Canada Tax - a primer for US expats Los impuestos en Canada - una introducción para los expatriados estadounidenses Les impôts du Canada - une introduction pour les expatriés americans

Canada Income Tax

Federal income taxes in Canada are levied under the Income Tax Act and administered by the Canada Revenue Agency (CRA). Provincial and territorial income taxes are levied under various provincial statutes.

Tips for Newcomers (and beyond)

CRA's tax guide for newcomers and page on Income Tax are a good introduction to Canadian income tax. However, there is little to no guidance for US citizens living in Canada, which therefore will be the focus of these tax posts.

Basis of assets - for the purpose of Canadian tax, your basis in all assets you owned prior to moving to Canada is their fair market value, in Canadian dollars, as of the day when you became a resident of Canada. I recommend keeping a list in a permanent file and using the Bank of Canada's posted exchange rate to convert to Canadian dollars.

Be sure to make the election to treat your Roth IRAs as tax deferred no later than April 30 (the due date of the Canada income tax return) after your move to Canada. See below for details.

Never invest in mutual funds or ETFs outside the US, outside of a retirement account, because for the purpose of US tax, they are considered to be Passive Foreign Investment Companies (PFICs), whose earnings are taxed by the US at punitively high rates (additional interest charges, PFIC losses cannot offset other PFIC gains, highest marginal income tax rate applies to everything, including capital gains) and have onerous reporting requirements. For a more detailed explanation, see this article.

Interest from US municipal bonds is not tax free in Canada, so US citizens moving to Canada should consider not investing in US muni bonds. Since Canadian income tax rates tend to be higher, US citizens should focus more on minimize their Canadian tax.

Low and moderate income (in Canadian dollars in the year or two before moving) immigrants might qualify for certain benefits and credits, which they should apply for as soon as possible after moving:

• Goods and services tax/harmonized sales tax (GST/HST) credit
• Canada child benefit
• Provincial and territorial benefits and credits

Capital gains are taxed at 50% of your marginal tax rate, and long and short term capital gains are taxed the same way, unlike in the US, where short term capital gains are taxed at your marginal tax rate, and the long term rate is 15% for most taxpayers but can range from 0 to 28%, and part of the capital gain could be subject to the 3.8% Net Investment Income Tax.

Canada's principal residence exemption exempts all gain from the sale of your primary residence from tax, while the US's Section 121 exclusion exempts only $250,000 ($500,000 if married filing jointly) of gain from tax.

Depreciation (called Capital Cost Allowance or CCA in Canada) is optional in Canada, unlike in the US, and the CCA rates differ. If you choose to take CCA in Canada, you can take as little or as much as you want, up to the maximum allowable for the year.

The best known expenses related to owning a home as a primary residence that are deductible for US tax purposes, namely the itemized deductions for mortgage interest and real estate taxes, are not deductible for Canadian tax, except when the property is being rented out, and even then, only the rental portion is deductible as a rental expense.

Read my page about tax planning for business and real estate for more discussion on depreciation, capital gains, and the tax considerations of real estate.

Foreign Tax Credit and Foreign Information Reporting

Federal Foreign Tax Credit 

Use Form T2209, Federal Foreign Tax Credits to take a credit for taxes paid to another country, such as the US. The credit is calculated separately for taxes on business and nonbusiness income and is the lesser of the foreign tax paid (converted to Canadian dollars) or your total federal Canadian tax liability multiplied by the foreign business or nonbusiness income as a percentage of total worldwide income.

Provincial or Territorial Foreign Tax Credit

Use Form T2036, Provincial or Territorial Foreign Tax Credit to take a foreign tax credit against provincial tax liability.

T1135 Foreign Income Verification Statement

You actually don't have to file this form for your first tax year in Canada, but you will need to file it in all subsequent years and should start planning immediately. For tax years after your first in Canada, you will need to file this form if you owned, at any time during the year, specified foreign properties costing at least $100,000 CAD. For us newcomers, the cost of assets we owned before moving to Canada, for the purpose of Canadian tax, is their fair market value in Canadian dollars on the day we moved to Canada.

