The net result is that if you are a U.S. citizen resident in Canada, you must file two returns each year, declaring your world-wide income on each: a Canadian return because you live here, and a U.S. return because you are a U.S. citizen. Fortunately, this does not necessarily mean you will have to pay tax to both countries. There are several mechanisms available to make sure you are not doubly taxed.

Earned Income Exclusion

If most of your income is earned income, you may be able to deduct up to $78,000 for U.S. tax purposes by completing Form 2555 and attaching it to your return. Form 2555 is a special form exempting foreign earned income from taxation. To claim this exemption you must have been living in Canada for at least 330 days out of the last 12 months. You must also file your return on time.

Treaty Benefits

In most cases, treaty benefits are not available to U.S. citizens because of Article XXIX, paragraph 2. This provision states that nothing in the treaty can prevent the U.S. from taxing its own citizens, except for those articles listed in paragraph 3. One of these exceptions is the article governing social security payments. This means that if you receive social security benefits from the U.S., these benefits are not taxable in the U.S. They are taxable only in Canada. You may claim a 15% deduction on Line 256 of your Canadian tax return.

Foreign Tax Credit or Deduction

Another way to avoid double taxation is by claiming a foreign tax credit on your U.S. return for taxes you are required to pay to Canada. To claim the credit, you must complete Form 1116 and attach it to your U.S. return. Alternatively, you can claim the Canadian taxes you paid as an itemized deduction. Both the deduction and credit are limited to foreign income that is subject to U.S. tax, so neither can be claimed for income excluded on Form 2555

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