This post provides information on the income tax treaty between the United States and Canada. It discusses a number of treaty provisions that most often apply to U.S. citizens or residents who may be liable for Canadian tax.Treaty provisions are generally reciprocal(the same rules apply to both treaty countries). Therefore, Canadian residents who receive income from the United States may also refer to this publication to see if a treaty provision affects their U.S. tax liability.
The United States–Canada income taxtreaty was signed on September 26, 1980. Ithas been amended by five protocols, the mostrecent of which generally became effective January 1, 2009. In this publication, the term “article” refers to the particular article of the treaty,as amended.
Application of Treaty
The benefits of the income tax treaty are generally provided on the basis of residence for income tax purposes. That is, a person who isrecognized as a resident of the United States under the treaty, who claims the benefit of the treaty, and who has income from Canada, will often pay less income tax to Canada on that income than if no treaty was in effect. Article IV provides definitions of residents of Canada and the United States, and provides specific criteria for determining your residence (a tie-breaker rule) if both countries consider you to be a resident under their domestic tax laws (a dual-resident taxpayer).
Dual-resident taxpayers who are Canadian residents under a tie-breaker rule. If you are a dual-resident taxpayer because you have a U.S. green card but you determine under the tie-breaker rule that you are a resident of Canada, you may claim treaty benefits and compute your U.S. income tax as a nonresident alien.But you must file a U.S. income tax return by the due date (including extensions) using Form1040NR or Form 1040NR-EZ. You must also attach a fully completed Form 8833,Tr If you are a U.S. citizen or green card holder living in Canada, you still have to file a Form1040 and report your worldwide income because of the “saving clause” in Article XXIX(2),which allows the United States to tax its citizens and residents as if the treaty had not entered into effect. There are limited exceptions to the saving clause, which means certain types of income may be exempt from tax in the United States. Exceptions to the saving clause can be found in Article XXIX, paragraph 3eaty-Based Return Position Disclosure Under Section 6114 or 7701(b).
Dual-resident taxpayers who are not Canadian residents under a tie-breaker rule. If you are a dual resident of the United States and a third country and derive income from Canada,you can only claim treaty benefits from Canada if you have a substantial presence, permanent home or habitual abode in the United States,and your personal and economic relations are closer to the United States than to any third state.
If you are a U.S. citizen or green card holder living in Canada, you still have to file a Form1040 and report your worldwide income because of the “saving clause” in Article XXIX(2),which allows the United States to tax its citizens and residents as if the treaty had not entered into effect. There are limited exceptions to the saving clause, which means certain types of income may be exempt from tax in the United States. Exceptions to the saving clause can be found in Article XXIX, paragraph 3
Special foreign tax credit rules for U.S. citizens residing in Canada. If you are a U.S.citizen and a resident of Canada, special foreign tax credit rules may apply to relieve double tax on income from the United States. See Article XXIV(3), (4) and (5).
Example. As a U.S. citizen residing in Canada, you have dividend income from a U.S. corporation. Canada will tax you on your worldwideincome, including your U.S. dividend income.As a resident of Canada under the treaty youcan claim a reduced withholding rate from theUnited States on the dividend income (15%)rather than 30%, and Canada generally allowsyou to deduct the U.S. withholding tax from yourCanadian tax on that income. However, you stillneed to file a U.S. income tax return and reportyour worldwide income, and pay any residualtax to the United States, to the extent it exceedsthe U.S. tax withheld and the Canadian tax paidwith respect to the income.