U.S. Citizenship and Canadian Tax Obligations: What You Need to Know

Wedged between the United States and the vast expanses of Canada, many individuals consider both countries as their home. Alex, a Canadian citizen working in the U.S., recently inquired about their tax obligations. This article aims to clarify the tax obligations for Canadians working in the U.S. and address the specific question Alex posed.

Introduction to Tax Obligations for Americans and Canadians

Alex, inspired by Michael Benton's original answer, highlights an essential distinction: while it is mandatory for U.S. citizens to file tax returns every year for their entire life, this is not a strict requirement for Canadian citizens. The only way to formally avoid this U.S. filing requirement is to renounce U.S. citizenship or residency, after which one can stop filing tax returns, but only after paying an Exit Tax.

Tax Obligation for Canadians

Unlike U.S. citizens, Canadian citizens are only required to report their income to the Canadian Revenue Agency (CRA) for any year during which they

owe Canadian income taxes that have not already been paid. receive a "request to file" notice from the CRA.

Canada and the U.S. have a reciprocal tax agreement that manages the exchange of financial and tax information. This means that Canadian citizens might owe taxes to both countries if they earn more than the exempt amount stipulated in the agreement or if they have income from sources other than employment, such as rental property or investment-related income.

Residency-Based Taxation in Canada

Canada follows a residency-based taxation system. Whether one is considered a resident of Canada for tax purposes is determined by the ties and connections one maintains with the country. The Canada Revenue Agency (CRA) uses two forms, NR-73 and NR-74, to determine one's residency status, primarily for individuals leaving or entering Canada. While these forms are not mandatory, filing them can ensure a record of one's residency status with the CRA.

U.S. Taxation for "U.S. Persons"

U.S. citizens and lawful permanent residents (green card holders) are referred to as "U.S. persons," and they are taxed on worldwide income regardless of where they reside. The U.S. taxation system is more objective, making it harder to dispute one's status as a U.S. person under the objective physical presence test.

Conclusion

Given the complexities and requirements of tax compliance for individuals balancing their lives between the U.S. and Canada, it is crucial to stay informed and possibly seek professional advice. Alex, as a Canadian citizen working in the U.S., shouldn't automatically assume they have no Canadian tax obligations. However, renouncing U.S. citizenship remains the most straightforward path to avoid U.S. tax requirements, after handling any Exit Tax obligations.

Regardless of your situation, ensure that you comply with the tax regulations of both countries to avoid any future issues or penalties.