Dual Citizens: How Canada and U.S. Taxes Interact 

Canada and the U.S. approach taxation from different starting points.

Canada taxes individuals based on residency. If you are considered a Canadian tax resident, Canada generally taxes your worldwide income, regardless of citizenship.

The United States, by contrast, taxes based on citizenship. U.S. citizens are required to file U.S. tax returns every year, even if they live permanently abroad and earn all of their income outside the U.S.

For dual citizens, this means U.S. tax filing obligations almost always continue, while Canadian tax obligations depend on residency status.

Many dual citizens find themselves filing two full tax returns each year:

• A Canadian resident tax return reporting worldwide income

• A U.S. federal tax return reporting worldwide income
  
  

While tax treaties help coordinate taxation, they do not eliminate filing obligations. Instead, they determine how tax paid in one country is credited or relieved in the other.

This dual-filing reality often surprises individuals who assumed citizenship alone would not matter once they settled in Canada.

The Canada–U.S. tax treaty is designed to prevent double taxation and clarify which country has the primary right to tax specific types of income. It plays a crucial role for dual citizens, particularly for employment income, pensions, and retirement accounts.

However, the treaty does not eliminate tax in one country simply because tax was paid in the other. Relief usually comes through foreign tax credits, which require careful calculation and reporting.

Certain areas; such as savings accounts, investment income, and specific Canadian registered plans, remain problematic despite treaty provisions.

Retirement planning is one of the most complex areas for dual citizens.

RRSPs are generally respected by both countries, with treaty provisions allowing tax deferral in the U.S. until withdrawals are made. However, proper reporting is still required.

TFSAs, on the other hand, are a frequent source of trouble. While tax-free in Canada, they are not recognized as tax-exempt by the U.S., often leading to annual U.S. taxation and additional reporting obligations.

U.S.-based retirement accounts, such as 401(k)s and IRAs, are typically taxable in Canada once residency is established, requiring coordination to avoid double taxation.

Dual citizens often face expanded reporting requirements, even when tax payable is limited.

These may include:

• Reporting foreign financial accounts
  
  

• Disclosing foreign investments
  
  

• Tracking cost bases across currencies and jurisdictions
  
  

Failure to comply with reporting obligations can result in penalties that far exceed any actual tax owed.

Dual citizenship does not shield individuals from departure or exit taxes.

If a dual citizen ceases Canadian tax residency, Canada may impose a departure tax on unrealized gains in certain assets. Similarly, U.S. exit tax rules may apply to certain long-term residents or citizens who renounce citizenship.

These rules can trigger tax even when no assets are sold, making advance planning essential.

Many dual citizens assume that:

• Citizenship alone determines tax residency
  
  

• Tax treaties eliminate the need to file in both countries
  
  

• Registered accounts are treated the same on both sides of the border
  
  

These assumptions often lead to compliance issues that only surface years later.

For dual citizens, tax planning is less about minimizing tax in a single year and more about long-term coordination. Decisions around where to live, how income is earned, and how assets are structured can have lasting consequences.

Early planning allows dual citizens to:

• Avoid unnecessary compliance burdens
  
  

• Use foreign tax credits efficiently
  
  

• Reduce exposure to penalties
  
  

• Align retirement and investment strategies across borders

Dual citizenship offers flexibility and opportunity- but it also requires careful navigation of two tax systems that were never designed to work seamlessly together.

The greatest risks are rarely obvious. They emerge over time through uncoordinated filings, misunderstood accounts, and overlooked reporting obligations. With proper guidance, dual citizens can manage these challenges effectively and plan with confidence across borders.

Yes. Most dual citizens are required to file U.S. tax returns every year due to U.S. citizenship-based taxation. If they are also Canadian tax residents, they generally must file a Canadian resident tax return as well. 

No. U.S. citizens must continue filing U.S. tax returns regardless of where they live. Canadian residency does not eliminate U.S. filing requirements, even if all income is earned in Canada.

Canada determines tax residency based on factual residential ties, such as housing, family, and economic connections- not citizenship. A dual citizen living and settled in Canada is often considered a Canadian tax resident. 

The tax treaty helps prevent double taxation, but it does not eliminate it automatically. Relief is typically provided through foreign tax credits or treaty provisions, all of which require proper reporting in both countries. 

No. Unlike RRSPs, which receive treaty protection allowing tax deferral, TFSAs do not benefit from any specific treaty provisions. There is no mechanism to defer U.S. tax on TFSA income. 

Generally, yes. RRSPs benefit from treaty provisions that allow U.S. tax deferral on income earned inside the account until withdrawals are made. However, proper reporting is still required on U.S. tax returns.

TFSAs are tax-free in Canada but are not recognized as tax-exempt by the U.S. As a result, income earned inside a TFSA is usually taxable on a U.S. return and subject to additional reporting requirements. 

In limited cases, such as holding low-yield cash or for very short-term savings, a TFSA may be considered. However, this requires careful analysis, as the compliance burden often outweighs the benefits. 

Often, yes. Dual citizens may need to file FBAR (FinCEN Form 114) and FATCA disclosures (IRS Form 8938) if they meet reporting thresholds, even when no tax is owed.

Yes. If a dual citizen ceases Canadian tax residency, Canada may impose a departure tax on certain unrealized gains. U.S. exit tax rules may also apply if U.S. citizenship is renounced under certain conditions. 

Common mistakes include assuming citizenship determines tax residency, failing to file in both countries, misunderstanding how registered accounts are treated, and missing foreign asset reporting requirements.