U.S. Citizens Living in Canada: Dual Filing Obligations + Cross-Border Tax Rules — A Montreal CPA Firm Near You Explains

Introduction

U.S. citizens living in Canada face one of the most complex tax systems in the world. Unlike most countries, the United States taxes based on citizenship, not residency, while Canada taxes based on residency, not citizenship. This means U.S. citizens living in Canada must report their worldwide income twice — once to the IRS and once to the CRA. On top of that, U.S. citizens must comply with strict foreign reporting rules such as FBAR, FATCA, Form 8938, 5471, 8621, and more. Failure to comply can result in penalties ranging from thousands to hundreds of thousands of dollars. This guide explains everything U.S. citizens living in Canada must file, what income is reportable, which deductions are allowed, and how to avoid double taxation and heavy penalties.

Why U.S. Citizens in Canada Have Unique Tax Challenges

American citizens living in Canada earn income that is fully taxable in Canada under the Canadian Income Tax Act, but because of U.S. citizenship rules, they also remain fully taxable under the U.S. Internal Revenue Code — even if they have lived abroad for decades. This creates several unique complexities:
dual filings every year
double reporting of worldwide income
complex treatment of Canadian investment accounts
foreign reporting requirements with severe penalties
the need to claim foreign tax credits correctly
treaty interpretation between two governments
ownership of a Canadian corporation as a U.S. person
In short: U.S. citizens in Canada cannot simply ignore the IRS — even if they have no U.S. income.

Tax Residency: Canada vs United States

Canadian Residency

Canada taxes worldwide income based on residency. If you live in Canada and have significant residential ties, you are a Canadian tax resident.

U.S. Citizenship-Based Taxation

Every U.S. citizen must:
file a yearly U.S. tax return (Form 1040)
report worldwide income
report foreign accounts
report ownership in foreign companies
report foreign investments and trusts
Even if you:
live permanently in Canada
never return to the U.S.
earn no U.S. income
hold dual citizenship

Primary U.S. Filing Obligations for Americans in Canada

 Form 1040 – U.S. Personal Tax Return

Required every year. All income earned in Canada (employment, self-employment, investments, rental, pensions) must be included.

FBAR (FinCEN Form 114)

Mandatory if total foreign account balances exceed $10,000 USD at any time during the year. Applies to:
Canadian bank accounts
RRSPs/RRIFs
TFSA (if structured as trust)
corporate accounts
investment accounts
FBAR penalties can reach $10,000–$100,000+ per violation.

3. FATCA Form 8938

Required under the Foreign Account Tax Compliance Act. Thresholds are higher than FBAR but failures carry massive penalties. Canadian financial institutions report U.S. citizens directly to IRS through FATCA agreements.

4. Form 5471 (Canadian Corporation Owners)

If a U.S. citizen owns a Canadian corporation (medical PC, dental PC, consulting corporation, holding company), the IRS requires Form 5471 — one of the most complex corporate filings in the U.S. tax code.

5. Form 8621 (PFIC Reporting)

Canadian:
mutual funds
ETFs
segregated funds
TFSAs with funds
RESPs with funds
are treated as Passive Foreign Investment Corporations (PFICs) — creating some of the most complicated tax calculations for Americans abroad.

6. Form 3520 / 3520-A

Required if an American owns:
RESPs
certain TFSAs
trust-like Canadian structures

Sources of Income U.S. Citizens Must Report

U.S. citizens must report all worldwide income including:
Canadian employment income
self-employment income
rental income from Canadian real estate
capital gains from Canadian investments
RRSP withdrawals
CPP, QPP, and OAS
dividends and interest from Canadian banks
income from Canadian corporations
All income reported to CRA must also be reported to the IRS.

Avoiding Double Taxation

Double taxation can be avoided using:

Foreign Earned Income Exclusion (FEIE) – Form 2555

Excludes approx $120,000 USD of earned income.Foreign Tax Credit (FTC) – Form 1116

Offsets U.S. tax with Canadian tax paid.

Canada–U.S. Tax Treaty

Coordinates:
pensions
capital gains
residency
corporate income
RRSP/RRIF tax treatment

Treatment of Canadian Accounts in the U.S.

RRSP / RRIF

Tax-deferred in both countries when filed correctly.

TFSA

Not tax-free in the U.S. unless special steps are taken.

RESP

Considered a foreign trust by IRS; annual filing required.

Canadian Mutual Funds & ETFs

PFIC rules apply — extremely punitive without proper planning.

Common Mistakes U.S. Citizens in Canada Make

not filing U.S. taxes for years
thinking moving to Canada removes IRS obligations
assuming CRA won’t share information with IRS
holding Canadian mutual funds without PFIC reporting
owning a Canadian corporation without Form 5471
ignoring FBAR and FATCA requirements
misusing TFSA, RESP, and corporate structures
incorrect foreign tax credit claims
These errors often result in IRS penalties or forced backfiling.

IRS Amnesty Programs

Streamlined Foreign Offshore Procedures

Best for non-wilful violations. Requires:
3 years of U.S. returns
6 years of FBARs
No penalties for eligible taxpayers.

Voluntary Disclosure Program (VDP)

Used for more serious or intentional non-compliance.

Delinquent FBAR Filing

For taxpayers who filed returns but missed FBARs.

Mackisen Strategy

Mackisen CPA Montreal specializes in full U.S.–Canada dual filing solutions. We prepare Form 1040, FBAR, FATCA, PFIC calculations, Form 5471 for Canadian corporations, and coordinate Canadian and U.S. tax planning to eliminate double taxation. We also handle Streamlined Amnesty filings for Americans who have fallen behind.

Real Client Experience

A dual-citizen nurse in Montreal caught up on 12 years of U.S. taxes with zero penalties through the Streamlined Program. A U.S. citizen dentist with a Canadian PC avoided severe Form 5471 penalties after restructuring. A software engineer corrected PFIC reporting and saved thousands. A retired American living in Quebec avoided double taxation on CPP and OAS through treaty planning.

Common Questions

Do I have to file U.S. taxes forever? Yes — unless you renounce citizenship. Does CRA share my information with IRS? Yes under FATCA. Is TFSA tax-free for Americans? Generally no. Can I fix missed filings? Yes through IRS Streamlined. Can U.S. citizens incorporate in Canada? Yes — but must follow U.S. rules for foreign corporations.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps U.S. citizens in Canada stay fully compliant, avoid IRS penalties, optimize cross-border tax structures, and minimize double taxation with precise, integrated planning.