Cross-Border Tax Guide: US/Canada Workers and Dual Filers

The fundamental rule: the US taxes on citizenship; Canada taxes on residency

Most countries — including Canada — tax their residents on worldwide income and tax nonresidents only on local-source income. The United States is the major outlier. The US taxes its citizens and lawful permanent residents on worldwide income regardless of where they live. A US citizen working in Toronto for ten years still files a US Form 1040 every year, in addition to a Canadian T1 General.

This is the foundation of every US-Canada cross-border conversation. Once you understand who is taxed by whom on what basis, the rest of the framework — treaty positions, foreign tax credits, exclusions, disclosure forms — falls into place.

Determining US tax residency: the substantial presence test

If you are not a US citizen or green card holder, your US tax residency is determined by the substantial presence test. You are a US resident for tax purposes in 2026 if you were physically present in the US at least 31 days in 2026 and at least 183 days under the weighted formula: all days in 2026 plus one-third of 2025 days plus one-sixth of 2024 days.

Snowbirds who spend roughly four months a year in Florida typically exceed 183 weighted days and become US tax residents — unless they qualify for the closer-connection exception (Form 8840), which requires fewer than 183 days in the current year and demonstrating closer connections to a non-US tax home.

Canadians who can demonstrate Canadian tax residency under the treaty tie-breaker rules can override US-domestic residency by filing Form 8833 disclosing the treaty position.

Determining Canadian tax residency

Canada looks at residential ties — primary (home, spouse, dependents in Canada) and secondary (driver's license, health card, bank accounts, vehicles, memberships, social ties). The CRA does not have a single bright-line presence test. If your primary ties remain in Canada, you remain a Canadian tax resident even if physically absent.

A Canadian who leaves the country permanently for a job in the US should consider a formal departure tax (deemed disposition of most non-real-estate assets at fair market value, with capital gain or loss recognized on the departure date). NR73 (Determination of Residency Status — Leaving Canada) is the CRA's mechanism to formally establish nonresidency.

Getting the residency question wrong creates years of friction. Worth a one-time CPA conversation to document the position cleanly.

The US-Canada Tax Treaty: what it actually does

The US-Canada Tax Convention (1980, as amended) is the rulebook for double taxation. The treaty does not prevent both countries from taxing the same income — both countries can and do. What the treaty does is determine which country has primary taxing right and provide credits for tax paid to the other country.

Practical applications you'll encounter:

• Article IV (residency tie-breaker) for individuals who would otherwise be resident in both countries: permanent home, then center of vital interests, then habitual abode, then citizenship.
• Article XV (employment income) generally allows the country of work to tax wages earned there, with limited exemptions for short-term assignees.
• Article XVIII covers pensions and retirement accounts, including RRSP and 401(k) treatment.
• Article XX exempts most students and trainees from tax on amounts received from outside the host country.
• Article XXIV (relief from double taxation) is the credit mechanism that prevents the same dollar from being taxed twice when both countries assert taxing right.

Foreign Tax Credit and Foreign Earned Income Exclusion

For US citizens and residents earning income in Canada, two mechanisms prevent double tax. The Foreign Tax Credit (Form 1116) credits Canadian tax paid against the US tax due on the same income — dollar for dollar, up to the amount of US tax on that foreign income. Because Canadian rates are generally higher than US rates on equivalent income, the FTC typically eliminates US tax on Canadian-source income entirely, often leaving excess credits to carry back one year or forward ten.

The Foreign Earned Income Exclusion (Form 2555) excludes up to $130,000 (2025; indexed for 2026) of foreign-earned wages from US taxable income, available to US persons who pass the bona fide residence test or the physical presence test (330 days outside the US in a 12-month period). It is generally less favorable than the FTC for someone paying high Canadian tax, but it can be useful for self-employed expats or those in lower-tax jurisdictions.

FEIE and FTC can be combined but not on the same dollar. The right choice depends on income mix, tax rates, and long-term plans — a one-conversation question for a cross-border CPA.

FBAR and Form 8938: the disclosure forms with brutal penalties

FBAR (FinCEN Form 114) is required of any US person with signature authority or financial interest in foreign accounts with an aggregate value exceeding $10,000 at any point during the year. RRSP, TFSA, RESP, Canadian chequing and savings, Canadian brokerage — all count. The form is filed separately from your tax return, electronically, due April 15 with an automatic extension to October 15.

Form 8938 is the FATCA disclosure on your Form 1040, required at higher thresholds ($50,000 to $600,000 depending on filing status and residence). Unlike FBAR, it covers a broader range of specified foreign financial assets.

Penalties for missed FBAR can reach $10,000 per non-willful violation per year, and the greater of $100,000 or 50% of account value per willful violation. The Streamlined Filing Compliance Procedures provide a path to back-file FBARs and returns without civil penalties if non-compliance was non-willful. Disclosing late is always preferable to being found out.

RRSP, TFSA, RESP: how each is treated by the US

Each major Canadian registered account has a different US treatment, and the differences matter:

• RRSP / RRIF: tax-deferred under the US-Canada treaty (Article XVIII). Income inside the account is not currently taxed by the US. Distributions are taxable in the US. Disclosure on FBAR and Form 8938 is still required.
• TFSA: not recognized by the US. Income inside a TFSA is currently taxable on the US return. Often treated as a foreign grantor trust requiring Forms 3520 and 3520-A with steep penalties for non-filing. For US citizens in Canada, a TFSA is often a tax trap rather than a benefit.
• RESP: also not recognized; treated similarly to TFSA. Government grants and growth inside the RESP are currently taxable to the US-person subscriber.
• Canadian non-registered brokerage: same treatment as a US brokerage — dividends, interest, capital gains all flow through to the US return, with FTC applied against Canadian tax paid.

Snowbird planning: spending winters in Florida or Arizona

Canadians who spend three to five months a year in the US need a deliberate strategy. The two main risks: triggering US tax residency under the substantial presence test, and exceeding the days-in-US limit on health insurance coverage or provincial residency.

The cleanest approach for most snowbirds: stay under 183 weighted days, file Form 8840 (Closer Connection Exception Statement) annually to formally claim Canadian tax residency, and avoid earning US-source income beyond casual investment income (which has its own treaty rules).

Owning US real estate adds another layer — US-source rental income reportable on Form 1040-NR, potential FIRPTA withholding on sale, and US estate tax exposure above the nonresident exemption ($60,000 unless treaty applies). Each of these has a planning answer; none of them is automatic.

How a US/Canada cross-border engagement works

Side Growth Partners is a Boston-based CPA firm registered with the Canada Revenue Agency. Our cross-border engagements typically start with a residency-determination conversation: where do you live, where do you work, where do you have ties, what is the time horizon. From there we map the filing obligations on both sides — 1040 and/or 1040-NR in the US, T1 General in Canada — and identify the treaty positions, credits, and disclosure forms.

We then prepare both returns in coordination, applying foreign tax credits and exclusions so the same dollar is not taxed twice, file FBAR and Form 8938 where required, and document treaty positions on Form 8833 where needed. For more complex situations — departure tax, RRSP rollovers, US-Canada estate planning — we coordinate with cross-border attorneys.

If you have a US/Canada situation in front of you — a job offer across the border, a move, a sale of property, a multi-year compliance gap — book a 15-minute scoping call and we'll walk through the right next step.