U.S. Tax Tips & Savings for Moving to Canada

Estimated reading time: 15 minutes

Key Takeaways:

• Understand U.S. and Canadian tax obligations before moving.
• File IRS Form 1040 for worldwide income, even if residing in Canada.
• Leverage the U.S.–Canada tax treaty to avoid double taxation.
• Avoid opening Canadian TFSAs and RESPs due to unfavorable U.S. tax treatment.
• Engage a cross-border CPA to create a personalized tax roadmap.

Table of Contents:

• Do Americans Still File U.S. Tax Returns While Living in Canada?
• How Do Double Taxation Rules Protect You?
• Watch Out for State Tax Residency
• How Does Canadian Tax Residency Work?
• What Are the Biggest Cross-Border Tax Traps to Avoid?
• What’s the Best Way to Manage U.S. and Canadian Retirement Accounts?
• Can U.S. Expats in Canada Ever Stop Filing U.S. Taxes?
• 5 Planning Tips Before Relocating to Canada

The short answer: Yes. Under U.S. law, citizens (and Green Card holders) must file U.S. tax returns reporting their worldwide income, no matter where they live. This citizenship-based taxation is unique to the U.S. So, when you’re living up north, you will still file IRS Form 1040, reporting salary, business income, investments, Canadian employment income, and other sources from anywhere in the world.

Here’s the good news: The U.S.–Canada tax treaty, along with credits and exclusions, helps prevent you from being taxed on the same income twice.

• Foreign Earned Income Exclusion (FEIE): Allows you to exclude up to $130,000 (2025) in earned foreign income from your U.S. tax return if you meet certain tests. However, FEIE only applies to earned income.
• Foreign Tax Credit (FTC): More commonly used by those living in Canada. You can claim a dollar-for-dollar credit on your U.S. return for certain Canadian federal and provincial income taxes paid, offsetting your U.S. tax bill instead of using the FEIE.
• Common Deductions/Credits: Beyond FEIE and FTC, U.S. expats in Canada might benefit from deductions on housing costs, student loan interest, or child tax credits, depending on circumstances.

While you may be moving physically, some U.S. states (like California, New Mexico, and Virginia) are notorious for trying to keep former residents subject to their state taxes based on domicile, not just physical presence. Before you move, ensure you’ve taken the required steps to sever ties, such as closing state bank accounts, updating your driver’s license, and selling property, to avoid unexpected tax bills.

The Canada Revenue Agency (CRA) uses a residency-based tax system. Becoming a Canadian
resident for tax purposes means you’ll pay Canadian tax on your worldwide income, too.

CRA examines primary and secondary residential ties:

• Primary ties: Home availability, spouse/common-law partner, or dependents in Canada.
• Secondary ties: Personal property, driver’s license, bank accounts, professional associations, health insurance.

Generally, if you have more significant ties to Canada than any other country, you’re considered a Canadian tax resident from the day you arrive.

Moving without understanding these can result in severe penalties or double taxation:

The U.S. classifies most Canadian mutual funds, exchange-traded funds (ETFs), segregated funds, and certain other pooled investments as Passive Foreign Investment Companies (PFICs). U.S. PFIC rules were designed to prevent deferral of U.S. tax and impose:

• Annual reporting on Form 8621
• Complex tax calculations, potential interest charges, and punitive tax rates on gains, even on unrealized income
• No capital gains treatment, ordinary income rates apply

Practical Advice: Avoid investing in Canadian mutual funds/ETFs until you clearly understand U.S. PFIC consequences and reporting requirements. Consider “PFIC-friendly” portfolios with individual stocks or U.S.-based ETFs while you remain a U.S. person.

The Tax-Free Savings Account (TFSA) and Registered Education Savings Plan (RESP) are beloved by Canadians for “tax-free” growth, but the IRS doesn’t see them this way, and income/gains within these accounts are taxable on your U.S. return.

Practical Advice: Understand tax implications before opening or contributing to Canadian TFSAs or RESPs if you will continue to be a U.S. taxpayer.

Certain employment benefits, such as stock options or Restricted Stock Units (RSUs), are taxed differently in Canada and the U.S., leading to mismatched timing for recognizing income and credits.

• You could be taxed in the U.S. before (or after) taxation in Canada, without the ability to claim credits, resulting in double taxation.
• Capital gains realized before or after moving may trigger taxes in both countries. Document the cost basis of all investments at your move date.

Practical Advice: Review your employer stock and incentive plans for cross-border tax impact with a tax professional before relocating.

U.S. expats must report certain non-U.S. financial accounts if their aggregate value exceeds $10,000 at any time during the year via the FBAR (FinCEN Form 114). FATCA (Form 8938) also expands information reporting on foreign assets. Penalties for non-compliance can be severe.

