Cross-Border Tax — Canada and the United States

Tax problems that cross the Canada-US border are rarely solved by looking at one country at a time. Each country has its own definition of residency, its own filing calendar, its own rules on which assets it can tax, and its own penalty regime for getting it wrong. The two systems overlap in some places and contradict each other in others, and the Canada-US Income Tax Convention sits on top of both to decide who taxes what. A position that is correct under Canadian law alone can create a US filing failure; a US election that looks sensible in isolation can trigger Canadian tax on the same dollars. The work is in making the two systems line up.

One advisor, two tax systems

Canada and the United States both tax their residents on worldwide income, both tax non-residents on income with a source inside the country, and both are parties to a treaty that mediates between them. The United States adds a feature almost no other country has: it taxes its citizens on worldwide income no matter where they live, so a US citizen who has spent decades in Canada still owes annual US returns. Most cross-border problems fall into one of three buckets. Someone is moving, or has already moved, across the border. Income, assets, or beneficiaries are split between the two countries. Or a US-side compliance gap has surfaced and needs to be resolved without escalating into something worse.

Barrett Tax Law's cross-border practice handles all three. Simone Barrett is admitted in Ontario and Florida and advises Canadian-side and US-side clients on the federal tax law of both countries plus Florida state law. For matters arising under the state law of US jurisdictions other than Florida, we engage locally-admitted US counsel and coordinate the Canadian position so the file is managed as one matter rather than two disconnected opinions. Because the firm is a law firm, the cross-border analysis is delivered as legal advice, and communications about it are generally protected by solicitor-client privilege — a distinction that matters when a file may later involve a dispute with the CRA or the IRS. You can read more on the cross-border tax overview.

Who we typically advise

• Canadians moving to or returning from the US — departure tax under Income Tax Act (ITA) section 128.1, RRSP treaty elections, US pre-immigration cost-base planning, and US exit-tax exposure under Internal Revenue Code section 877A for those giving up green cards or citizenship.
• US citizens and green-card holders living in Canada — annual US returns filed alongside Canadian T1s, FBARs (FinCEN Form 114), Form 8938 under FATCA, passive foreign investment company (PFIC) treatment of ordinary Canadian mutual funds and ETFs, and treaty-based positions on RRSPs and other plans.
• Canadian snowbirds — substantial-presence-test day counting, Form 8840 closer-connection statements, US-situs assets, and the residency tie-breaker rules in Article IV of the treaty.
• Canadian companies expanding into the US — permanent-establishment risk, treaty-based return positions, branch-profits tax, transfer pricing, and the choice of US subsidiary or branch structure.
• Families with mixed-citizenship spouses and US-situs property — US estate-tax exposure, qualified domestic trust (QDOT) planning where the surviving spouse is not a US citizen, and coordination of Canadian and US wills.
• Non-residents selling Canadian or US real estate — section 116 clearance on the Canadian side, FIRPTA withholding on the US side, and the timing problems both create at closing.

Residency: the question that decides everything

Almost every cross-border outcome turns first on residency, and the two countries reach it by different routes. Canada uses a facts-and-circumstances test centred on residential ties — a home, a spouse, dependants, and secondary ties such as bank accounts, vehicles, and memberships. There is no fixed day count that makes you a Canadian resident or frees you from it. The United States, by contrast, uses bright-line rules: a green-card holder is a US tax resident automatically, and anyone else is caught by the substantial presence test. That test is met if you are physically present in the US for at least 31 days in the current year and 183 days over a three-year weighted formula — all of the current year's days, one-third of the prior year's, and one-sixth of the year before that.

Because the two systems can each conclude a person is resident, the treaty includes a tie-breaker in Article IV that runs through permanent home, centre of vital interests, habitual abode, and citizenship in order until one country wins. For a snowbird who counts too many US days, the practical relief is often Form 8840, the closer-connection statement, which can preserve non-resident status where the individual was present fewer than 183 days in the current year, kept a tax home in Canada, and has a closer connection to Canada. The form has to be filed on time, and a missed or sloppy filing is a common and avoidable trap. Day counting that ignores partial days, or that forgets the three-year lookback, is the other.

Crossing the border: departure tax and pre-immigration planning

When a Canadian resident emigrates, ITA section 128.1 deems them to have disposed of substantially all of their property at fair market value immediately before departure and to have reacquired it at the same value. The accrued gain is taxed in the year of departure even though nothing has actually been sold — this is the Canadian departure tax. Certain property is excluded, including Canadian real property and assets used in a business carried on through a Canadian permanent establishment, and short-term residents who were here for 60 months or less in the prior decade get relief on property they brought with them. The tax does not have to be paid immediately: under ITA subsection 220(4.5) a departing resident can post security with the CRA and defer payment until the asset is actually sold. And if plans change, subsection 128.1(6) lets a returning former resident elect to unwind the deemed disposition.

On the US side, the mirror-image issue is the cost basis a new arrival brings into the US system and, for those leaving the US, the section 877A exit tax that can apply to covered expatriates who give up citizenship or a long-held green card. Pre-immigration planning — done before the move, not after — can reset values, time the realization of gains in the lower-tax jurisdiction, and avoid the situation where the same gain is taxed twice with no foreign tax credit to relieve it. We work through this in detail on the departure tax planning page.

US compliance for citizens and green-card holders in Canada

A US citizen living in Canada is filing two systems' worth of returns every year. Canadian income tax usually absorbs most of the US liability through foreign tax credits and the foreign earned income exclusion, so the dollars owed to the IRS are often small — but the reporting obligations are extensive and the penalties for missing them are not proportionate to the tax. The main ones are the FBAR (FinCEN Form 114), required when aggregate foreign financial accounts exceed US$10,000 at any point in the year, and Form 8938 under FATCA, which has higher and residency-dependent thresholds. We cover the mechanics on the FATCA and FBAR compliance page.

