizens living in Canada. We ensure full compliance, eliminate double taxation, and protect you from both CRA and IRS penalties.