Navigate US-Canada Cross-Border Taxes with Specialized Toronto Accountants

The bilateral tax treaty prevents paying full tax to both countries on the same income through two primary mechanisms: foreign tax credits (you can credit Canadian taxes paid against your US tax liability using Form 1116, or US taxes paid against Canadian liability) and specific treaty articles that allocate taxing rights to one country for certain income types. For example, employment income is generally taxed where services are performed, while pension income can often be taxed only in the country of residence. The treaty also provides tie-breaker rules for dual residents.

Both report foreign assets but for different governments with different rules. FBAR (FinCEN Form 114) reports foreign bank and investment accounts to the US Treasury, required when aggregate balance exceeds $10,000 at any point, due April 15. T1135 (Foreign Income Verification Statement) reports specified foreign property to the CRA, required for Canadian residents with total cost amount exceeding $100,000 at year-end, due with your Canadian return. You may need to file both if you're a Canadian resident and US person. The forms require different information and penalties differ significantly.

The substantial presence test determines US tax residency for non-citizens. You meet the test if you're present in the US for 183 days or more using this formula: all days in current year + 1/3 of days in prior year + 1/6 of days in year before that. Certain days are exempt (commuters, students, certain visa holders). Even if you meet the test, you may qualify for closer connection exception if you maintain a tax home in Canada and have stronger ties there. Dual residents use treaty tie-breaker rules to determine which country has primary taxing rights.

FBAR (Foreign Bank Account Report, FinCEN Form 114) is required for US persons with signature authority over foreign financial accounts exceeding $10,000 aggregate at any point during the year. This includes Canadian bank accounts, investment accounts, TFSAs, RRSPs, and certain business accounts. The penalty for willful failure to file can reach 50% of the account balance, with $10,000 minimum for non-willful violations. The deadline is April 15 with automatic extension to October 15.

The IRS and CRA both offer amnesty programs for catching up on past returns. The Streamlined Foreign Offshore Procedures provide penalty relief for US citizens abroad who failed to file due to non-willful conduct—you file three years of returns, six years of FBARs, and Form 14653 certifying non-willfulness. The Canadian Voluntary Disclosures Program offers similar relief from prosecution and penalties. It's critical to enter these programs before the IRS/CRA contacts you. We guide clients through the process, determining the best path forward based on your specific situation.

It depends on your citizenship and residency status. US citizens and green card holders must file US returns reporting worldwide income regardless of where they live—this is citizenship-based taxation. Canadian residents must file Canadian returns reporting worldwide income regardless of citizenship—this is residency-based taxation. If you're both a US citizen AND a Canadian resident, you typically file in both countries. However, the tax treaty and foreign tax credit provisions generally prevent true double taxation on the same income.