What are some examples of specified foreign property (SFP)? Basically cash and investments outside of Canada:

• foreign bank accounts
• foreign stocks and mutual funds
• debts owed by non-residents including bonds, debentures, mortgages, and notes receivable
•  foreign rental property (real, tangible personal property, and intangible)
• life insurance policies issued by a foreign insurer
• precious metals held outside of Canada, and 
• cryptocurrency held outside of Canada (e.g., in a wallet or exchange located outside of Canada).

What is not SPF?

• foreign property held exclusively for business or personal use
• foreign property held in a Canadian retirement/registered plan such as RRSP, LIF, RRIF, LIRA, TFSA, RESP and RDSP
• assets held in a foreign registered pension account such as an IRA or 401(k)
• Note: although regular 401(k) and traditional IRA accounts are exempt from reporting on Form T1135, it is currently not clear whether this exemption relates to Roth IRA accounts as well November 2020 update: CRA says that if a Roth election (see below) has been made and there have not been Canadian contributions, Roth IRAs are not reportable on Form T1135. 
• Some people think that if the election is timely filed to defer taxes on the Roth IRA under Article XVIII(7) of the US-Canada Tax Treaty, the Roth IRA would also be exempt from reporting on Form T1135. Form T1135 instructions reference "an interest in a trust described in paragraph (a) or (b) of the definition of 'exempt trust' in subsection 233.2(1) of the Act" as not being specified foreign property. 
• Considering the potential penalties involved in not reporting all required accounts, others advise including Roth IRA accounts in your annual T1135.
• November 2020 update: CRA recently published a new Income Tax Folio S5-F3-C1, Taxation of a Roth IRA which states, "If an Election has been filed and no Canadian Contribution has been made to a Roth IRA, the CRA does not require information relating to the Roth IRA to be reported in the following forms: Form T1135, Foreign Income Verification Statement ..." This is effective October 9, 2020 and replaces and cancels Income Tax Technical News, Issue No. 43 - September 24, 2010; the comment period for this Chapter ends on January 9, 2021.

See a more thorough discussion in this article, and the following for more about cryptocurrency:
Crypto as Specified Foreign Property
Canadian Taxation of Cryptocurrency So Far

Retirement Planning

The following tax sheltered retirement or education savings vehicles are available to all Canadian residents:

Registered Retirement Savings Plan (RRSP)

The RRSP is similar to the US 401(k), in that contributions are deductible in the year of contribution and grow tax deferred, except:

• the contribution limit is the lesser of 18% of your earned income in the previous year (so newcomers aren't eligible to contribute in their first year) or the annual limit ($26,500 CAD for 2019), versus $19,000 USD (with an additional $6000 for those over age 50) in 2019 for the 401(k);


• if one does not contribute the maximum allowed for one year, the unused amount carries over to the next year, versus for 401(k)s, if you don't make the allowed contribution for the year, it's lost forever;


• you can contribute to an RRSP only until December 31st of the year you turn 71 years of age, versus with a 401(k), you can contribute for as long as you work for an employer with a 401(k) plan

For US citizens living in Canada,

• Article XVIII(7) of the US-Canada Tax Treaty allows US citizens living in Canada to elect to defer tax on earnings in RRSP accounts (i.e., respect Canada's tax treatment). This election is automatic ever since IRS Revenue Procedure 2014-55 was released in 2014; previously, the election had to be made manually each year on the now obsolete IRS Form 8891.


• In general, the IRS does not allow a deduction for RRSP contributions. However, if the RRSP contribution is made via employee contributions to an employer sponsored group RRSP plan, then the contribution is deductible on the US tax return, up to the lesser of your RRSP your RRSP deduction limit in Canada or your 401(K) limit, under Article XVIII paragraphs 13 and 14 of the US-Canada Tax Treaty. In addition, you would need to file Form 8833 with your US tax return and claim an exemption under Article XVIII of the US-Canada tax treaty. Note, however, that since the Canadian tax rates are higher, it often makes sense to contribute to a RRSP and get the Canadian tax deduction even if you don't get the US tax deduction, as you might still have enough Canadian tax liability to wipe out your US tax liability via the Foreign Earned Exclusion and the Foreign Tax Credit (including excess carryovers from previous years) on the US side.

