US-Canada tax treaty: simple guide for expats

If you live, work, invest, or retire across the US-Canada border, your taxes can get complicated fast. The tax treaty between Canada and the US exists to prevent double taxation – it lays out clear rules about who pays tax, where, and on what.

Below, you'll find a plain-English summary of what the US-Canada tax treaty covers, who it applies to, and how you can take advantage of it – including answers to common questions like how the US Canada tax treaty works for expats and what tax rules apply to Americans living in Canada.

Background of the US-Canada tax treaty

The US-Canada tax treaty or income tax convention was first signed in 1980 and has been updated multiple times, with the most recent protocol added in 2007.

This tax agreement prevents double taxation, provides reduced withholding rates on investment income, helps define tax residency in cross-border cases, and enables cooperation between the Internal Revenue Service (IRS) and Canada Revenue Agency (CRA) to enforce tax laws.

Who does the US-Canada tax treaty apply to?

The treaty applies to you if you’re a:

• US citizen, green card holder, or a resident alien with income from Canada
• Canadian resident with income from the US
• dual resident under tax law (living or earning in both countries)

If you’re a dual-status alien – taxed as both a US resident and nonresident in the same year – the treaty may still affect how certain income is taxed. But you’ll need to apply the residency tie-breaker rules especially carefully.

Example: dual residency

Let’s say you’re a US citizen who moved to Canada, or a Canadian who moved to the US mid-year. In both cases, you’ve spent time in each country and may still have ties – like a home, job, or bank accounts – in the one you left. That means both countries could claim you as a tax resident.

The US Canada tax treaty helps resolve situations like this with a set of tie-breaker rules. We’ll walk through those in this article. In short, if your job, home, and daily life are now based in your new country, the treaty will usually treat you as a tax resident there.

Even if you’ve moved years ago, things like rental properties, pensions, or investment accounts can still create tax obligations. Not sure where you stand? Talk to a tax professional.

Key provisions of the US-Canada tax treaty

The US-Canada income tax treaty covers a range of income types and tax situations. Understanding the key provisions can help you figure out which country has taxing rights – and where you may be eligible for credits, exemptions, or lower rates.

Employment income (Article XV)

This treaty provision helps short-term contractors, temporary assignees, and remote workers avoid having to file taxes in both countries.

Per the tax treaty, your employment income is taxed where the work is physically performed. If you work in Canada for less than 183 days in a 12-month period and your employer is US-based and has no Canadian office, your income stays taxable only in the US.

Example: You’re a US citizen working 5 months in Toronto for a US company with no Canadian branch. You’ll only owe US tax on that income.

Pensions and annuities (Article XVIII)

This provision helps cross-border retirees avoid double taxation on fixed incomes. If you're receiving both Canadian and US retirement income, the treaty ensures each country taxes only what's appropriate under your residency status.

Private pensions are usually taxed only in your country of residence. US social security is taxed only in Canada if you live there, and only 85% of the benefit is included as income.

Example: You’re a US citizen living in Canada and receiving a 401(k) and US social security. The 401(k) may be taxed in both countries (with a credit applied), but social security is only taxed in Canada – at a reduced inclusion rate of 85%.

Residency tie-breakers (Article IV)

If both countries consider you a tax resident, the US-Canada tax treaty uses tie-breaker rules to determine which one has the primary right to tax you. It does this by asking a series of questions:

• Where is your permanent home?
• Where are your strongest personal and financial ties?
• Where do you spend the most time?
• What is your citizenship?

If it’s still unclear after these steps, the IRS and CRA may negotiate directly to reach a decision.

Example 1: You’re a US citizen who moved to Canada mid-year but kept a home, bank accounts, and some ties in the US. If your main home, job, and daily life are now in Canada, the treaty will treat you as a Canadian resident.

Example 2: In March, you move from Canada to the US. After earning income in Canada as a sole proprietor, you begin a US job. If you're considered a US resident for the tax year, Canada can only tax the income earned before the move. The rest is taxed by the US.

Note that the US still taxes worldwide income because of your citizenship, but you can claim foreign tax credits to avoid paying tax twice on the same income.

Business profits (Article VII)

Business profits are only taxed in the country where the business operates, unless it has a permanent establishment in the other country – such as an office, warehouse, or fixed place of business.

For example, if your US-based business serves Canadian clients but has no physical presence in Canada, your profits are taxed only in the US. But if you maintain a business address there or hire local employees, you may be considered to have a permanent establishment, and Canada could claim taxing rights.

Pro tip. Keep detailed records of where services are performed and where your business assets are located. These factors are key in determining your tax obligations under Article VII.

