Frequesntly Asked Questions.
You have questions about U.S. tax compliance? We have some answers for you.
Q: I’m a Canadian citizen living back in Canada and I have a U.S. pension such as 401(k), IRA, or other retirement plan. What should I know before withdrawing or transferring the funds?
This is a very common situation for Canadians who previously worked in the U.S. Many investment advisors in the U.S. are not licensed to deal with Canadian residents, and as a result, clients are sometimes told they must immediately liquidate their 401(k) or IRA. However, doing so can be extremely costly. A full liquidation triggers U.S. withholding tax (typically 15%) and also makes the entire amount fully taxable in Canada at your graduated Canadian tax rates, which are often much higher. Before taking any action, explore options such as transferring the plan, maintaining it in the U.S. under specific conditions, or withdrawing funds over time to minimize the overall tax burden.
Q: I was asked to complete a W-8BEN form by my investment company. Do I need to file this form if I’m a U.S. citizen?
No. The W-8BEN form is not for U.S. citizens — it is for Canadian (non-U.S.) residents who are receiving income from U.S. sources such as pensions, investments, or interest.
If you are asked to complete a W-8BEN by an investment company such as TD Waterhouse, it’s because you are claiming benefits under the Canada–U.S. Tax Treaty to reduce U.S. withholding tax.
For example: If you are a Canadian receiving a U.S. pension, the standard U.S. withholding rate is 30%. By completing the W-8BEN form and claiming the appropriate treaty provision, this withholding can be reduced to 15%. In this case, you are not required to file a U.S. tax return, because the correct amount of tax has already been withheld at source. The 15% withheld in the U.S. can be claimed as a foreign tax credit on your Canadian income tax return, avoiding double taxation.
Q: I’m a Canadian citizen and own rental property located in the United States. Do I have to file a U.S. tax return for my rental income?
Yes. If you are a Canadian citizen earning rental income from U.S. property, you are subject to U.S. income tax on that rental income, even if you live in Canada.
- Reporting Requirements – If you rent your U.S. property for more than 15 days during the year, you are required to file a U.S. Non-Resident Tax Return (Form 1040-NR) to report your rental income and claim allowable deductions such as repairs, property insurance, mortgage interest and management fees.
- Filing Deadlines and Extensions – If you reside outside the U.S., you automatically receive an extension until June 15 to file your return.
- Withholding Option (Form W-8ECI or Form 1042-S) – If your U.S. property manager or tenant withholds 30% tax on gross rents, you can file an election to treat your rental income as effectively connected income (ECI) — allowing you to report income net of expenses and potentially receive a refund.
Q: What happens when I sell my U.S. personal use or rental property as a Canadian resident?
When a Canadian resident sells U.S. real estate, the transaction is subject to special U.S. withholding and tax reporting rules under the Foreign Investment in Real Property Tax Act (FIRPTA).
- You Need a U.S. Individual Taxpayer Identification Number (ITIN) – If you do not already have a U.S. Social Security Number, you must obtain an ITIN to file your U.S. Non-Resident Tax Return (Form 1040-NR). To apply: Complete Form W-7, submit Form W-7, and Form 1040-NR together to an IRS acceptance office.
- FIRPTA Withholding Requirement – The buyer is required to withhold 15% of the gross sale price and remit it to the Internal Revenue Service (IRS). This withholding is not necessarily your final tax—it is a prepayment toward any actual U.S. tax owed on the gain from the sale.
- U.S. Tax Return Requirement (Form 1040-NR) – As a non-resident of the U.S., you must file a U.S. Non-Resident Tax Return (Form 1040-NR) to: Report the sale, calculate the actual capital gain or loss, and claim a refund if the 15% withheld exceeds the true tax owing.
- Canadian Tax Implications – The sale is also taxable in Canada, since Canadian residents are taxed on worldwide income. However, you can claim a foreign tax credit for the U.S. tax paid to avoid double taxation. It’s essential to coordinate the U.S. and Canadian filings so that both tax returns align on the reported gain and timing.
In summary:
Selling U.S. property as a Canadian requires compliance with both U.S. and Canadian tax rules. Properly coordinating your filings and understanding FIRPTA withholding, ITIN requirements, and foreign tax credits ensures you pay the correct amount of tax.
Q: I’m a U.S. citizen living in Canada. How do I avoid being taxed twice on the same income?
