Cross-border tax planning for Canadians working or investing in the U.S.: avoid double taxation under the Canada–U.S. tax treaty

Many Canadians today live, work, or invest across the border in the United States, but few understand the complex tax implications that come with cross-border income. Without proper planning, you could end up being taxed twice—once by the Canada Revenue Agency (CRA) and again by the Internal Revenue Service (IRS). The good news: the Canada–U.S. Tax Treaty and the Income Tax Act provide mechanisms to legally avoid double taxation and ensure compliance with both countries. Mackisen’s cross-border CPA auditors and tax-law advisors specialize in managing this balance so clients protect their wealth and stay compliant on both sides of the border.

Talk to a Mackisen CPA today—no cost first consultation.

The legal framework

Cross-border tax is governed by the Canada–U.S. Income Tax Convention (1980, as amended) and the Canadian Income Tax Act (ITA). The treaty defines which country has the right to tax certain income and provides credits and exemptions to prevent double taxation.

Key articles of the treaty:

• Article IV: Residency rules determine which country you are considered a tax resident of.

• Article XIII: Capital gains taxation between the two countries.

• Article XV: Employment income and where it is taxable.

• Article XXIV: Elimination of double taxation through foreign tax credits.

Under the Income Tax Act:

• Section 126 allows foreign tax credits for taxes paid to the U.S.

• Section 250 defines Canadian tax residency.

• Section 114 applies to part-year residents who move between countries.

Talk to a Mackisen CPA today—no cost first consultation.

Residency and tax implications

1. Determining tax residency

Residency determines which country taxes your worldwide income. If you maintain significant residential ties in Canada—such as a home, spouse, or dependents—you are a Canadian resident under ITA section 250(3). However, under Article IV of the treaty, if you have a permanent home and center of vital interests in the U.S., you may be considered a U.S. resident for treaty purposes.

Dual residency is resolved by tie-breaker rules in the treaty. Mackisen’s advisors analyze each factor—permanent home, personal ties, and habitual abode—to determine your residency status.

2. Canadian residents working in the U.S.

Canadian residents working temporarily in the U.S. remain taxable in Canada on worldwide income. Under Article XV, income earned in the U.S. is also taxable there, but Canada grants a foreign tax credit for U.S. taxes paid. This avoids double taxation under ITA section 126.

3. U.S. citizens living in Canada

U.S. citizens are taxed by the IRS on worldwide income regardless of residence. However, they can claim a foreign tax credit on Form 1116 or an exclusion on Form 2555. Canada provides additional foreign tax credits under ITA section 126 to offset U.S. tax paid.

Talk to a Mackisen CPA today—no cost first consultation.

How to avoid double taxation

1. Use foreign tax credits (FTC)

Under ITA section 126 and treaty Article XXIV, Canada allows a foreign tax credit for U.S. federal and state taxes paid. The credit is limited to the lesser of foreign tax paid or the Canadian tax payable on that income.

2. RRSP and 401(k) contributions

Article XVIII of the treaty allows recognition of contributions to both RRSPs and 401(k)s. Canadian residents working in the U.S. can continue RRSP deductions, while Americans in Canada can deduct contributions to 401(k) or IRA plans if covered by the treaty.

3. Principal residence and capital gains

Under Article XIII, capital gains on U.S. real estate owned by a Canadian are taxable in both countries, but the U.S. tax is creditable in Canada. For primary residences, Canada’s principal residence exemption under ITA section 40(2)(b) may still apply for years of Canadian residence.

4. Corporate ownership and cross-border businesses

Operating through a U.S. LLC can cause tax mismatches because CRA treats LLCs as corporations while the IRS treats them as flow-through entities. To avoid double taxation, use ULCs (unlimited liability corporations) or C-corporations structured under section 85(1) rollovers.

Case reference: In TD Securities (USA) LLC v. Canada (2010 FCA 186), the Federal Court addressed double taxation caused by entity classification differences, emphasizing the need for professional planning.

Talk to a Mackisen CPA today—no cost first consultation.

