Jerry Chen

Tax Guide for Canadians Moving to the US

NOTHING HERE IS LEGAL OR FINANCIAL ADVICE. CONSULT AN ACCOUNTANT OR TAX LAWYER AND DO YOUR OWN RESEARCH BEFORE PROCEEDING.

Have any suggestions, comments, thoughts or notice any errors? Let me know! You can find my contact information on my website or email me at hello@jerrychen.xyz.

Taxes are daunting, but even more so when moving countries. While moving to the US, I spent countless hours researching how to file taxes myself without having to spend hundreds or thousands of dollars on accountants and tax lawyers. This guide is a collection of many things that may apply to you if you moved from Canada to the US for work. This guide isn't meant to be exhaustive, or step-by-step guide by any means - but a list of things to research and consider, or at least be aware of before it hits you.

It is highly recommended that you make online accounts with the Canada Revenue Agency (CRA) before departing Canada and the Internal Revenue Service (US IRS) as soon as possible for convenience. Start before you need it since verifying your identity and troubleshooting issues take time.

Assumptions

This guide assumes the following things. Many of these things might still apply to you if you are leaving Canada, or moving to the US from another country, but always do your own research.

  • You are/were a Canadian tax resident.
  • You are NOT an American tax resident/US person for tax purposes. This means:
    • You were not born in the US or a US citizen.
    • You do not have a US Green Card / Legal Permanent Resident (LPR) status.

Options

Background Information and the SPT

Since you are not a US LPR or US citizen, you are an alien. The US decides if you are a Resident Alien (RA) or a Non-Resident Alien (NRA) through the Substantial Presence Test (SPT). In general, a RA has to pay taxes to the US on ALL their income, whereas a NRA only has to pay taxes on their US-sourced income. You can also be a "Dual-Status Alien", where you are a RA for a part of the year, and a NRA for another part of the year - typically the year you move.

The crux of the SPT is based on this formula:

  • number of days present in the US in the:
    • A - tax year
    • B - 1 year before the tax year
    • C - 2 years before the tax year
(1/6 * C) + (1/3 * B) + A >= 183 days

Your options will depend on whether you meet the SPT or not. The options are listed in the order of defendability if audited or asked (in my opinion). If you are unsure, the IRS provides some example scenarios or this decision chart to help determine your residency status. Remember there are exceptions - such as the first 5 years spent as a student/intern (F/J) status, which doesn't count towards the SPT. See the IRS website for more exemptions.

Does not meet SPT

This is likely if you moved to the US close to, or after mid-year. Choose one of:

  1. File as a Canadian tax resident for the whole year. File as a US Non-Resident Alien (NRA) (not recommended), or
  2. File Canadian taxes as an emigrant. File US taxes as a Dual-Status Alien by First Year Choice (FYC), or
  3. File Canadian taxes as an emigrant. File US taxes as a Dual-Status Alien by the US-Canada Tax Treaty. Include Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), or
  4. File Canadian taxes as an emigrant. File US taxes as a Non-Resident Alien (NRA).
    • I haven't found the basis to defend this, but I've heard from friends that reputable accounting firms use this method. If defendable, this is the easiest and most tax-efficient method by far.

Meet SPT

Choose one of:

  1. File Canadian taxes as an emigrant. File US taxes as a Dual-Status Alien by either:
    1. Residency start date procedure under 26 CFR § 301.7701(b)-4. https://www.irs.gov/individuals/international-taxpayers/residency-starting-and-ending-dates, or
    2. US-Canada Tax Treaty, or
  2. File Canadian taxes as a Canadian tax resident. File US taxes as an NRA even though you meet the SPT with the Closer Connection Exception. (not recommended)
    • Note: If you meet SPT, but stayed in the country for <183 days (already highly unlikely if you work + live in the US), then it is possible to use the Closer Connection Exception under 26 CFR § 301.7701(b)-2 to file as an NRA for this tax year. However, since you moved and worked in the US, it is likely an undefendable position, and you would be paying higher taxes to Canada.

Situations

Canadian Departure (Emigrant) Tax

It is important to terminate your Canadian tax residency properly so you do not need to pay taxes to Canada. Not filing or ignoring your Canadian taxes may lead to problems in the future, including having to pay back taxes.

General Notes

These are general notes that apply to most emigrants. You should also look at the different sub-headings for other specific things you should be aware of.

