When moving from Canada to the United States

Jason Berger
Sep 4
4 min read

When moving from Canada to the United States, navigating the complexities of cross-border tax law is crucial. A simple move can trigger significant and unforeseen tax liabilities in both countries. Understanding the key concepts of tax residency, deemed disposition, and how the Canada-US Tax Treaty can mitigate these issues is essential for a smooth transition.

Understanding Tax Residency

One of the first and most important steps is properly severing your tax ties with Canada and establishing them in the U.S. Canada's tax system is based on residency, not citizenship. This means that if the Canada Revenue Agency (CRA) determines you have "significant residential ties" to Canada, you could still be considered a Canadian tax resident and be taxed on your worldwide income, even after you've moved.

Primary residential ties include:

A home in Canada
A spouse or common-law partner in Canada
Dependents in Canada

Secondary ties, such as Canadian bank accounts, credit cards, or a driver's license, also factor into the CRA's assessment. The U.S., on the other hand, taxes its citizens and lawful permanent residents on their worldwide income regardless of where they live. For a non-citizen, tax residency is determined by the Substantial Presence Test, which is based on the number of days you are physically present in the U.S. It's possible to be considered a tax resident in both countries simultaneously, which is where the tax treaty becomes vital.

The "Departure Tax" & Deemed Disposition

When you cease to be a resident of Canada, you are subject to a "departure tax." This isn't a separate tax but rather a result of a rule called "deemed disposition." This rule treats you as if you have sold most of your worldwide assets at their fair market value on the day you leave Canada and immediately reacquired them for the same amount. This can trigger a capital gains tax on any accrued but unrealized gains on your assets, even if you haven't actually sold them.

However, certain assets are exempt from this rule, including:

Canadian real estate (e.g., your principal residence)
Registered retirement accounts (RRSPs, RRIFs)
Tax-Free Savings Accounts (TFSAs)

While Canadian real estate is exempt from the deemed disposition rules, a later sale while you are a non-resident of Canada will still trigger Canadian tax obligations. Also, be aware that while RRSPs can remain tax-deferred in both countries under the tax treaty, TFSAs are not recognized as tax-sheltered in the U.S. and should be carefully planned for.

Step-Up in Basis & The Canada-US Tax Treaty

To prevent double taxation on the same gain once in Canada upon departure and again in the U.S. when you eventually sell the asset, the Canada-US Tax Treaty provides an essential mechanism. Under Article XIII(7), a Canadian emigrant can elect to have their assets' cost basis "stepped-up" for U.S. tax purposes.

This means that for assets subject to the Canadian deemed disposition rules, their cost basis is reset to their fair market value on the date you become a U.S. resident. This ensures that when you eventually sell the asset, the U.S. will only tax you on any appreciation that occurred after you became a U.S. resident. This election is a critical component of pre-emigration planning to avoid being taxed twice on the same capital gain.

Converting Canadian Companies to Unlimited Liability Corporations (ULCs)

For Canadians who own private companies, an often-overlooked but crucial consideration is the entity's tax treatment in the U.S. Many Canadian corporations are treated as corporations for both Canadian and U.S. tax purposes, which can result in complex and punitive tax issues like "double-taxation" on dividends.

A common strategy is to convert a Canadian corporation into an Unlimited Liability Corporation (ULC). Available in Alberta, British Columbia, and Nova Scotia, a ULC is a hybrid entity that is treated as a corporation for Canadian tax purposes but can be elected to be a "fiscally transparent" or "flow-through" entity for U.S. tax purposes. This means that for U.S. tax purposes, the income and losses of the company flow directly to the U.S. shareholder, avoiding a layer of corporate-level tax in the U.S. and simplifying the tax structure. This is a highly specialized area and requires careful analysis to determine if it is the right strategy.

Lower Withholding Tax Rates

If, after becoming U.S. taxpayer, you maintain ownership of a Canadian corporation and wish to distribute dividends from the Canadian corporation, the Canada-U.S. Tax Treaty would reduce the normal Canadian withholding tax rate of 25% to 15%. However, if your Canadian corporation is owned by a U.S. corporation, dividend withholding tax payable to Canada may be reduced to 5%. There may be opportunities to restructure your ownership of your Canadian corporation prior to emigrating from Canada in order to be able to avail yourself of the lower withholding tax rate. Furthermore, with some additional planning and a well-timed restructure involving a combination of converting to a ULC and a transfer of shares to certain U.S. corporations, you may have a one-time opportunity to distribute all cash and other assets out of your Canadian corporation at a very favourable tax rate.

Final Thoughts

Emigrating to the U.S. is an exciting new chapter, but failing to plan for the tax implications can lead to significant financial headaches. The intersection of Canadian and U.S. tax laws, particularly with respect to tax residency and the deemed disposition rules, requires careful pre-emigration planning. The Canada-US Tax Treaty provides key provisions to mitigate the risk of double taxation, but its benefits must be properly understood and claimed.