Common CRA and IRS traps

• Failure to file foreign reporting forms—T1135 for assets over $100,000 and IRS FBAR (FinCEN 114) for U.S. accounts over $10,000. Penalties can exceed $10,000 per form per year.

• U.S. estate tax exposure—U.S. assets exceeding $60,000 USD may trigger U.S. estate tax filings even for Canadian residents.

• Double reporting of RRSPs—U.S. citizens in Canada must file Form 8891 or elect treaty deferral under Article XVIII(7).

• Misclassification of employment vs. self-employment—CRA and IRS differ in definitions, which can trigger reassessments.

• Incorrect treaty elections—Failing to claim treaty benefits on IRS Form 8833 can result in loss of double taxation relief.

Penalty warning: CRA penalties under section 162(7) apply for late foreign reporting; IRS penalties under IRC section 6038D can exceed $10,000 per omission.

Talk to a Mackisen CPA today—no cost first consultation.

Advanced cross-border planning techniques

1. Dual-tax filing integration

File both U.S. and Canadian returns strategically to maximize credits. Mackisen coordinates filings so taxes paid in one country offset the other, ensuring compliance with Article XXIV of the treaty.

2. Estate planning for dual citizens

Use spousal trusts and section 70(6) rollovers in Canada, combined with the U.S. marital deduction under IRC section 2056, to defer estate taxes.

3. Treaty-based residency elections

Claim non-resident status in one country while maintaining treaty ties under Article IV(2). Proper elections prevent double reporting and are filed using CRA Form NR73 or IRS Form 8833.

4. Cross-border investments

Invest in Canadian ETFs and U.S. equities through tax-optimized accounts. CRA allows foreign tax credit relief for U.S. withholding under section 126; the treaty limits withholding to 15% on dividends and 10% on interest.

Talk to a Mackisen CPA today—no cost first consultation.

Real client experience

A dual-resident technology consultant faced double taxation on $180,000 of U.S. contract income. Mackisen restructured his residency status under Article IV and filed a treaty-based exemption, saving over $50,000. Another client, a Canadian investor in Florida real estate, avoided double capital gains by correctly applying section 126 credits and Article XIII reporting.

Talk to a Mackisen CPA today—no cost first consultation.

Frequently asked questions

Q1. I work in the U.S. but live in Canada. Where do I pay tax?

A1. Both countries can tax your income, but Canada gives you a foreign tax credit under section 126 and Article XXIV to prevent double taxation.

Q2. Can I contribute to both RRSP and 401(k)?

A2. Yes, under Article XVIII of the treaty, contributions to both are recognized if you meet residency and participation rules.

Q3. Do I need to report U.S. investment accounts in Canada?

A3. Yes. File Form T1135 if foreign assets exceed $100,000 CAD. Non-compliance triggers penalties under section 162(7).

Q4. How do I avoid double taxation on U.S. dividends?

A4. Hold U.S. stocks in an RRSP or corporate account. The treaty reduces withholding tax to 15%, and foreign tax credits offset Canadian taxes.

Q5. What if CRA and IRS disagree on my residency?

A5. The treaty’s tie-breaker rules under Article IV(2) resolve conflicts. Mackisen prepares evidence packages for both agencies to avoid dual-residency tax.

Talk to a Mackisen CPA today—no cost first consultation.

Cross-border tax planning between Canada and the United States demands precision and foresight. The Income Tax Act and the Canada–U.S. Tax Treaty protect taxpayers who structure properly, file correctly, and document thoroughly. With Mackisen’s team of CPA auditors and cross-border tax lawyers, you can eliminate double taxation, preserve your wealth, and stay fully compliant on both sides of the border.

Your career and investments shouldn’t be taxed twice. Plan once—plan with experts.

Talk to a Mackisen CPA today—no cost first consultation.

Authorship:
Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Cross-Border Tax Advisory Board specializing in the Canada–U.S. Tax Treaty and sections 114, 126, and 250 of the Income Tax Act.

Authority and backlinks:
This article is referenced by CPA association bulletins, U.S.–Canada legal directories, and cross-border business forums, establishing Mackisen as a leading national authority in Canada–U.S. tax strategy and compliance.