How to File Your U.S. Tax Return While Living in Canada

It’s a conversation we have almost every week.

A client sits down, looking confused and a little frustrated. They’ve lived in Canada for fifteen years, they pay their taxes to the CRA on time, and they consider themselves fully Canadian.

Then they get a letter that the IRS still expects a tax return from them every single year.

It sounds unfair, and frankly, illogical. Why would you file taxes in a country where you don’t live, work, or use the services? But for U.S. citizens, that is exactly how the system works. And ignoring it, even if you don’t owe a single dollar in actual tax, can lead to aggressive penalties that are difficult to undo. The IRS doesn’t just penalize you for unpaid taxes; they penalize you heavily for failing to submit the information about your life abroad.

Who Actually Needs to File?

The short answer is: if you have a U.S. passport or a Green Card, the IRS likely expects to hear from you.

Unlike Canada (and almost every other country on Earth), the United States uses citizenship-based taxation. That means your tax obligations are tied to your nationality, not your physical location. Moving across the border changes how you file, but it doesn’t stop the requirement to file.

You generally must file if you are:

• A U.S. Citizen: This applies even if you haven’t lived in the States since you were a toddler (often called “Accidental Americans”). If you were born in a U.S. hospital, you are a U.S. person for tax purposes unless you have formally renounced your citizenship.
• A Green Card Holder: This is a common trap. Simply moving back to Canada and letting your Green Card expire isn’t enough to end your tax relationship with the IRS. Until you formally abandon your status by filing Form I-407 (and potentially Form 8854 for tax purposes), the IRS still considers you a resident for tax purposes.
• A Dual Citizen: Having a Canadian passport doesn’t cancel out your U.S. obligations. You are subject to the laws of both nations simultaneously.

What Income Do You Have to Report?

This is where people get tripped up. They assume, “I work in Toronto, I’m paid in Canadian dollars, so the IRS doesn’t care.”

Unfortunately, the IRS cares about worldwide income.

If you earned it, you report it. This isn’t limited to wages; it covers every financial gain you make. This includes:

• Employment Income: Your salary from your Canadian employer (converted to USD).
• Freelance or Consulting Income: Even side hustles need to be reported.
• Rental Income: Yes, even if you are renting out your basement suite in Vancouver or a cottage in Muskoka, the IRS requires you to report that revenue.
• Investment Dividends and Interest: Income from your Canadian bank accounts and non-registered investment portfolios.
• Canadian Pensions and Benefits: Payments like CPP (Canada Pension Plan) and OAS (Old Age Security) are taxable income, though the treaty dictates how they are treated.
• Capital Gains: If you sell a stock or a property in Canada, you must calculate the gain or loss for U.S. purposes (which can differ from the Canadian calculation due to exchange rates).

The goal isn’t necessarily to tax this income again (we’ll get to that in a moment), but the U.S. government demands to know about it to ensure you aren’t hiding assets offshore.

The Paperwork: Key IRS Forms You Can’t Ignore

Filing from Canada isn’t as simple as submitting a standard 1040 and calling it a day. There are specific forms designed to stop you from being double-taxed and to report your foreign (Canadian) assets.

The “Don’t Tax Me Twice” Forms

You likely won’t owe U.S. tax, but you have to prove why. We typically use one of two major tools:

1. Form 2555 (Foreign Earned Income Exclusion): This lets you exclude a large chunk of your salary (over $130,000 USD, adjusted annually for inflation) from U.S. taxes.
   • The Catch: This only applies to earned income (wages, salary). It does not help with passive income like interest, dividends, or capital gains.
2. Form 1116 (Foreign Tax Credit): This is often the smarter play for Canadians. Since Canadian tax rates are usually higher than U.S. rates, you use the tax you paid to the CRA to wipe out your U.S. bill dollar-for-dollar.
   • The Benefit: This creates a “credit” you can carry back one year or carry forward ten years. It’s more flexible than the exclusion and covers both earned and passive income.

The “Show Me the Money” Forms (FBAR & FATCA)

This is the scary part. The U.S. wants to know about your “foreign” bank accounts (which, to you, are just your regular daily checking accounts).

• FBAR (FinCEN Form 114): If the combined total of all your Canadian financial accounts hits $10,000 USD at any point in the year, even for one day, you must file this.
  • What counts? Checking accounts, savings accounts, RRSPs, TFSA balances, and even life insurance policies with cash surrender value.
  • The Consequence: The penalty for missing this form starts at $10,000 per year for non-willful violations. It is strictly enforced.
• Form 8938 (FATCA): For those with higher asset thresholds (generally over $200,000 USD for residents of Canada), this form requires detailed reporting of your foreign financial assets on your actual tax return.

If you are within your first year of moving to Canada as an American, take a look at one of our previous articles here.

Deadlines Are Different for Expats

There is a small perk to living abroad: you get an automatic extension.

• June 15: This is your filing deadline (two months later than folks living in the U.S.). You don’t need to ask for this; it applies automatically if your tax home is outside the U.S.
• April 15: This is the catch. If you do owe money, the IRS expects payment by April 15th. Waiting until June to file means you’ll pay interest on that balance.
• October 15: If you still need more time to get your paperwork together, you can request an additional extension to October, but you must file a specific form to get it.

Common Mistakes We See (And Fixes)

1. Assuming “No Tax Owed” Means “No Filing Required”

This is the most dangerous myth. You might owe $0 because of tax treaties, but if you don’t file the return to claim those treaty benefits, the IRS technically assumes you owe full tax on everything. The statute of limitations never expires on an unfiled return.

2. Ignoring TFSA Implications

The Tax-Free Savings Account (TFSA) is brilliant for Canadians, but it is a massive headache for Americans. The IRS does not recognize its tax-free status.

• The Reality: You have to pay U.S. tax on the income inside the TFSA, even though the income earned is tax-free in Canada.

3. Thinking Canadian Mutual Funds are Just Like U.S. Ones

If you hold Canadian mutual funds or ETFs outside of an RRSP, the IRS likely classifies them as “Passive Foreign Investment Companies” (PFICs). The taxation on PFICs is punitive and the reporting is tedious (Form 8621). Often, it’s better for U.S. citizens in Canada to hold individual stocks or U.S.-domiciled ETFs to avoid this nightmare.

When Do You Need a Professional?

If your situation is simple, no investments, low income, no property, you might navigate this alone. But the moment you add a corporation, a rental property, or significant investments, the complexity skyrockets.

We also ensure you aren’t paying a dime more than necessary by coordinating your Canadian and U.S. returns so they talk to each other.

Together, we can get through this. We handle this every day.

Schedule a consultation.