U.S. Citizens in Canada

Volume No. 10-04

“U.S. status could eliminate many Canadian tax benefits.”

Canada taxes individuals on their worldwide income only if they are resident in Canada. The United States taxes its citizens and green card holders on their worldwide income, no matter where they are resident. Many U.S. citizens or green card holders who are resident in Canada are not aware that their U.S. status could eliminate many Canadian tax benefits.

Two common examples of items that are tax-free in Canada but not in the United States are:

  • capital dividends; and
  • capital gains exemption on shares of a qualifying small business corporation

Imagine the dismay where someone uses their capital gains exemption merely to increase the cost base of shares they own, only to find that a tax bill has been created.

There are a number of other items where there can be significant differences between the Canadian and U.S. tax rules depending on how the planning is implemented. For example, a tax-free rollover under subsection 85(1) of the Income Tax Act may not be tax free for U.S. purposes without proper U.S. planning and compliance.

Canadian-resident U.S. citizens or green card holders with Canadian investment companies can be subject to punitive income tax rules in the U.S. relating to corporate investment income, as well as penalties for not filing certain information returns. Even ordinary Canadian mutual fund investments can create U.S. tax problems.

The U.S. estate tax regime also applies to U.S. citizens and people domiciled in the U.S., no matter where they reside at the time of death, and captures all of their worldwide assets.

This short discussion illustrates a significant issue. If a Canadian taxpayer is a U.S. citizen or green card holder, common Canadian planning cannot be taken for granted. Non-compliance will not make these issues go away. It can make matters worse as various U.S. deductions that provide relief from double taxation are dependent on filing tax returns within certain time limits.

U.S. citizenship or status must be identified and addressed or the tax results can be serious.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.