  • CRA page for emigrant tax
  • RBC tax guide for people leaving Canada
  • In general, you would have to pay taxes on ALL your income worldwide to Canada before departure, since you were a tax resident of Canada. After departure, you only have to pay taxes to Canada on Canadian-sourced income.
  • Use TurboTax or GenuTax (windows only, but free).
    • Other tax software may also work, but do research and make sure it specifically supports emigrant tax. This is not the same as non-resident tax since it has to be able to do the special tax credit calculations.
    • Check your credit card for discount programs or offers on tax software. Sometimes companies will also offer tax software for free, especially if you moved.
  • The return has to be mailed to the CRA** (see Non-resident individuals). Include copies of all slips such as T4 or T5.
    • It seems like filing by fax is temporarily supported. In that case, use a reputable service like HelloFax to fax a PDF of the return. For mailing, consider using websites like Pirate Ship for cheaper shipping labels, and ensure you are using the correct address (PO Box for USPS only or courier address for UPS/FedEx).
  • There is a special method for calculating tax credits. You are not entitled to the full amount as a full-year resident would get. You should also manually verify that any tax software you used calculated these amounts correctly.
  • You/your tax software should use the tax package of the last province you were in before departing Canada. The first page has space for a departure date that must be filled in to correctly declare your departure.

T1135 - Foreign Income Verification Statement

For the part of the year you are a Canadian tax resident (or the full year if you choose to stay as a Canadian tax resident), you must report to the CRA on Form T1135 if you have certain foreign assets totaling over $100,000 CAD.

Deemed Disposition

Property (unless investments in a registered account, a house, etc.) are deemed to be sold at Fair Market Value (FMV) on the date you depart, and then immediately rebought to reset your cost basis when you are not a resident. Depending on your situation, this may have significant tax consequences. Plan well ahead of your move to prevent them.

Forms T1243 / T1161

If you have to pay capital gains/losses as a result of Deemed Disposition rules, you must file Form T1243.

If the Fair Market Value (FVM) of all your properties (for Deemed Disposition purposes) exceeds $25,000 CAD, you must file Form T1161.

Registered Investment Accounts

In general, you cannot deposit money into some registered investment accounts (FHSA, TSFA, RRSP, RESP, etc.) if you are not a Canadian resident, or there may be significant tax consequences for doing so. In general, you can keep these accounts, but there may be significant tax consequences or paperwork for the US.

  • TSFAs, RESPs and FHSAs are not considered tax protected accounts in the US by the IRS. They will be taxed like a normal brokerage account in addition to filing paperwork, so it is highly recommended you withdraw money from them (or hold and don't sell - in which you only pay taxes on interest and dividends, assuming most of the gains are in capital gains/losses).
  • The IRS recognizes RRSPs as a tax protected account on a federal level, HOWEVER some states do not, including California. It may be beneficial to keep the account, but there is additional paperwork with it.
  • These registered accounts may be considered "Foreign Trusts" by the IRS which comes with sigificant paperwork requirements based on interpretation of many tax professionals. The actual position of the IRS is unknown, since it hasn't been tested in court yet.

Landlords renting out their property (after departure)

If you are a landlord and plan to rent out property after you cease to be a Canadian tax resident, there are special steps you must follow to collect rent. Another Canadian tax resident must act as a withholding agent for the rent and remit 25% of the rent to the CRA before paying you monthly. You can elect to file an annual return under Section 216 so that only 25% of the net rent has to be remitted (instead of the gross/entire amount). You cannot get the withholding tax back, but you can get a foreign tax credit on the US side. Needless to say, this creates a significant hassle.

Form NR73 - Determination of Residency Status

DO NOT fill out this form. It is not recommended or necessary. The purpose of the form is to ask the CRA to make an opinion on your residency. It is not necessary for correct residency termination. Simply stating a departure date on your last Canadian tax return is sufficient to declare your departure (see General Notes for filing procedures).

Canadian Tax After Departure

After departure, you no longer have to file Canadian tax returns, unless under specific circumstances.

Benefits and Credits

You do not qualify for most credits such as the GST/HST credit. If you receive credits after becoming a non-resident, the CRA will make you pay them back later.

Changing Address

You should change your residential address with the CRA online as soon as possible after moving. This helps solidify your position as a non-resident, and you will stop receiving any benefits or credits so there is less work to do later. Your mailing address can still be Canada if you wish. Enable online mail for less hassle.

If you file as a Canadian tax resident, your worldwide income must be reported, including your US income. This is not recommended since US tax rates are generally lower than Canadian tax rates.

After filing your US tax return (see sections below), you can deduct the amount of taxes paid to the US on your Canadian return as a foreign tax credit.

US Tax - Non-Resident Alien (NRA)

If you file as a non-resident alien, you only have to pay tax to the US that is sourced from or effectively connected with the US. In general,

  • You can use tax software that supports Non-Resident Alien returns (Form 1040NR) with mail or electronic submission.
  • If you are a J-1 intern, you do not need to pay FICA tax. You should contact your employer and have them deduct this for you and issue an amended W-2 form.

