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You moved. The IRS did not stop expecting a return.
The United States taxes its citizens on worldwide income wherever they live, so a US return falls due every year alongside your Canadian one. Neither replaces the other, and the two only work properly when they are built together.
Why you file twice
Canada taxes you because you live there. The United States taxes you because of who you are. Those two claims overlap almost completely, and the machinery that reduces the overlap is the treaty and the foreign tax credit system. It reduces double taxation rather than guaranteeing it away: credits have limits tied to the tax, the income category, the source and the timing, and state rules can differ from federal treaty treatment.
That machinery is not automatic. It has to be claimed on a return, using figures that reconcile to the other country's return. When a Canadian accountant prepares the T1 and an American one prepares the 1040 without speaking, the credits get claimed on mismatched numbers, and the gap becomes a bill.
Filing in Canada does not discharge the US obligation, and a US refund does not satisfy the CRA.
The practical consequence is that the order of work matters, and it is not the same order every time. Which country has the primary taxing right and which grants relief depends on the income and the treaty rules, so US source income can require Canadian credits just as Canadian source income requires US ones. We determine the taxing rights and relief for each income item, then coordinate both returns, the currency conversions and the credits in the appropriate order. Prepared as one job it is straightforward. Prepared as two, it is where most of the corrections we handle come from.
That is not a warning, it is just the shape of the problem. Handled properly it costs you a return and some reporting, not extra tax.
Where it usually goes wrong
These three account for most of the amended returns we prepare for Americans in Canada.
TFSAs and RESPs
Tax free in Canada and not treated as such by the IRS, so the income is generally reportable. The label alone does not create a Form 3520 obligation. Depending on the structure it can attract trust reporting, and relief may be available for qualifying education savings trusts and eligible individuals. Any trust reporting relief is separate from income tax, FBAR, Form 8938 and PFIC analysis. It needs a decision rather than a hope.
Canadian mutual funds and ETFs
Funds held outside the US can fall under the passive foreign investment company rules, which are punitive and require their own annual form. Many people hold these for years inside a Canadian brokerage without ever being told.
Taking the exclusion by default
The foreign earned income exclusion is not automatically the better choice. At Canadian tax rates the credit often produces a better result and preserves other reliefs, and switching between them is not free once elected.
The forms that usually apply
Not every one of these will be yours. This is the set we work through to establish which are.
United States
- 1040 individual return, worldwide income
- 1116 foreign tax credit
- 2555 foreign earned income exclusion
- FinCEN 114 foreign bank account report
- 8938 specified foreign financial assets
- 8621 passive foreign investment companies
Canada
- T1 personal return, federal and provincial
- T1135 foreign income verification, generally where specified foreign property cost exceeds CAD100,000 in aggregate, with exceptions
- T2209 federal foreign tax credit
- T2091 principal residence designation
- RRSP and TFSA contribution tracking
- Provincial credits and benefit claims
Treaty and planning
- 8833 treaty based return positions
- RRSP treatment under the treaty
- 3520 and 3520-A where a plan is treated as a trust
- Social security coordination
- Timing of pension and plan withdrawals
- Currency conversion methodology
Questions Americans in Canada ask
This is general guidance rather than advice on your situation.
I have not filed a US return since I moved. What happens now?
Often less than you fear. A streamlined procedure may be available where the failure to file was non-willful. Eligible foreign offshore submissions can receive relief from specified penalties; domestic offshore submissions generally carry a 5% offshore penalty. Tax and interest may still be due, and foreign tax credits reduce the US liability within their limits rather than always covering it. The options narrow once the IRS makes contact, so the useful moment is before that happens.
Do I have to pay US tax on my Canadian salary?
You have to report it. Whether you pay anything is a separate question, and for most people employed in Canada the answer is little or nothing once foreign tax credits are applied. The return still has to be filed to claim that relief, which is why skipping it causes problems even when no tax is due.
What about my RRSP?
The treaty allows the growth inside an RRSP to be deferred for US purposes, which is one of the more helpful provisions available to you. It is not automatic in every circumstance and the reporting still has to be done, so it should be confirmed rather than assumed.
Does renouncing citizenship solve it?
It ends the future obligation but it is not a way out of the past, and it has its own tax consequences including a possible exit charge depending on your assets and filing history. It is a decision worth modelling properly before anyone starts the paperwork.
Other situations we handle
Most people fit more than one of these. Where two apply, they get handled on the same return.
Two returns, one team, credits claimed properly.
Twenty minutes, no charge, and a written fixed quote afterwards. Evening slots on both time zones.
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