For U.S. citizens and green card holders moving to or living in Canada, tax residency is a critical and often misunderstood issue. Residency determines where income must be reported, which country has primary taxing rights, and what ongoing filing obligations apply.
Understanding how tax residency is determined in Canada and the United States is a critical first step for the individuals who move between the two countries. Both jurisdictions tax residents on worldwide income, but they apply very different residency rules. In cross-border situations, it is common for individuals to be considered residents of both countries at the same time, making careful analysis essential to avoid double taxation and compliance errors.
This article explains how U.S. and Canadian tax residency is determined, how the two systems interact, and the key cross-border tax considerations U.S. persons must address when relocating to or residing in Canada.
How Canadian and U.S. Tax Residency Is Determined: CRA vs. IRS Rules Explained
CANADIAN TAX RESIDENCY
Factual Residency (Primary Test)
Under Canadian tax law, residency is determined based on facts and circumstances, not citizenship or immigration status. An individual is considered a factual resident of Canada if they establish significant residential ties to the country.
The Canada Revenue Agency (CRA) places the greatest weight on the following primary residential ties:
- A dwelling place in Canada
- A spouse or common-law partner residing in Canada
- Dependents residing in Canada
In addition to these primary ties, the CRA evaluates secondary residential ties, including:
- Personal property in Canada (such as a vehicle or household furnishings)
- Social connections (memberships in Canadian clubs or organizations)
- Economic ties (Canadian bank accounts, employment, business interests, or credit cards)
No single factor is determinative. Instead, the CRA assesses the overall degree of permanence, regularity, and intention associated with the individual’s presence in Canada. An individual may be considered a Canadian tax resident even if they are not a Canadian citizen or permanent resident.
The date Canadian tax residency begins is generally when the individual enters Canada with the intention to settle, begins employment in Canada, establishes a home, or otherwise demonstrates meaningful residential ties. The CRA may also consider supporting indicators such as the acquisition of provincial health coverage.
Deemed Residency (183-Day Rule)
If an individual does not qualify as a factual resident, they may still be treated as a deemed resident of Canada under Income Tax Act (ITA) section 250(1)(a).
An individual is deemed to be a Canadian resident if they sojourn in Canada for 183 days or more in a calendar year. A sojourn refers to a temporary stay, and any part of a day counts toward the 183-day threshold.
Deemed residents are subject to Canadian tax on worldwide income for the entire year. However, if the individual is also considered a resident of another country under an applicable tax treaty, the treaty’s tiebreaker rules may override deemed residency and result in non-resident status for Canadian tax purposes.
Part-Year Residency
Under ITA section 114, individuals who become or cease to be residents of Canada during the year are considered part-year residents.
Part-year residents are taxed on:
- Worldwide income earned during the period of Canadian residency, and
- Canadian-source income only during the period of non-residency
The change in residency date generally occurs when all significant residential ties are established or severed, depending on whether the individual is entering or leaving Canada.
U.S. TAX RESIDENCY
U.S. Citizens and Green Card Holders
The United States applies one of the most expansive tax residency regimes in the world. Under Internal Revenue Code (IRC) §7701(b)(1)(A), U.S. citizens and lawful permanent residents (green card holders) are treated as U.S. tax residents regardless of where they live.
As a result, U.S. citizens and green card holders are subject to U.S. tax on worldwide income, even if they reside permanently in Canada or another country.
Substantial Presence Test
Non-U.S. citizens may still be classified as U.S. tax residents if they meet the Substantial Presence Test under IRC §7701(b)(3).
This test is satisfied if the individual:
- Is physically present in the U.S. for at least 31 days in the current year, and
- Has a total of 183 weighted days over the current year and the two preceding years, calculated as:
- All days in the current year
- One-third of days in the prior year
- One-sixth of days in the year before that
Meeting this test results in U.S. tax residency and worldwide income taxation, unless a treaty exception applies.
Dual Residency and Canada–U.S. Tax Treaty Tiebreaker Rules
It is common for individuals to meet the domestic residency tests of both Canada and the United States. In these cases, Article IV of the Canada–U.S. Tax Treaty provides a series of tiebreaker rules to determine treaty residency.
The tiebreakers are applied sequentially:
- Permanent home – where the individual has a permanent residence available
- Center of vital interests – where personal and economic ties are closer
- Habitual abode – where the individual spends more time
- Citizenship – if the above tests are inconclusive
- Mutual agreement – if citizenship does not resolve the issue, the competent authorities of both countries determine residency by agreement
These rules require careful analysis of an individual’s facts and circumstances, play a critical role in allocating taxing rights, claiming treaty benefits, and preventing double taxation. Professional advice is recommended for complex situations.
Raj Pandher is a qualified CPA (cross border tax accountant), a Trust and Estate Practitioner (TEP) and a Certified Executor Advisor (CEA) who assists the U.S. citizens and green card holders immigrating from the U.S. to Canada with their U.S. Canada cross border income tax return(s) filing including foreign information return(s) reporting.
