Earning income in Canada as a US citizen or green card holder seems challenging—reporting that income on your US tax return. But don’t worry. With the right steps, you can handle this process with confidence. This guide is here to walk you through everything you need to know. From US tax reporting of Canadian income to taking advantage of tax benefits under the US-Canada tax treaty, we’ve got you covered.

Quick Takeaways

Report all worldwide income, including Canadian earnings, on your US tax return using Form 1040.
Claim tax benefits with Form 1116 for a foreign tax credit or Form 2555 to exclude up to $120,000 of foreign income, if eligible.
Avoid double taxation by using the Foreign Tax Credit (Form 1116) to offset taxes paid to Canada.
Convert Canadian income to US dollars using the average exchange rate for the year.
File an FBAR with the IRS if your Canadian bank accounts total more than $10,000 at any point during the year.

Who Needs to Report Canadian Income on USA Tax Returns?

You need to report Canadian income on your US tax return if you’re:

A US citizen living in Canada
A US green card holder residing in Canada
A US resident earning income from Canadian sources
A dual US-Canadian citizen

What Types of Canadian Income Do You Need to Report?

All income earned in Canada must be reported on your US tax return. Below is a breakdown of the types of Canadian income on the US tax returns you need to report, along with the forms you’ll use to file them:

Income Type	Examples	Form to Use	US-Canada Tax Treaty Clause
Employment Income	Salary or wages from Canadian employers	Form 1040 (Wages section)	The country of tax residence (US) has the right to tax employment income.
Self-Employment Income	Freelance work or Canadian business income	Form 1040 (Self-Employment section)	The country of tax residence (US) may tax this income, but Canada may also tax it, with a credit for Canadian taxes paid.
Investment Income	Dividends, interest, capital gains	Form 1040 (Schedule B for interest/dividends)	Interest and royalties are taxed in Canada, but you may qualify for a reduced tax rate or exemption. Capital gains are taxed in the country of residence (US).
Rental Income	Earnings from Canadian rental properties	Form 1040 (Schedule E for rental income)	The country where the property is located (Canada) has the right to tax rental income first. The US usually provides a credit for Canadian taxes paid.
Pension Income	Canadian pension or RRSP withdrawals	Form 1040 (Pension section)	Pension income is generally taxed in the country of residence (US). Canada may also tax pensions from Canadian sources, with a potential tax credit in the US.
Business (Corporate) Income	Income earned from a Canadian business	Form 1040 (Schedule C)	Business income is generally taxed in the country of residence (US), but Canada may also tax it with credits to avoid double taxation.

Example: John, a US citizen working in Canada, reports his Canadian salary on Form 1040. He uses the Foreign Tax Credit (FTC) to reduce his US tax liability, offsetting taxes he paid to Canada.

How to Report Canadian Income on US Tax Return: Step-by-Step Guide

You need accurate and up-to-date knowledge before reporting your Canadian income on US tax return. Typically, there are six main steps to take in order to ensure a smooth and flawless process:

Step 1: Gather Your Canadian Tax Documents

Before starting your US tax return, gather these essential Canadian tax documents to ensure accurate reporting:

T4 Slips (Like US W-2s)

T4 slips are used for employment income from Canadian employers. They include your total salary or wages, taxes withheld (both federal and provincial), and other deductions. These slips are necessary to report your employment income on Form 1040.

T3 and T5 Slips

Used to report investment income such as dividends, interest, and capital gains. These forms help you report passive income and claim tax benefits, like the Foreign Tax Credit (FTC).

Canadian Tax Return

If you’ve filed with the Canada Revenue Agency (CRA), keep a copy of your return. It’s useful for verifying income, credits, deductions, and taxes paid in Canada. Read this CRA guide for tax preparation, or you can just contact us to do it for you.

Bank Statements

If you have foreign accounts (personal and business), you must provide year-end balances. If the total exceeds $10,000 USD, they’re required for FBAR reporting.

Foreign Tax Paid Records

You must keep tax receipts, payment statements, or CRA documentation as proof of taxes paid in Canada. These are essential for claiming the Foreign Tax Credit (FTC) and preventing double taxation.

Step 2: Convert Canadian Dollars to US Dollars

You must convert Canadian dollars (CAD) to US dollars (USD) in order to report your income to the IRS. Choose the right conversion method:

Use the Annual Average Exchange Rate for steady income like a salary.
Use the Exchange Rate on the Date of Receipt for one-time payments like bonuses or property sales.
Use the Exchange Rate on the Date of Payment for expenses or deductions.
Pro Tip: Keep detailed records of the exchange rates you use and note their source—common ones include the IRS, Bank of Canada, or Federal Reserve. Also, you can use currency converters (like Xe or OANDA) to get the most accurate exchange rate for your earnings.

Example: Say you earned CAD $50,000 in 2024, and the average exchange rate was 1.3013. Your conversion is simple:
CAD $50,000 × 1.3013 = USD $65,065.

Step 3: Complete Required US Tax Forms

You need to complete some key forms for your cross-border tax reporting. If you don’t have the time or just don’t want to deal with it, our US tax accountants can do it for you. Here are key forms:

1. Form 1040 – US Individual Income Tax Return

Form 1040 is your main form for reporting worldwide income. You may need to attach these schedules, if applicable:

Schedule 1: For reporting extra income like rentals or business income.
Schedule B: For interest or dividends. It is required if you earn over $1,500 in foreign interest or hold/own foreign accounts. It also determines whether you need to file FBAR (FinCEN Form 114) and Form 8938.