Tax credits and exemptions

One of the most practical benefits of the US-Canada tax treaty is that it helps you avoid being taxed twice on the same income through foreign tax credits, income exclusions, and reduced withholding rates.

Foreign tax credit (FTC)

FTC is the most common way to offset double taxation. US taxpayers can file Form 1116 to claim a credit for Canadian taxes paid. Canadian taxpayers use Form T2209 for US tax credits.

This credit is limited to the amount of tax you'd normally owe in your country of residence on that income. If the foreign tax is higher, you may not get full credit. Note that the FTC cannot be more than the portion of your tax that applies to foreign-source income.

Pro tip. Many expats miss out on the Foreign Tax Credit simply because they didn’t realize they were eligible. If you didn’t claim the FTC in a previous year, you may still be able to recover it by filing an amended return within 3 years of the original filing. You can also carry unused credits back one year or forward up to 10 years.

Income exemptions

Certain types of income are taxed in only one country under the tax treaty:

• US social security benefits are taxed only in Canada if you're a Canadian resident. Only 85% of the benefit is included in your Canadian taxable income.
• Government pensions (like CPP or US federal pensions) are usually taxed in the country that pays them.
• Scholarships and fellowships may be exempt from tax if the recipient is temporarily present in the host country and meets specific conditions.

The rules depend on residency status and type of income. In many cases, exemptions must be claimed by filing the correct form or checking the right box on your tax return.

Lower withholding taxes

Without the treaty, US-source income paid to Canadians – such as dividends, interest, or royalties – is subject to a default 30% withholding tax.
The US-Canada tax treaty significantly reduces this burden to:

• 15% on dividends, or 5% for Canadian shareholders who own at least 10% of the US company
• 0% on most interest payments, such as those on bank deposits or corporate bonds
• 0–10% on royalties, depending on the type

To claim these reductions, file Form W-8BEN for US payers (if you're a Canadian resident), or Form NR301 for Canadian payers (if you're a US resident). These forms must be submitted before payment is made – otherwise, the higher default withholding rate will be applied.

For more details on how investment income is taxed, see Articles X, XI, and XII of the US-Canada tax treaty.

The saving clause, exit tax & estate rules: what to know

For many taxpayers, the US-Canada tax treaty covers the most common scenarios. But if you have more complex ties, high-value assets, or plans to renounce US citizenship, it’s worth understanding a few advanced treaty issues.

The saving clause

The treaty includes a “saving clause” that allows the US to continue taxing its citizens and green card holders as if the treaty didn’t exist, with limited exceptions. That means even if the treaty treats you as a resident of Canada, the US can still tax your worldwide income unless a specific article says otherwise.

Always check whether a treaty benefit is exempt from the saving clause before relying on it.

Estate tax on US assets

Canadians who own US real estate, stocks, or other US-situs assets may be subject to US estate tax if the value exceeds the filing threshold. The treaty provides a proportional unified credit to reduce or eliminate estate tax for Canadian residents.

You can find official guidance here; also see Instructions for Form 706-NA – US estate tax return for nonresidents.

US exit tax and the tax treaty

If you're planning to renounce US citizenship or abandon your green card, you may be subject to the US exit tax under IRC Section 877A. The treaty doesn’t prevent the tax itself but may impact how deferred income (like pensions or stock options) is treated post-expatriation.

Cross-border estate or expatriation moves often have tax consequences in both countries. Don’t rely on assumptions – this is where expert guidance really matters.

Filing requirements and forms

To use the treaty properly, you’ll need to file the right forms:

Purpose	US tax form	Canadian tax form
Claim tax treaty benefit	Form 8833	NR301
Claim foreign tax credit	Form 1116	T2209
Reduce withholding	W-8BEN	NR301

When to file US and Canadian tax returns

Staying on top of tax filing deadlines is key – especially when you're navigating taxes in both countries.

• US tax returns are due April 15, with an automatic extension to June 16 (in 2025) for Americans living abroad. If more time is needed, you can request an extension to October 15.
• Canadian tax returns are due April 30 for most individuals, or June 15 if you're self-employed.

Treaty forms should be filed with your return or submitted to the payer before any income is paid to ensure the correct withholding rate is applied.

Claim the treaty benefits with Taxes for Expats

The US Canada tax treaty can save you a lot of hard-earned money – but only if you understand how to use it. You need to know which rules apply, fill out the right forms, and time everything correctly.

At Taxes for Expats, we specialize in cross-border tax compliance. We help US expats and green card holders living in Canada, Canadians earning US income, and dual-status taxpayers filing in both countries.

We will make sure you stay compliant and don’t pay a dollar more than required.

Reach out to get help with tax treaty planning, form preparation, and peace of mind at tax time.