How to Avoid Double Taxation as a US Expat in Canada

Living in Canada as a U.S. expat brings exciting opportunities—but it can also create tax headaches, especially when it comes to double taxation. If you’re earning income in Canada, you might worry about being taxed twice: once by the Canadian government and again by the IRS. The good news? With the right knowledge and strategies, you can avoid double taxation and keep more of your hard-earned money. Let’s break down how you can protect yourself, stay compliant, and enjoy peace of mind.

Understanding double taxation for U.S. expats in Canada

Double taxation happens when two countries tax the same income. For U.S. expats in Canada, this is a real concern because the U.S. taxes its citizens on worldwide income, no matter where they live. At the same time, Canada taxes residents on their global income as well. This overlap can feel overwhelming, especially if you’re new to expat life or navigating cross-border finances for the first time.

Here’s how double taxation Canada US typically plays out:

• You earn a salary in Canada and pay Canadian income tax.
• The IRS still expects you to report—and potentially pay tax on—that same income in the U.S.

This situation can feel unfair and confusing. But you’re not alone, and there are well-established solutions to help you avoid paying tax twice. The U.S. and Canada have created systems and agreements to protect expats from double taxation, so you can focus on your life abroad without unnecessary financial stress.

The US-Canada tax treaty: Key provisions and benefits

The US-Canada Tax Treaty is your first line of defense against double taxation. This agreement coordinates how each country taxes various types of income, ensuring you’re not taxed twice on the same earnings.

What does the treaty cover?

The treaty covers a wide range of income, including:

• Employment income
• Self-employment income
• Pensions and social security
• Dividends, interest, and capital gains

Key benefits for U.S. expats in Canada

• Tax credits and exemptions: The treaty allows you to claim credits or exemptions for taxes paid to the other country.
• Tie-breaker rules: If both countries consider you a tax resident, the treaty provides rules to determine your primary residency and avoid double taxation.
• Reduced withholding rates: On certain types of income (like dividends or pensions), the treaty may lower the amount withheld for taxes.

Practical example

Suppose you’re a U.S. citizen living in Toronto, working for a Canadian employer. You pay Canadian taxes on your salary. Thanks to the treaty, you can use the taxes paid in Canada to offset your U.S. tax liability, so you’re not taxed twice on the same income.

Foreign Tax Credit (FTC): How to file Form 1116

One of the most effective tools for avoiding double taxation in Canada and the US is the Foreign Tax Credit (FTC). This credit lets you reduce your U.S. tax bill by the amount of income tax you’ve already paid to Canada.

How does the Foreign Tax Credit work?

• If you pay $10,000 in Canadian income tax, you can generally claim up to $10,000 as a credit against your U.S. tax liability on the same income.
• The credit is non-refundable, meaning it can reduce your U.S. tax to zero, but not turn it into a refund.

Filing Form 1116: Step-by-step

1. Gather documentation: Collect your Canadian tax return (T1), Notice of Assessment, and proof of taxes paid.
2. Complete Form 1116: This IRS form calculates your allowable credit. You’ll need to report the type of income, the amount of foreign tax paid, and the exchange rate used.
3. Attach to your U.S. tax return: Include Form 1116 with your annual Form 1040.
4. Carryover and carryback: If you can’t use the full credit this year, you may be able to carry it back one year or forward up to ten years.

Real-world example

Let’s say you earned $80,000 CAD in Canada and paid $15,000 CAD in Canadian taxes. When you file your US return, you use Form 1116 to claim a credit for those taxes, significantly reducing or even eliminating your US tax owed on that income.

Foreign Earned Income Exclusion for Canadian residents

Another powerful way to avoid Canada-U.S. double taxation is the Foreign Earned Income Exclusion (FEIE). This provision allows you to exclude a certain amount of foreign-earned income from your U.S. taxable income.

How much can you exclude?

For the 2025 tax year, you can exclude up to $130,000 (indexed annually) of foreign-earned income if you qualify.

Who qualifies?

To use the FEIE, you must:

• Have a tax home in a foreign country (like Canada).
• Meet either the Physical Presence Test (spend at least 330 full days outside the U.S. in a 12-month period) or the Bona Fide Residence Test (be a bona fide resident of Canada for an entire tax year)

How to claim the exclusion

• File IRS Form 2555 with your US tax return.
• Report your total foreign-earned income and calculate the exclusion.

Take the stress out of double taxation

Navigating double taxation between Canada and the U.S. doesn’t have to be overwhelming. With the right guidance, you can protect your income, stay compliant, and focus on enjoying your life in Canada. Our team of expat tax experts is here to help you every step of the way—so you can file with confidence and peace of mind.

Frequently Asked Questions