There is a U.S.-Canada tax treaty, but it doesn’t exempt Americans living in Canada from filing either tax return. Any American who earned over $14,600 USD of income worldwide in 2023, or just $400 USD of self-employment income, must file a U.S. federal tax return. Some Americans living in Canada may also have to file a U.S. state tax return, depending on the rules of the state in which they live.
To avoid double taxation, Americans living in Canada, who pay Canadian income tax, often claim the Foreign Tax Credit by filing IRS Form 1116 when they file their US return. This IRS provision enables them to claim U.S. tax credits for the same value as the Canadian income tax they’ve paid. Because Canadian income tax rates are higher than U.S. rates, claiming the Foreign Tax Credit normally eradicates the US tax bill, and leaves excess tax credits which can be carried forward or applied to the previous year.
Alternatively, some Americans claim the Foreign Earned Income Exclusion, which simply allows Americans living abroad who meet IRS criteria to exclude up to $120,000 USD (2023) of their earned income from US taxation. Neither of these provisions are applied automatically though. They must both be actively claimed by filing the corresponding IRS form.
Americans who have over $10,000 USD in total non-U.S. registered financial accounts that they have signatory control over, including bank and investment accounts, and most individual pension accounts, even if not registered in their name, are required to file an FBAR.
An FBAR is a Foreign Bank Account Report. Filing an FBAR involves reporting the details of foreign-registered accounts, including maximum balances, online to FinCEN, the US financial crimes authority. There is no additional tax implication – FBAR filing is just a reporting requirement – however, there are steep penalties for not filing and the US is receiving the same information directly from foreign financial firms.
Additionally, Americans living in Canada must report their non-U.S.-registered financial assets on IRS Form 8938 if the total value of their assets exceeds $200,000 USD. They must also report any Canadian business interests that they have.
The filing deadline for Americans abroad is June 15. Expats who need more time can always request an extension until October 15th by filing Form 4868.
Americans in Canada who have not been filing their US taxes because they didn’t know they were required to can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure.