Tax-Free Savings Account (TFSA) (but do not contribute!)

The TFSA is Canada's equivalent to the US Roth IRA: contributions are not deductible, but earnings and withdrawals grow tax free. Even better than the Roth IRA, the TFSA does not have any early withdrawal penalties. Unfortunately US citizens should not have any TFSAs, because not only does the US not respect the tax treatment of TFSAs (i.e., income is taxed in the US), but the TFSA might be considered a foreign trust necessitating the filing of IRS Forms 3520 and 3520-A.

Registered Education Savings Plan (RESP)

The RESP is Canada's equivalent to the 529 college savings plans in the US, in that contributions are not deductible, but earnings grow tax deferred. There are no annual contribution limits to an RESP, but there is a lifetime contribution limit of $50,000 for each beneficiary. Withdrawals are taxable to the beneficiary, unlike 529 plan withdrawals that are tax free if used for qualified education expenses. Although the earnings grow tax deferred in Canada, they are taxable in the US. A RESP is also considered a foreign trust requiring the filing of IRS Forms 3520 and 3520-A; thus, the owner of the RESP should not be a US person.

Canadian tax treatment of US retirement accounts

Roth IRA

To defer taxation on your Roth IRAs that you had before moving to Canada and have it considered as a "pension" under Article XVIII(3)(b) of the US-Canada Tax Treaty (i.e., have Canada treat your Roth IRAs the same way the US does), you must file an election with the Competent Authority Services Division in Ottawa, postmarked no later than the due date of your first year's tax return (i.e., April 30). You must also not make any contributions to the Roth IRA after you become a resident of Canada (rollovers from other Roth IRAs or Roth 401(k) are all right).

The election letter must contain the following:

• Your name and address;
• Your social insurance number and social security number;
• Name and address of Roth IRA trustee or plan administrator;
• Roth IRA account number;
• Date that the plan was established;
• Date that you became resident in Canada;
• Balance of the Roth IRA as of December 31, 2008 or as of the date on which you became resident in Canada, whichever is later;
• Amount and date of the first Canadian Contribution made to the Roth IRA, if any (as noted above, do not make any Roth IRA contributions after you become a Canadian resident!); and
• A statement signed by you indicating that you elect to defer Canadian taxation under paragraph 7 of Article XVIII of the Canada-U.S. Income Tax Convention with respect to any income accrued in the Roth IRA for all taxation years ending before or after the date of the Election, until such time as a Canadian Contribution is made.

Keep a copy of your U.S. tax forms and records of transactions in the Roth IRA, including records of contributions, conversions, rollovers, income, and withdrawals. Although you do not have to provide this information to the CRA at the time of making the Election, these documents may be requested by the CRA to verify the taxable portion of your Roth IRA distributions, if any.

The election must be mailed no later than April 30 to:

Competent Authority Services Division
International and Large Business Directorate
5th Floor, Canada Building
344 Slater Street
Ottawa ON K1A 0L5

For informational purposes, here is the election letter I sent. I received a letter in response 5½ weeks later confirming receipt of my election and with a warning that if I make any contributions to the Roth IRA while I am a resident of Canada, it would cause all subsequent income earned and distributions made to become taxable in Canada (with the exception of rollovers from other Roth IRAs or Roth 401(k)s).

Traditional IRAs and 401(k)s

Unlike Roth IRAs, traditional IRAs and 401(k)s are already treated as tax deferred by the Income Tax Act, so there is no need to make an election to defer taxation under the US-Canada tax treaty. The CRA has also published a statement that there is no need to elect to defer tax under the treaty for a traditional IRA because 56(1)(a)(i)(C.1) and 56(12) of the Income Tax Act already provide for a deferral of taxation for a Traditional IRA (2015-0576551E5 Election for Traditional IRA, May 16, 2016).

Stop contributing to all US retirement accounts after moving to Canada

As mentioned above, you will lose all the benefits of your US Roth IRAs on the Canadian side (and therefore in general) if you contribute to them after moving to Canada.

