U.S./Canada dual citizenship taxes: 5 things you should know
Understanding U.S. tax requirements can be confusing when you only have one passport, and for U.S./Canada dual citizens, taxes become a lot more complicated. For example, if you were born in the U.S. but have lived your whole life in Canada; do you have a U.S. tax obligation? What if you live in Canada and have U.S. citizenship through a parent? What if you’re a U.S./Canada commuter?
To help guide you through your U.S. requirements, we’ve addressed the common questions and concerns about dual citizenship taxes for U.S. citizens living in Canada and distilled them into five things you should know.
1. Yes, U.S./Canada dual citizens file U.S. taxes
As a U.S./Canada dual citizen, taxes can get tricky — dual citizens have few more tax and financial challenges than the typical resident that affect not only taxes on your wages, but taxes on investments, pensions, and properties as well.
The most common question we hear is, "do U.S. dual citizens in Canada have to file U.S. taxes?"
Yes, if you are a citizen or resident alien of the United States, you have a U.S. tax obligation, even if you’re a dual citizen of the U.S. and Canada.
The U.S. is one of two countries in the world that taxes based on citizenship, not place of residency. That means it doesn’t matter where you call home — if you’re a U.S. citizen, you have a tax obligation. This is true even if you earn no income in the U.S., or if you are a U.S./Canada commuter.
You should know the Canadian tax year is the same as the U.S. tax year, but the filing deadline is different. The U.S. tax year starts January 1 and ends December 31. Canadian taxes follow a January to December tax year. Canadian tax returns are due on April 30 for individuals and June 15 for self-employed taxpayers. In general, no extensions are allowed.
If you’re a dual citizen living in Canada, taxes go both ways — so you may end up having to file not only U.S. taxes but also Canadian taxes. Where you fall in Canada and U.S. tax brackets can influence decisions on how to file your U.S. taxes, so it’s important to understand the Canadian tax bands and taxation rates. To see up–to–date Canadian tax bands for 2020/21* and the qualifications, head over to our tax guide for American citizens in Canada.
2. Most dual citizens of the U.S. and Canada do not end up owing U.S. taxes because of the Foreign Earned Income Exclusion and the Foreign Tax Credit
Just because you have a U.S. tax obligation doesn’t mean you’ll end up owing anything at the end of the tax year — there are a few tools the U.S. provides to citizens abroad to ease its tax burden, including the Foreign Tax Credit and the Foreign Earned Income Exclusion.
The Foreign Earned Income Exclusion for U.S./Canada dual citizens
The Foreign Earned Income Exclusion (FEIE) is the most commonly used tool to lower U.S. taxes. It excludes your foreign earned income from U.S. income tax, therefore lowering (or eliminating) your U.S. tax liability. If you qualify, you’re able to exclude up to $107,600 of foreign earned income in 2020. You qualify if you live and work outside the U.S. and pass either the Bona Fide Residency test or the Physical Presence Test.
For example, say you’re a dual citizen who was born in the U.S., now lives and works in Toronto, and has a salary of $105,000. You would be able to exclude all that income from your U.S. taxes, lowing your U.S. tax obligation to $0.
The Foreign Tax Credit for U.S. citizens living in Canada
Another important tool for lowering your U.S. tax obligation is the Foreign Tax Credit (FTC). The FTC gives you a dollar-for-dollar reduction of your U.S. tax liability per Canadian taxes paid.
3. Your Canadian pensions and tax-free investments may be treated differently in the U.S., even if you’re a U.S./Canada dual citizen
As it turns out, many of the tax-free investment accounts you own in Canada are probably not tax-free in the United States. For example, if you own a Registered Education Savings Plan (RESP), a Canadian Tax-Free Savings Account (TFSA), or a Registered Disability Savings Plan (RDSP), your earnings are subject to U.S. taxes, and you may need to report your account as a foreign grantor trust. In Canada, those investments are allowed to grow tax-free.
There is good news — thanks to the U.S./Canada tax treaty, your Canadian pensions and certain retirement accounts may qualify for special treatment.
The Canada/U.S. tax treaty, U.S. taxes, and your Canadian pensions explained
The U.S. has entered into tax treaties with more than 50 countries around the world. Among other things, they serve to clarify what income is taxable and therefore affect whether or not you can take a tax credit, tax exemption, or qualify for a reduced tax rate.
An important feature of the Canada/U.S. tax treaty is the specifications on how Canadian retirement plans and pensions are treated by the U.S.
Additionally, you’re almost always allowed to defer the U.S. tax on undistributed earnings from a Canadian Registered Retirement Savings Plan (RRSP) or Canadian Registered Retirement Income Fund (RRIF). However, while these kinds of contributions may also be tax deferred, the RRSP and RRIF are still subject to FBAR and FATCA reporting.
You also might need to report your Canadian retirement and pension on Form 1040, but when you file with an H&R Block Expat Tax Advisor, they’ll take care of all that for you.
4. U.S./Canada dual citizens (and Accidental Americans) can catch up on U.S. taxes with Offshore Streamlined Compliance Procedures
In some cases, Canadians will find out that they’re "Accidental Americans." These dual citizens aren’t aware they have a U.S. tax obligation because they’ve lived and worked in Canada their entire lives. They may have been born in the U.S. while their Canadian parents were employed there, or they may have one U.S. parent. It’s important to understand if you were born in the U.S. or have a U.S. parent, you may be considered a dual citizen of Canada and the U.S.
If you are a dual citizen living in Canada and have never filed a U.S. tax return, there’s good news: You may be able to get caught up without being penalized. The IRS is pretty understanding when it comes to not filing because you honestly didn’t know you had to, and they have a program to help you get caught up — Streamlined Foreign Offshore Procedures — which the Expat Tax Advisors here at H&R Block can happily help you with.
Streamlined Foreign Offshore Procedures helps U.S. dual citizens in Canada (as well as elsewhere in the world) get compliant with prior year filings while helping reduce penalties. To qualify, you must:
- Have lived in a foreign country for at least 330 days during one of the last three years and not maintained a U.S. abode.
- Confirm that your failure to file U.S. tax returns and FBAR was not willful.
To catch up on past returns, get started with an Expat Tax Advisor now.
5. Dual U.S. citizens living in Canada may have financial reporting obligations in addition to filing U.S. taxes
As a U.S. dual citizen in Canada, filing your U.S. taxes may not be the end of your paperwork — if you have a Canadian bank account, you may also have to file your Foreign Bank Account Report (FBAR) and FATCA Form 8938.
The U.S. enacted the Foreign Account Tax Compliance Act (FATCA) to increase transparency of U.S. citizens with foreign bank accounts, and your FBAR serves a similar purpose. One difference between the two is you submit Form 8938 to the IRS while you submit your FBAR with FinCEN, the U.S. Treasury Department’s Financial Crimes and Enforcement Network.
If you’re confused about your FBAR and FATCA filing requirements, it’s best to leave your U.S. expat taxes to seasoned pros who will dig into your specific tax situation to find all your filing requirements.
Have dual citizenship in the U.S. and Canada? H&R Block Expat Tax Services is here to help with your taxes.
Filing taxes in one country is enough to give anyone a headache, and it only gets more complicated for dual citizens of the U.S. and Canada. But no matter your situation, we’ve got a tax solution for you — whether you want to be in the driver’s seat with our DIY online expat tax service designed for U.S. citizens abroad or let one of our experienced Tax Advisors take the wheel. Head on over to our Ways to File page to choose your journey and get started.