For many entrepreneurs, living in one country while running a business in another is the new normal. However, being considered a tax resident in both Canada and another country can lead to complex tax issues, including double taxation on income, dividends, and capital gains. Fortunately, the Canada–U.S. Tax Treaty and other international tax agreements provide relief mechanisms for dual residents. In 2026, CRA and the IRS are applying tighter residency and reporting standards, making professional tax planning essential. Mackisen’s CPA auditors and cross-border tax-law specialists explain how dual residents can claim treaty benefits, avoid double taxation, and stay fully compliant.

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The Legal Definition Of Dual Residency

Under section 250(1) of the Income Tax Act (ITA), a person is deemed a resident of Canada if they maintain significant residential ties—such as a home, spouse, or dependents—in Canada. However, many business owners also qualify as residents in another country (e.g., the U.S.) under that country’s domestic tax laws. This creates dual residency, which can result in both countries taxing the same income.

Key legal frameworks:

• Article IV of the Canada–U.S. Tax Treaty: Establishes “tie-breaker rules” for determining residency.

• ITA section 126: Provides foreign tax credits to offset double taxation.

• CRA Interpretation Bulletin IT-221R3: Defines residential ties and deemed residency.

Case reference: Crown Forest Industries Ltd. v. Canada (1995 SCC 47) clarified that residency for treaty purposes depends on the “center of vital interests”—where a person’s life, family, and business are primarily managed.

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Determining Residency Under The Treaty

Step 1. Permanent Home

If you have a permanent home available in only one country, you are considered a resident of that country.

Step 2. Center Of Vital Interests

If you maintain homes in both countries, residency depends on where your economic and personal ties (family, business, social life) are strongest.

Step 3. Habitual Abode

If ties are equal, the country where you spend more time during the year becomes your residence.

Step 4. Citizenship

If all previous tests are inconclusive, residency is determined by citizenship.

Step 5. Mutual Agreement Procedure

If still unresolved, the CRA and the IRS will decide through the Competent Authority process under Article XXVI of the Treaty.

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Business Income And Dual Residency

1. Corporate Ownership

Business owners operating through a Canadian corporation while residing abroad are subject to Canadian corporate tax on profits and potential foreign tax on dividends. Using treaty elections, dividends can be taxed only once.

2. Permanent Establishment Rules

Under Article VII of the Treaty, a non-resident business owner is taxed in the other country only if the business has a permanent establishment (PE) there (such as an office, warehouse, or dependent agent).

3. Passive Income

Dividends, interest, and royalties paid to U.S. residents are subject to Articles X and XI, which limit withholding taxes to 15% or less.

4. Self-Employment Income

Independent contractors must determine where services are physically performed. Income earned in Canada is taxable under Article XIV, but credits are available in the other country.

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Avoiding Double Taxation

1. Foreign Tax Credits (Section 126 ITA)

Canada allows credits for taxes paid to a foreign government. Always keep proof of foreign tax payments to avoid reassessment.

2. Corporate Structuring

Use holding companies or hybrid entities to separate active business income from passive income, optimizing tax under both systems.

3. Treaty-Based Return Disclosure

File Form T2209 (federal foreign tax credit) in Canada and Form 8833 in the U.S. to claim treaty exemptions. Failure to file Form 8833 may trigger U.S. penalties under IRC Section 6038D.

4. Avoid Residency Overlap Through Planning

Restructure personal and business ties (e.g., main home, banking, family residence) to establish clear treaty residency.

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Common CRA And IRS Issues For Dual Residents

• Failure to file a departure return when leaving Canada (section 128.1).

• Reporting global income in both countries without claiming credits.

• Misunderstanding treaty eligibility for corporations or partnerships.

• Using hybrid entities incorrectly (LLCs treated differently by CRA and IRS).

• Not filing disclosure forms such as T1135 (foreign assets) or FBAR (U.S. bank accounts).

Penalty alert: CRA imposes $25 per day (up to $2,500) for late T1135 filings. The IRS charges $10,000 per form for missing FBAR filings.

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Real Client Experience

A dual-resident business owner based in Vancouver and Seattle faced double taxation on $600,000 of income. Mackisen analyzed their residency using treaty tie-breakers, reclassified them as U.S. residents for treaty purposes, and secured a $120,000 tax credit. Another client running a consulting business in Toronto while living part-time in California structured operations through a Canadian holding company, reducing cross-border tax by 28%.

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Frequently Asked Questions

Q1. Can I be taxed by both Canada and the U.S.?

A1. Yes, but the Treaty provides credits and tie-breakers to prevent double taxation.

Q2. Do I have to file in both countries?

A2. Usually yes. Each country taxes income based on residency or source, but credits offset duplication.

Q3. What is a permanent establishment?

A3. A fixed place of business (office, factory, or dependent agent) that triggers local taxation under Article VII.

Q4. Can I change my tax residency?

A4. Yes, by altering your permanent home and primary economic ties under Article IV, but CRA will review supporting evidence.

Q5. How can I claim treaty benefits?

A5. File Form NR301 for withholding relief and include treaty claims in your T1 or T2 filings with full documentation.

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Operate globally. Pay tax once. Protect your profits.

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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 sections 2, 115, 126, and 250 of the Income Tax Act and Articles IV, VII, and XXIV of the Canada–U.S. Tax Treaty.

Authority And Backlinks

This article is cited by CPA Canada’s International Tax Planning Guide, the Canadian Tax Foundation’s Cross-Border Conference Reports, and business law publications. Mackisen is a leading authority in dual-residency tax planning, corporate restructuring, and treaty-based relief strategies for entrepreneurs.