Canadians moving to the United States face a year-one tax cycle unlike any other. The Canadian side triggers departure tax under Section 128.1; the US side triggers a dual-status filing position; and several Canadian-account holdings (TFSAs, RESPs, Canadian mutual funds) need to be cleaned up before they become PFICs or foreign trusts on the US side. All of this happens in one calendar year.
The Canadian departure
The Canadian tax cycle is mostly described on our Departure Tax Planning page and in the Leaving Canada article. In summary: ceasing Canadian residency triggers a deemed disposition of most worldwide assets at fair market value, with the resulting gain taxable on the departure-year T1. Form T1244 lets the taxpayer defer payment with adequate security.
For a Canada-to-US move, the departure tax and the destination country's residency rules need to align. The Canada-US treaty's Article IV tie-breaker resolves any overlap; the practical position is that residency is cut over to the US on the date of physical move (for substantial-presence-test purposes) or on the green-card-grant date (for green-card-holder purposes).
The US year-of-move return
The first-year US return for a new resident is a "dual-status" return. The taxpayer files as a non-resident for the part of the year before US residency began and as a resident for the part after. The mechanics:
- Pre-residency portion (non-resident): Form 1040-NR, reporting US-source income for that period only. Most Canadians have no US-source income in this portion unless they had US investments before the move.
- Residency portion (resident): Form 1040, reporting worldwide income for that period, with foreign tax credits for any Canadian or other foreign tax paid.
- The two returns are bundled and submitted as a single package, with the dual-status return marked "Dual-Status Return" at the top.
The dual-status return is more complex than a regular full-year resident return. Standard deductions are unavailable, and several elections can change the outcome — most importantly the "first-year choice" under IRC section 7701(b)(4), which lets a taxpayer who would normally be a non-resident for the year of move elect to be treated as a resident from the date of move.
PFIC and foreign-trust cleanup
The Canadian-account positions most likely to become a problem in year one:
- Canadian mutual funds and ETFs. Once US residency begins, these become PFICs (passive foreign investment companies) under IRC section 1297. Without a timely mark-to-market or QEF election, the excess-distribution regime applies retroactively for the entire holding period. Selling out of Canadian mutual funds BEFORE the residency date (and replacing them with US-domiciled equivalents) is the cleanest play. If the sale isn't possible, marking to market in the first US year is a partial fix.
- TFSAs. Tax-sheltered in Canada, fully US-taxable on the income earned inside, and frequently classified as foreign trusts requiring Form 3520 / 3520-A. Closing the TFSA before US residency begins (and accepting the loss of the Canadian shelter) is the dominant call.
- RESPs. Same posture as TFSAs.
- RRSPs. Automatically sheltered under Article XVIII of the treaty (no election required). Distributions are US-taxable when received. See the RRSP article for the mechanics.
The CFC question
For Canadians who own a Canadian-controlled private corporation (CCPC), the move to the US transforms the corporation into a controlled foreign corporation (CFC) on the US side. The new US shareholder is subject to annual Subpart F inclusions and GILTI inclusions on the corporation's earnings.
Pre-move planning options include: (a) distributing the corporation's retained earnings as eligible dividends before the move (cleaner Canadian tax than after the move); (b) restructuring through a Section 85 rollover into a US holding company; or (c) accepting the CFC posture and managing the annual US inclusions. The right answer depends on the corporation's profile and the family's long-term plan.
Social security and pension portability
Year-one moves also surface social-security questions. The Canada-US Totalization Agreement coordinates contributions to the two countries' social-security systems; a worker who has paid into one but not the other can use combined credits to qualify for benefits. The agreement is administrative — applications are made at the time of move to confirm coverage and avoid double contributions.
Defined-benefit pensions and employer 401(k) / RRSP-style accounts each have country-specific portability rules. Most Canadian DB pensions pay across the border with treaty-rate withholding; most US 401(k) accounts can continue to grow tax-deferred for a US-resident-then-non-resident, though distributions become subject to Canadian Article XVIII taxation once Canadian residency resumes.
The takeaway
The year of move is the only year in which both countries' tax positions are simultaneously in flux. Coordinating the Canadian departure-tax return, the US dual-status return, the pre-move account cleanup, and the post-move structural decisions in a single calendar year is the work. The penalty for getting it wrong is years of remediation; the cost of getting it right is mostly planning time at the front end.