How to Avoid Double Taxation Between the U.S. and Canada

Imagine working hard all year, only to find out that both the Canada Revenue Agency (CRA) and the Internal Revenue Service (IRS) want a full slice of your income. Suddenly, a $100,000 salary could look more like $40,000 after both countries take their cut.

This isn’t a hypothetical nightmare; it’s a very real risk for cross-border employees, dual citizens, and investors who don’t have the right tax strategies in place.

Here’s the thing though: you’re not supposed to pay tax twice on the same income. Canada and the U.S. have a tax treaty specifically designed to prevent this. But it doesn’t kick in automatically. You need to file the right forms, claim the right credits, and know exactly which country has first dibs on taxing your money.

When Does Double Taxation Actually Happen?

Here’s how it happens: You earn money in one place. Both countries say “that’s ours to tax.” And if you don’t know the rules, you end up paying both.

For example, if you are a U.S. citizen living in Toronto, the U.S. taxes you because of your citizenship, and Canada taxes you because of your residency. Without intervention, you get a bill from both sides for the same paycheck or investment dividend.

This hits a lot of people: 

U.S. citizens living in Canada have to file a 1040 every year, no matter what. Even if you haven’t set foot in the States in a decade.

Snowbirds who spend too much time in Florida or Arizona can accidentally trigger U.S. tax residency. The IRS starts counting days, and suddenly you’re filing in both countries.

Cross-border commuters are in a tricky spot. Think about someone living in Windsor who drives to Detroit for work every day. Michigan takes state tax off their paycheck. Canada wants to tax their worldwide income.

Investors with property or stocks in both countries need to report everything correctly or risk having both tax agencies coming after the same income.

What the CRA Expects From You

The first thing we look at is residency. The CRA views you as either a resident or a non-resident, and that distinction changes everything.

If you are a Canadian tax resident, the CRA wants to know about your worldwide income. It doesn’t matter if that money came from a rental in London, a job in New York, or a bank account in Tokyo, it goes on your Canadian return. But just because you report it doesn’t mean you pay double tax on it, provided we claim the Foreign Tax Credit.

If you are a non-resident of Canada (like a U.S. resident who owns a rental condo in Vancouver), you generally only report Canadian-source income. You usually don’t report your U.S. salary to Canada. Instead, you’ll likely see withholding tax taken off your Canadian rental income before it even hits your bank account.

How to Actually Avoid Paying Twice?

The Canada-U.S. Tax Treaty is your best defence. Here are the main tools we use to make sure you only pay what’s fair.

1. Foreign Tax Credits (FTC)

This is the bread and butter of cross-border tax. If you pay tax to the U.S. on your U.S. income, Canada gives you a credit for that amount to lower your Canadian bill. Ideally, you end up paying the higher of the two tax rates, but never the sum of both.

2. The “Tie-Breaker” Rules

Here’s where it gets messy: both countries might claim you as their resident. Maybe you’re a U.S. citizen who moved to Vancouver but still has a condo in Seattle. Who gets to tax you?

The treaty has “tie-breaker” rules that figure out where your real tax home is. They look at where your permanent home is, where your family lives, and where your strongest economic ties are. Whoever wins gets to tax you as a resident. The other country has to back off (mostly).

3. The Foreign Earned Income Exclusion (FEIE)

For U.S. citizens living in Canada, the FEIE allows you to exclude a significant chunk of your earned income (salary, wages) from U.S. taxation entirely. This can simplify your U.S. filing, though sometimes using the Foreign Tax Credit works out better mathematically. We run the numbers both ways to see which saves you more.

Why You Need a Pro (TurboTax Isn’t Built for This)

Look, standard tax software isn’t built for this. We’ve seen people lose thousands because they checked the wrong box or didn’t know Form 1116 existed.

Can you be taxed in both countries? Yes.

Will you automatically avoid double taxation? No.

The treaty protects you, but only if you know how to use it.

A cross-border accountant knows which country gets first crack at your income and makes sure you’re not leaving money on the table or accidentally committing to pay twice. We ensure your income is “sourced” correctly so that the credits actually trigger. If you mis-source your income, the CRA or IRS may deny your credits, leaving you with the full double-tax bill.

Get it right the first time.

Your bank account will thank you.

FAQ: Double Taxation Basics