U.S. Green Card Holders Living in Canada: Understanding Your Tax Obligations

Holding a U.S. green card while living in Canada creates unique cross-border tax challenges. As a U.S. tax resident and a Canadian tax resident, you are required to report worldwide income in both countries. Fortunately, the U.S.-Canada Tax Treaty and the foreign tax credits help prevent double taxation - but compliance can be complex.

1. Tax residency and filing requirements:

   1. U.S.: Green card holders are U.S. tax residents regardless of where they live and must file the Form 1040 annually, reporting worldwide income.

   2. Canada: Canada taxes a resident based on significant residential ties (home, family, social/economic connections). Canadian residents must file an annual tax return (T1) reporting worldwide income.

      
      

2. Avoiding Double Taxation:

   1. Income can be sourced to either Canada or the U.S. depending on which country has the first right to tax, as well as the type of income and timing of payments.

   2. Both U.S. and Canada tax worldwide income, but the Canada-U.S. Tax Treaty and foreign tax credits help prevent double taxation.

      
      

3. Other Reporting Requirements:

   1. U.S.: Must file FBAR (FinCen114) and Form 8938 (FATCA) if foreign (non-US) assets exceed certain thresholds. Additional forms may be required for interest in foreign corporations, trusts, or partnerships, e.g. Form 5471, Form 3520/3520-A, Form 8865 etc.

   2. Canada: Must report specified foreign (non-Canadian) assets on Form T1135.

      
      

4. Special Accounts and Investments Considerations:

   1. US Retirement accounts (IRA/401(k)) – Tax-deferred in both countries until withdrawal, with foreign tax credit relief available. Specific rules surrounding Roth IRA accounts should be considered.

   2. Canadian RRSPs/RRIF’s – Tax-deferred in both countries if a property treaty election is made. Reporting is still required.

   3. TFSA’s/RESP’s/FHSA’s – Not tax-free for U.S. purposes; income is taxable and may trigger additional reporting.

   4. Canadian Mutual Funds/ETF’s – Often these holdings, if held in a non-registered or TFSA account are treated as PFICs (passive foreign investment companies), which are subject to punitive U.S. tax and complex reporting.

   5. Principal Residence – Canada exempts the full gain on sale, while the U.S. allows only up to US$250,000 (single) or US$500,000 (joint filing).

      
      

5. Expatriation Risk:

   1. Green card holders who have held status for 8 of the last 15 years may face the U.S. exit tax when relinquishing their card if certain income, net worth, or compliance thresholds are met. This can trigger a mark-to-market tax on unrealized gains and deemed distributions from retirement accounts.

Conclusions

US green card holders living in Canada face dual tax residency, extensive reporting, and potential double taxation. However, with careful planning – leveraging treaty relief, foreign tax credits, and registered account elections – you can manage these obligations efficiently and avoid costly tax surprises.