US Tax Obligations for US Citizens Living In Canada
Income tax laws significantly differ when you talk about the US and Canada. And one of the most striking differences between the two is the fact that while taxes in the US are primarily based on citizenship, tax laws in Canada are based on residency.
In simpler terms, what this actually means is, if a person is living in Canada as a full-time permanent individual, this individual is liable to pay taxes on his worldwide income, which he earns in Canada. It really doesn’t matter whether the person as US citizenship or is from another country, if he’s permanently living in Canada, he is obligated to be pay taxes in Canada.
If a resident from Canada or a Canadian citizen at some point in time leaves his home country to live in a different nation, cutting all ties with Canada, he will not be liable to pay taxes in Canada and won’t be subject to Canadian taxation laws and regulations.
US nationals however, have a lot more obligations when it comes to declaring their worldwide income when paying taxes in their home country – this is irrespective of wherever they live in the world. However, if the citizen has departed from his country, severing all ties with the US and begins to live in Canada as a full-time resident, they are still obligation to file for their income tax on a yearly basis with the IRS (Internal Revenue Service).
The only way they can escape paying taxes living in Canada is if they formally renounce their nationality, give up their passport and become Canadian citizen, if the person is to live in Canada. But this is a rather drastic measure to avoid filing for taxes, which most people don’t go for.
So, a US national who lives in Canada is subject to filing for his taxes in the US. They will have to go through the same filing procedures as they were when they lived in the US. And this essentially means, filling out the 1040 Form every single year, declaring all their worldwide income. They also have to do annually a separate filing for reporting foreign assets outside US (yearly FBAR Compliance).
The bottom line is US nationals residing in Canada have to file for a total of two tax returns every year. A tax return filed for the Canadian Revenue Agency because they live in Canada, and the second for the IRS as the individual is a US citizen.
The tax treaty signed between the two countries has a plethora of components, which are available as foreign tax credits. This is primarily to ensure that US citizen living in Canada refrains from duplicating taxes to both Canada and the US.