US Tax - Dual-Status Alien

If you were a Non-Resident Alien (NRA) for a part of the year and a Resident Alien (RA) for a part of the year, you are considered to be a Dual-Status Alien. There are some exceptions you must follow as a Dual-Status Alien, such as:

  • Your return must be submitted by mail. This means tax information slips (like W-2 or 1099-INT must be included).
  • Most tax software does not support Dual-Status Aliens. The only one I know of is TaxAct.
  • You cannot take the standard deduction, only itemized deductions.
  • Your residency start date is determined by special rules. See:
  • IRS page on Dual-Status Alien filing procedures
  • You will pay taxes on your worldwide income to the US during the part of the year you are an NA. You will pay taxes only on your US-sourced income the part of the year you’re a NRA.
  • If you're a RA at the end of the year, you have to file with Form 1040 with DUAL-STATUS RETURN written across the top.
    • In addition, you have to file a statement to show which parts of your income were earned during the part of the year you’re a NRA. The IRS suggests that you use Form 1040NR to file this statement with DUAL-STATUS STATEMENT written across the top.
  • If you are an NRA at the end of the year (very unlikely if you just moved to the US for work - more for if you decide to return), you have to file with Form 1040-NR with DUAL-STATUS RETURN written across the top.
    • In addition, you have to file a statement to show which parts of your income were earned during the part of the year you’re a RA. The IRS suggests that you use Form 1040 to file this statement with DUAL-STATUS STATEMENT written across the top.
  • If your tax software does not support the DUAL-STATUS RETURN or DUAL-STATUS STATEMENT annotation, you can add it manually in a Preview (MacOS), Adobe Reader, or similar PDF software.

De Minimis Presence Rule

Days may be excluded from residency start or ending dates if you meet the SPT. Read 26 CFR § 301.7701(b)-4 for more details if you want to take advantage of this. A statement needs to be filed to claim this benefit.

First Year Choice (FYC)

If you are not a US tax resident (due to not passing the SPT), you may choose to be a US resident for tax purposes. This is a safe choice, since an argument can be made to the CRA that you are not a tax resident of Canada anymore when you are a tax resident of the US.

There is a specific way you need to make this election. You must meet certain requirements and include a written statement. This is a template I created for the statement for making the election that must be attached to the return. Double check to make sure it follows the requirements according to 26 CFR § 301.7701(b)-4 and the Checklist for correct FYC procedures for IRS Agents linked below.

You may need to file an extension for FYC because you need to show that you meet the SPT for the year after the tax year. Fill out Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return so that you can get an extension until you meet the SPT. Even though this form extends your filing deadline, it does not extend your payment deadline. You must estimate your tax (using an online calculator or use tax software to complete a quick draft return to get a number) and prepay any owing taxes (most times the withholding taxes should be enough) or you might have to pay interest and/or penalties. This form can be filed electronically for free with most tax software. You don’t need to use the same tax software you used to file the extention for your actual return, but save a PDF of the completed form. Include a copy of it with your return.

US Tax - Resident Alien (RA) (Future Years)

For subsequent years in which you remain a US tax resident, you can file taxes normally and use most tax software including electronic submission.

Bank Accounts - FBAR and FACTA (RA only)

The US wants to keep tabs on foreign assets that you might have, since they don't have authority over them. There are 2 different laws surrounding foreign asset reporting, and you must comply with both separately. The requirement only applies once you meet a certain reporting threshold.

  • The FBAR (Report of Foreign Bank and Financial Accounts) required under the Bank Secrecy Act is an annual report you must file separately from your tax return. You must report this information via the FinCEN website. You must file and report details on ALL foreign accounts if the aggregate value of any foreign accounts is over $10,000 USD at any point in the calendar year.
  • Form 8938, Statement of Specified Foreign Financial Assets required under the Foreign Account Tax Compliance Act (FACTA) is an annual report you must file with your tax return. The reporting threshold is more granular, but generally, if the aggregate value of all accounts is over $50,000 USD on the last day of the year, or over $75,000 USD at any point in the calendar year, you must report details on ALL foreign accounts and attribute any income in those accounts to which forms/lines it is included on your tax return.

The IRS website has a comparison of both of these filing requirements and reporting thresholds that is good to review.

FACTA

When you cease to become a Canadian tax resident, you are required to tell your banks that your residency has changed for tax compliance. This is especially true if your new tax residency is in the US due to FACTA. FACTA and any reciprocal laws in foreign countries, including Canada, requires banks to report information about any accounts owned by US persons for tax purposes to the IRS. When signing up for bank accounts, you may notice a very specific question if you area US tax resident for that reason. Many banks in Canada and around the world refuse to serve clients who are also US tax residents (RAs/US LPR/US citizens). The only way to keep these accounts is to not notify them of your changed tax residency (which is obviously illegal).

  • Tangerine allows you to keep any accounts you made prior, but will not let you make new ones.
  • EQ Bank will force you to withdraw funds and close your account.
  • Wealthsimple will force you to withdraw funds and close your account. If you own securities like stocks, you will only be able to sell them.
  • Simplii Financial will force you to withdraw funds and close your account.
  • The big 5 banks (CIBC, Scotiabank, BMO, TD, RBC) are generally fine, but be aware of the high account fees and minimum balances.