The U.S./Canada Tax Treaty Explained

The U.S. and Canada have a great relationship, and that which extends to taxes laws within their borders. The U.S./Canada tax treaty sets out how U.S. citizens living in Canada, and Canadian citizens residing in the U.S. should get taxed in certain circumstances, and it saves many headaches when it comes to challenging tax scenarios.

Why Does the Tax Treaty Between the U.S. and Canada Exist?

In summary, the U.S./Canada tax treaty eases tax issues for U.S. citizens and residents living in Canada and vice versa.

Many countries around the world have a form of income tax that residents are obligated to pay. This obligation creates problems for U.S. ex-pats because Americans are required to file U.S. income tax. This applies even if they aren't living in the U.S. at the time.

The U.S. is one of few countries that impose taxes based on citizenship and not place of residency. This policy leaves Americans responsible for paying taxes in dual countries. once in the U.S. and once in their country of residence.

One of the purposes of tax treaties is to solve this double-taxation issue, and the United States treaty with Canada is no different.

The U.S.has specific tools like the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) to help alleviate the double–taxation issue. 

However, there are some sticky situations — U.S. citizens with Canadian pensions and tax–free retirement accounts, to name a couple, ran into trouble when it came to U.S. taxation of those accounts. 

The U.S./Canada tax treaty addresses these concerns and directs how those situations and individuals should be taxed.

It addresses cross-country ex-pat financial reporting to ensure transparency between Canadian financial institutions and the U.S.

If you're behind on U.S./Canada financial reporting like the FBAR and FATCA filing requirements, you need to get caught up with Streamlined Filing as soon as you can.

That's where Thrive Business Intelligence Chartered (Thrive BI) can help. Contact us today and see how we can help with your Tax Treaty requirements & filings.