- U.S. citizens are required to file a U.S. tax return every year, reporting their worldwide income — even if they live and work in Canada. Fortunately, there are provisions in place to avoid double taxation between the two countries. Foreign Earned Income Exclusion (Form 2555). If you are a bona fide resident of Canada, or if you have been physically present in Canada for at least 330 days in a 12-month period, you may be eligible to exclude up to a set annual amount of your foreign earned income (such as T4) from U.S. taxation.
- Foreign Tax Credit (Form 1116) – Alternatively, you can claim a foreign tax credit on your U.S. return for income taxes paid to Canada. This credit directly offsets your U.S. tax liability on the same income.
- U.S. Social Security Benefits – If you are a Canadian citizen and resident receiving U.S. Social Security benefits, these payments are taxable only in Canada under the Canada–U.S. Tax Treaty.
If you are a U.S. citizen living in Canada, your U.S. Social Security benefits are excluded from your U.S. return and are taxable only on your Canadian return.
This coordination between the two countries ensures the same income is not taxed twice.
Q: As a U.S. citizen living in Canada and earning Canadian income, do I have to file a U.S. tax return?
Yes. Every U.S. citizen, no matter where they live, is required to file an annual U.S. tax return reporting worldwide income, even if no U.S. tax is owed. If your total income is under the standard deduction, there is no requirement to file a US return.
Canada has taxes based on residency. The United States, however, taxes based on citizenship, meaning U.S. citizens remain subject to U.S. tax laws even while living abroad.
To prevent double taxation, the Canada–U.S. Tax Treaty provides relief through the Foreign Earned Income Exclusion and Foreign Tax Credit for Canadian taxes paid.
Filing Deadlines: The standard U.S. filing deadline is April 15th. U.S. citizens whose tax home is outside the United States automatically receive an extension to June 15th to file their U.S. return.
Foreign Bank Account Reporting (FBAR / FinCEN Report 114) – In addition to filing a tax return, U.S. citizens must disclose ownership of non-U.S. financial accounts, including Canadian bank, investment, or savings accounts, if the aggregate value exceeds USD $10,000 at any time during the year.
This disclosure is made using FinCEN Form 114 (Report of Foreign Bank and Financial Accounts), due annually by June 15th. Failure to file these reports can result in severe penalties, even if no tax is owed.
Q: What do I need to know about FBAR (Foreign Bank Account Report) filings?
U.S. citizens living in Canada are required to report their Canadian bank and investment accounts annually to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) by filing a Foreign Bank Account Report (FBAR).
Who Must File an FBAR? – You must file an FBAR if: You are a U.S. citizen or green card holder, you have a financial interest in or signature authority over one or more non-U.S. accounts, and the aggregate value of all your foreign accounts exceeded $10,000 USD at any point during the year.
This includes bank accounts, savings accounts, investment or brokerage accounts, and certain joint accounts. Even if the balance exceeded $10,000 for just one day, filing is required.
Q: How to File FBAR?
The FBAR is filed electronically through the BSA E-Filing System; no paper filings are accepted. The FBAR deadline aligns with the U.S. tax filing schedule: October 15.
Penalties for Non-Compliance – Failure to file an FBAR can lead to severe penalties, even if no tax is owed. Non-willful violations: up to $10,000 USD per account.
Q: What is the IRS Amnesty Program – Streamlined Procedures?
Many Americans in Canada were unaware of their ongoing U.S. filing obligations.
The IRS Streamlined Foreign Offshore Procedures allow qualifying taxpayers to catch up on back filings without penalties. This program is an excellent opportunity to become fully compliant while avoiding the steep penalties that can otherwise apply.
Does “Non-Taxable in Canada” Mean “Non-Taxable in the U.S.”?
If something is tax-free in Canada, is it also tax-free in the United States? Not necessarily. Canadian tax-free accounts and exemptions do not always apply under U.S. tax law. As a U.S. citizen or Green Card holder living in Canada, you are still required to report your worldwide income to the IRS, even if that income is not taxable in Canada.
Q: What about the sale of my home in Canada, as a US citizen living in Canada?
The U.S. offers a Principal Residence Exclusion—you may exclude up to $250,000 USD of gain from the sale of your main home ($500,000 for married couples filing jointly) if you meet ownership and use tests. This exclusion may be claimed only once every two years. Any gain above the exclusion amount may be taxable in the U.S., even if fully exempt in Canada.
Q: Are Tax-Free Savings Accounts (TFSAs) tax-free for U.S. citizens?
No. TFSAs are not recognized as tax-free by the IRS. The income earned inside a TFSA (interest, dividends, or capital gains) must be reported annually on your U.S. return, and in some cases may also require foreign trust reporting.