Additionally, Canada generall does not allow a deduction for contributions made by Canadian residents to US Traditional IRAs and 401(k)s (except, in certain circumstances, they are employed by a US company and contributing to their employer-sponsored 401(k) and they file Form RC267 or Form RC268 with their Canadian tax return; see Article XVIII paragraphs 10 and 11 of the US-Canada Tax Treaty).

What to do with US retirement accounts

There are 3 options:

1. Keep those accounts open

   If you keep your accounts open and don't make any more contributions, tax treatment will be as if you had stayed in the US and held onto the accounts, with the same tax deferral treatment. This is the option I chose. You will be taxed by both countries when you take distributions in the future, but you will be able to take a foreign tax credit to the other country. Both countries have minimum distribution requirements that begin the year you turn age age 71; you will need to take the higher of minimum distribution required by the two countries to make sure you satisfy minimum distribution requirements for both countries. In other words, you will end up taking the higher minimum distribution and paying the higher tax rate of the two countries.

2. Roll the funds over to an RRSP

   Canada's Income Tax Act allows you to roll an IRA or a 401(k) over to an RRSP on a tax-deferred basis. Unfortunately the US does not recognize this as a valid rollover and will tax the withdrawal like an early withdrawal, i.e., at your marginal tax rate plus 10% early withdrawal penalty if you are under age 59½. This could also result in double taxation because you will pay tax to the US but not to Canada, but Canada will tax these funds in the future at withdrawal. You can use the foreign tax credit only to offset taxes paid in the other country that same year, so the US tax paid at rollover will not be available to offset the Canadian tax paid years later at withdrawal. However, if your other income in Canada was high enough, you could take a foreign tax credit on your Canadian return for the US taxes paid on the IRA or 401(k) withdrawal to offset other Canadian income; see for example this article.

3. Take out the funds and close the accounts

   This would also be equivalent to taking an early withdrawal on the US side, where you will be taxed at your ordinary income tax rate, plus the 10% early withdrawal penalty if you have are under age 59½. This withdrawal would also be taxed in Canada, but you would be able to take a foreign tax credit for the tax paid in the US, because it would be paid in the same year.

You should try to decide which option(s) you'd like to take before moving to Canada, as it is harder to make transactions after you move. Many US brokerage companies do not like dealing with people living outside the US and might drag the process out and demand more paperwork.

If you plan to do any Roth conversions (i.e., convert a traditional IRA into a Roth), it could be better to do so before moving to Canada so that you would be subject only to the (usually lower) US tax rate on the conversion. Also, this could be a good idea if you expect your tax rate to be higher when you make withdrawals in retirement.

To reduce paperwork and simplify reporting, it is also a good idea to consolidate your accounts before moving to Canada (e.g., roll all Roth IRAs into one account, all 401(k)s and traditional IRAs into one traditional IRA).

Useful Links

CRA's tax guide for newcomers
CRA's page on Income Tax
Log in to your CRA account, where you can view your Notice of Assessment, payments, apply for benefits and credits, see your RRSP and TFSA contribution limits (although as noted above, US citizens should not make TFSA contributions)
Register for an account if you don't have one (click on the "CRA register" button)
Canada income tax rates
US-Canada Tax Treaty (downloadable PDFs from the IRS website)
Tax treaty benefits for U.S. citizens and residents - useful article that summarizes some key provisions of the US-Canada Tax Treaty
IRS Publication 597, Information on the United States-Canada Income Tax Treaty

Smartblock Law "Crypto-Tax Primer" Blog Series
Simple Tax Guide for Americans in Canada

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Important warning! I do not provide tax, legal or accounting advice. I am writing this guide only for informational purposes, and based heavily on my own unique personal facts and circumstances. And I am a unique individual with a unique background and my unique set of personal facts and circumstances, so what is applicable to me might not be applicable to you. This guide, like all other content in this blog, is not intended to provide, and cannot be relied on for, tax, legal or accounting advice. You are responsible for consulting your own tax, legal and accounting advisors to obtain advice on your personal situation.