The Tax Implications of Moving from the U.S. to Canada

Introduction

Moving from the United States to Canada comes with significant tax implications. As a U.S. citizen or resident relocating to Canada, you must understand how your tax obligations will change, how both countries will tax your income, and what steps you can take to minimize your overall tax burden. This guide explores the key tax considerations for individuals transitioning from the U.S. to Canada.

Understanding U.S. Tax Obligations After Moving to Canada

U.S. Citizenship-Based Taxation

The United States follows a citizenship-based taxation system, meaning that U.S. citizens and green card holders must continue to file U.S. tax returns and report their worldwide income, even after moving to Canada. This means you are still required to file:

• Form 1040 (U.S. Individual Income Tax Return) annually.
• FBAR (FinCEN Form 114) if your foreign bank accounts exceed $10,000 at any time during the year.
• Form 8938 (FATCA Reporting) if your specified foreign financial assets exceed $200,000 for single filers ($400,000 for joint filers living abroad).

Failure to comply with these requirements can result in hefty penalties from the IRS.

U.S. Exit Tax (For Green Card Holders or Renouncing Citizenship)

If you choose to renounce your U.S. citizenship or abandon your green card, you may be subject to the U.S. Exit Tax under Section 877A of the Internal Revenue Code. This tax applies if:

• Your net worth exceeds $2 million at the time of expatriation.
• Your average annual U.S. tax liability exceeds $190,000 (for 2025, adjusted annually for inflation).
• You fail to certify that you have complied with U.S. tax obligations for the past five years.

Exit tax is assessed as if you sold all your worldwide assets on your final day as a U.S. taxpayer, with gains exceeding a certain threshold subject to capital gains tax.

Canadian Tax Obligations After Moving from the U.S.

Becoming a Canadian Tax Resident

Canada taxes individuals based on residency, not citizenship. You will be considered a 

Canadian tax resident if:

• You establish significant residential ties in Canada (such as a home, spouse, or dependents).
• You stay in Canada for 183 days or more in a calendar year.

Once you become a Canadian tax resident, you must report your worldwide income to the Canada Revenue Agency (CRA), including income from U.S. sources.

Departure Tax from the U.S. & Entry Tax in Canada

Upon moving to Canada, you may face the following:

• U.S. Departure Tax: If you renounce U.S. citizenship or abandon your green card, you may be taxed on unrealized capital gains over a certain threshold.
• Canadian Entry Tax: Canada considers you to have acquired assets at fair market value on the date of arrival. This means that unrealized gains accrued before moving to Canada are not taxable in Canada when sold later.

Key Tax Considerations for U.S. Expats in Canada

U.S.-Canada Tax Treaty Benefits

The U.S.-Canada Tax Treaty helps prevent double taxation and provides tax relief in the following ways:

1. Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE):
   • You can claim a credit for taxes paid to Canada on your U.S. tax return (Form 1116).
   • Alternatively, if you qualify, you can exclude up to $126,500 (2024 limit) of foreign earned income using Form 2555.
2. Social Security & Pension Taxation:
   • U.S. Social Security benefits are taxable only in Canada if you are a Canadian tax resident.
   • Canada Pension Plan (CPP) & Old Age Security (OAS) benefits are taxable in both countries but with tax treaty relief.
3. Retirement Accounts (401(k), IRA, RRSPs, and RRIFs):
   • The treaty allows tax-deferred growth of U.S. retirement accounts after moving to Canada.
   • Canadian RRSPs & RRIFs must be reported on U.S. tax forms (FBAR & FATCA), but tax deferral is allowed under Revenue Procedure 2020-17.

Capital Gains and Investments

Canada does not recognize U.S. tax treatments for some investment accounts:

• 401(k) and IRAs are recognized but may have different withdrawal tax rates.
• U.S. capital gains tax rules do not apply in Canada. Capital gains are taxed in Canada based on half of the gain being included in taxable income (50% inclusion rate).

For those holding U.S. mutual funds or ETFs, be aware that Canada may tax them at higher rates or classify them as Passive Foreign Investment Companies (PFICs).

How to Minimize Taxes When Moving to Canada

Here are some strategic steps to reduce your overall tax burden before and after moving to Canada:

Before Moving to Canada

✔ Withdraw from Roth IRA accounts before becoming a Canadian tax resident—these withdrawals are tax-free in the U.S. but taxable in Canada if withdrawn after residency.
✔ Review investments and capital gains before moving—Canada will tax certain U.S. investments differently.
✔ Consider selling U.S. real estate or businesses before moving to simplify tax reporting.

After Moving to Canada

✔ Maximize Foreign Tax Credits (FTC) to prevent double taxation on U.S. income.
✔ Use the U.S.-Canada Tax Treaty to claim tax-exempt benefits where applicable.
✔ Consult a cross-border tax professional to ensure compliance with both IRS and CRA requirements.

Conclusion

Moving from the U.S. to Canada brings significant tax changes that require careful planning. Understanding how U.S. tax laws apply after your move, how Canadian tax residency works, and utilizing tax treaty provisions can help minimize your tax liability.

At Tax Partners, we specialize in cross-border taxation and can help you navigate your U.S. and Canadian tax obligations with ease.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.