The deepest trap on this side of the practice is the PFIC regime. Ordinary Canadian mutual funds, ETFs, and many pooled investments are passive foreign investment companies in US eyes, and the default PFIC tax treatment is punitive — a high interest charge on deferred distributions and the loss of capital-gains rates — plus an annual Form 8621 for each holding. A perfectly sensible Canadian portfolio can become a US compliance burden simply because of how the funds are wrapped. A TFSA, despite the name, generally receives no US shelter and may itself be treated as a foreign trust. Catching these before money goes into the wrong vehicle is far cheaper than fixing them after.

Real estate on both sides of the border

When a non-resident sells Canadian real property, the buyer is generally required to withhold a percentage of the gross sale price — not the gain — and remit it to the CRA, unless the seller obtains a section 116 certificate of compliance. Following the 2024 federal budget changes, that withholding rate increased from the long-standing 25% to 35% of the gross proceeds (and 50% for depreciable property), which makes the clearance certificate far more valuable than it used to be: without it, a large fraction of the sale price is tied up with the CRA until the seller files a Canadian return to recover the excess. The section 116 process has tight deadlines — notice to the CRA before the sale or within ten days after closing — and missing them carries daily penalties. We walk through it on the section 116 clearance page.

The US has a parallel mechanism. Under the Foreign Investment in Real Property Tax Act (FIRPTA), a buyer of US real property from a foreign person must withhold 15% of the amount realized, with reduced rates of 10% or zero where the buyer will use the property as a residence and the price falls under US$1 million or US$300,000 respectively. As with section 116, the withholding is on gross proceeds, so a Canadian seller can have far more held back than the actual US tax due, and recovering the difference means filing a US return or seeking a withholding certificate in advance. Our FIRPTA for Canadian sellers page covers the planning that reduces the cash trapped at closing. Coordinating the two regimes matters when a cross-border family holds property on both sides at once.

US estate tax exposure for Canadians

This is the area where the most expensive surprises happen, because the rule is counter-intuitive. The US estate tax can reach a Canadian who is neither a US citizen nor a US resident, purely because they died owning US-situs assets — most commonly US real estate and shares of US corporations, including shares held inside a Canadian brokerage account. A non-resident alien gets only a US$60,000 estate-tax exemption under domestic US law, far below the exemption available to US persons, and the tax runs at graduated rates up to 40%.

The Canada-US treaty softens this in two ways. Article XXIX-B lets a Canadian estate claim a pro-rata share of the much larger US unified credit, calculated on the ratio of US-situs assets to the worldwide estate, and it provides a marital credit where assets pass to a surviving spouse. As of 2026, the US estate and gift tax exemption is US$15 million per person, raised and made permanent by the legislation enacted in July 2025, with inflation indexing scheduled to begin in 2027. That figure is generous today, but US estate-tax thresholds move with US law and have swung dramatically in the past, so estate plans built around a current number should be reviewed as the law changes. The critical procedural point is that the treaty relief is not automatic: if no US estate-tax return is filed, only the bare US$60,000 exemption is available, and the IRS can deny the treaty credit on a return filed late. Where a surviving spouse is not a US citizen, a QDOT may be needed to defer tax that would otherwise fall due at the first death. We expand on all of this on the US estate tax for Canadians page.

Cleaning up a compliance gap without making it worse

Many people arrive at this practice not to plan a move but because a gap has already opened — years of unfiled US returns surfaced when a bank asked for a US tax number, an unreported foreign account, or an estate that never filed the return it needed. The instinct to quietly start filing forward, or to dump everything in at once, can convert a non-willful oversight into something that looks willful and forfeits the better remedies. The IRS Streamlined Filing Compliance Procedures remain available in 2026 for taxpayers whose failure to file was non-willful: the streamlined foreign offshore version carries no miscellaneous offshore penalty, while the domestic version carries a 5% penalty, and both require a genuine, documented non-willfulness certification. Choosing the right program — streamlined, delinquent FBAR or information-return procedures, or in serious cases a different route — is a legal judgment about exposure, not a clerical one. Doing it as privileged legal work, before contact from the tax authority, preserves options that disappear once an audit or examination begins.

Common traps we see

• Counting US days without the three-year weighted formula, then missing the Form 8840 deadline.
• Holding Canadian mutual funds or ETFs as a US person and triggering PFIC treatment and Form 8621.
• Selling Canadian property without arranging section 116 clearance and watching 35% of the price get withheld.
• Assuming the US$15 million exemption protects a Canadian estate, when only the US$60,000 base applies unless a US return is filed to claim the treaty credit.
• Filing forward on a US compliance gap instead of using a structured disclosure program, and losing access to the better remedy.
• Making a treaty-based filing position without the required disclosure form, which can keep the statute of limitations open.

How Barrett Tax Law approaches cross-border tax

Most engagements begin with a free initial consultation. We map your factual matrix against both the Canadian Income Tax Act and the US Internal Revenue Code, identify the points where the two systems disagree and where the treaty supplies the answer, and set out the filings and elections each side requires. Where a US-state issue outside Florida arises, we tell you up front and bring in locally-admitted counsel under a coordinated retainer so the file stays integrated. We quote a fixed fee for the work wherever the scope allows it, so you know the cost before we start. You can also read our cross-border guides on the blog for background on specific situations. To talk through your own facts, book a free consultation.

This page is general information, not legal advice. Cross-border tax outcomes depend on your specific facts and on the current law of both Canada and the United States, which can change; you should obtain advice on your own situation before acting.