Practical Advice: Maintain detailed records of all Canadian accounts and be proactive in U.S. financial account reporting.

Retirement savings are subject to intricate cross-border rules. Here’s what to watch for:

• Withdrawals from your U.S. IRA or 401(k) are always taxable in the U.S., even if you’re now a Canadian resident.
• The U.S.–Canada tax treaty generally allows you to defer Canadian tax until withdrawal, and sometimes qualifies U.S. taxes paid as a credit in Canada.
• Consider Roth IRAs/401(k)s carefully; Canadian tax deferral requires proper treaty disclosure, and there may be conflicting treatment of distributions.

Planning Tip: If possible, avoid early distributions to prevent additional tax or penalty exposure.

• Registered Retirement Savings Plans (RRSPs) are recognized by the U.S.–Canada treaty. U.S. taxpayers can defer U.S. tax on RRSP growth.
• Income inside an RRSP is tax-deferred for U.S. and Canadian purposes; withdrawals are eventually taxable in both countries, mitigated by foreign tax credits.

Key Point: Don’t forget to report your RRSP/RRIF on FBAR and FATCA, there is no filing “exclusion”.

As mentioned, TFSAs and RESPs aren’t recognized by the U.S. for tax deferral. Growth or income from these accounts is taxable annually on your U.S. return, and significant reporting requirements (Forms 8621) apply.

Planning Tip: Do not open or fund these accounts unless you plan to renounce U.S. citizenship or have a sophisticated tax plan.

The only way to end your ongoing annual U.S. tax (and reporting) obligations is to give up your U.S. citizenship or Green Card; citizenship-based taxation lasts for life.

• Renunciation isn’t a light decision. It requires paying all taxes due, an exit interview at a U.S. consulate, and filing a final Form 8854 (Initial and Annual Expatriation Statement).
• High-net-worth individuals (over $2 million net worth or averaging $190,000 for 2023 in annual tax over five prior years) may be subject to the Exit Tax, levied on certain unrealized gains as if you sold all assets on the day you renounced.

Emotional and Financial Trade-Offs:

• Giving up a passport can affect the ability to travel, inherit from U.S. persons, and participate in future U.S. business activities.
• For some, the compliance burden, cost, and emotional impacts outweigh the tax savings.

Alternative: Many expats simply choose to continue filing annually from abroad, often using streamlined programs to come into compliance and expert preparers.

The most costly mistakes can be avoided by proactive cross-border planning. Here are five vital steps for optimal U.S. expats’ taxes in Canada:

• Convert Investments with U.S. PFIC Rules in Mind: If you are rebalancing your taxable brokerage accounts overseas, consider buying U.S.-friendly foreign mutual funds/ETFs. Choose investments that are tax-efficient in both countries.
• Consolidate Accounts and Review Beneficiaries: Close unnecessary U.S. bank, brokerage, and retirement accounts. Update beneficiaries to avoid cross-border estate hurdles.
• Document and Check Cost Basis for All Assets: For stocks, real estate, and other investments, obtain written confirmation of adjusted cost basis, especially for any unrealized gains before your move. Canada (but not the U.S.) may consider market value on entry as your new cost basis for future Canadian tax purposes.
• Evaluate Outstanding Stock Options, RSUs, and Deferred Compensation: Coordinate vesting, triggering, or exercising options/RSUs for optimal taxation and eligibility of FTCs in both countries. Seek custom advice on “split-year” and multi-year deferral plans.
• Schedule a Cross-Border Tax Consultation: Above all, engage a cross-border tax professional to create a personalized tax roadmap. Many issues, such as state residency, benefit elections, and investment reallocation, are unique to your profile.

Relocating to Canada as a U.S. citizen shouldn’t feel overwhelming, but it does demand diligent preparation, precise tax planning, and nuanced execution. At Provide Clarity Consulting, Inc., our cross-border tax experts help U.S. expats navigate complex U.S. tax laws, avoid costly traps, and optimize their financial outcome on both sides of the border. Whether you need assistance with individual tax returns, small business cross-border structuring, retirement planning, or compliance with FBAR/FATCA, we tailor our services to fit your life.Ready to move or already settling in Canada?

Let’s create your personalized U.S.–Canada tax plan before the next filing deadline arrives. Reach out for a friendly, no-obligation consultation with our cross-border CPAs. Contact us today or book a consultation online.

• IRS: U.S. Citizens and Resident Aliens Abroad
• Canada Revenue Agency: Residency Status
• IRS: Expatriation Tax
• IRS: PFIC Guidance
• IRS: FBAR Comparison Guide

Bottom Line: With strategic planning and the right support, you can turn cross-border tax complexity into a manageable, even advantageous, part of your international move. Let the professionals at guide you every step of the way.Looking for more insights? Check our blog for tips on FBAR compliance for U.S. expats and navigating foreign tax credits.