While Canada imposes income taxes on residents of Canada, the income tax system in the United States is based on either citizenship or residence. Therefore, Canadians who live or work in the United States may find themselves subject to taxation on their world income in both Canada and the U.S. The income tax system in the U.S. is administered by the Internal Revenue Service, and is considered one of the most complex systems of taxation in the world and many legal reporting and compliance requirements are considerably different from those in Canada.
Exemption from income taxation in the U.S. because of provisions contained in the Canada-United States Income Tax Convention, 1980 and the subsequent Protocols (Fifth Protocol – effective 2008 is the latest) does not result in an exemption from filing an income tax return. Failure to file U.S. income tax forms and elections in an accurate and prescribed manner and on a timely basis may result in a denial of the exemption being sought (therefore possibly resulting in double taxation if the person is also taxable in Canada), denial of otherwise deductible expenses, interest, and penalties for inaccurate, incomplete or non filed forms or returns. The sections which follow are intended to provide a very brief summary only of some of the income tax topics relevant to Canadians in the U.S. and do not constitute a complete analysis of the tax law and planning opportunities available. Accordingly, competent international tax advice should be sought prior to acting on any of the information contained herein.