2. Form 1116 – Foreign Tax Credit

You should use Form 1116 to claim foreign tax credit. It prevents double taxation by reducing your US tax liability based on those payments.

Pro tip: Use Form 1116 with a Treaty-Based Election to cut down on taxes and avoid paying twice on income earned abroad. This election lets you use tax treaty benefits to lower rates or skip taxes on things like dividends, interest, and royalties. Just note the election on Form 1116 to make sure the treaty rules apply.

Download the official Form 1116 here. Also you can read the 2024 instructions for Form 1116 on the IRS website for more information.

3. Form 2555 – Foreign Earned Income Exclusion

If you qualify, this form lets you exclude up to $120,000 of foreign earned income from US taxes. It’s for full-time residents of Canada who pass the Physical Presence or Bona Fide Residence Test.

Download the official Form 2555 here. Also you can read the 2024 instructions for Form 2555 on the IRS website for more information.

4. Form 8938 – Statement of Specified Foreign Financial Assets

If you hold substantial foreign assets, like bank accounts, stocks, or real estate, this form is required.

5. FinCEN Form 114 (FBAR) – Report of Foreign Bank and Financial Accounts

This is mandatory if your foreign accounts exceed $10,000 USD at any time during the year. The deadline is April 15, with an automatic extension to October 15.

Step 4: How to Avoid Double Taxation

The US-Canada Tax Treaty helps you avoid paying taxes twice on the same income. Here are two easy ways to manage this:

Claim the Foreign Tax Credit (FTC)

Use Form 1116 to reduce your US taxes by the amount you’ve already paid to Canada. Here are what you need to do:

Convert your Canadian taxes to USD using the annual exchange rate.
File Form 1116 to apply for the credit.

Example: John paid CAD $5,000 in Canadian taxes. His US tax on the same income is USD $4,500. By converting his Canadian taxes to about USD $3,850 and using Form 1116, he nearly wipes out his US tax bill. This works because he paid more in Canada than he owes in the US.

Use the Foreign Earned Income Exclusion (FEIE)

If you qualify, Form 2555 lets you exclude up to $126,500 of foreign-earned income from US taxes (2024 limit). You are eligible if you pass one of these two tests:

Physical Presence Test: Be in Canada (or abroad) for at least 330 full days in 12 months.
Bona Fide Residence Test: Live in Canada full-time for an entire tax year.

Example: Sarah, a US citizen in Canada, earned CAD $100,000 in 2024. By meeting residency criteria, she excludes her income from US taxes since it’s below the FEIE limit.

Ensuring you don’t pay double taxes on the same income can be overwhelming. Contact our cross-border tax specialists to see how we can help you manage this process smoothly.

Step 5: Don’t Forget Your Canadian Tax Obligations

If you live in Canada or earn income there, you must report your global income to the CRA. Missing this can lead to penalties. Key forms are:

T1 General: Report income, claim deductions, and apply for credits.
T1135: Declare foreign assets over CAD $100,000 to avoid penalties.

Step 6: Reporting Foreign Financial Accounts

If you have foreign financial accounts, you need to report them to both the IRS and CRA to comply with their tax treaties. Relevant forms are:

FBAR (FinCEN Form 114)

File this if the total value of your foreign accounts goes over $10,000 at any time during the year. For detailed FBAR filing instructions, visit the IRS FBAR filing page.

FATCA (Form 8938)

Report significant foreign assets like bank accounts, stocks, or investments to the IRS.

Example: John’s Canadian account exceeds $10,000, so he files the FBAR. He also files Form 8938 to report other foreign assets. Skipping these forms could lead to penalties and fines.

Key Considerations for Reporting Canadian Accounts on a US Tax Return

Before reporting your Canadian accounts on a US tax return, you need to keep a few things in mind. Here are key points to consider to save more money on taxes and prevent potential problems:

1. RRSPs (Registered Retirement Savings Plans)

RRSPs help you delay taxes on contributions in Canada, but the IRS taxes withdrawals as regular income. You can use the Foreign Tax Credit (FTC) to offset Canadian taxes. You might also need to file Form 8833 to claim treaty benefits under the US-Canada Tax Treaty. No need to file Form 8891 anymore for RRSPs.

2. TFSAs (Tax-Free Savings Accounts)

TFSAs grow tax-free in Canada, but the IRS doesn’t treat them the same. Report their earnings as foreign trusts using Forms 3520 and 3520-A. If your TFSA balance is high enough, you’ll also need Form 8938 to list it as a foreign asset. We usually tell our clients to close their TFSAs because the earnings are taxed in the U.S., which cancels out the tax-free benefit in Canada. Instead, RRSPs or RESPs are better options as they work well with both U.S. and Canadian tax rules. Check out the CRA TFSA guide for more information on how to handle TFSAs for US tax purposes.

3. CPP/QPP (Canada Pension Plan/Quebec Pension Plan)

The IRS counts CPP and QPP benefits as social security income. You must report them on your Form 1040 as income and on Form SSA-1099. The US-Canada Tax Treaty prevents double taxation, but accurate reporting is crucial to avoid issues.

What Are the Benefits of US-Canada Tax Treaty?

The US-Canada Tax Treaty helps prevent double taxation and provides tax advantages for individuals with cross-border income. Here’s a quick look at key benefits:

Avoiding Double Taxation

The treaty ensures you don’t pay tax twice on the same income. If you’re taxed in Canada, you can claim credits or exclusions to lower your US tax liability. Wages, self-employment income, and investment earnings are examples of covered income.

Lower Tax Rates on Income

Certain types of income benefit from reduced withholding taxes:

Dividends: Tax is reduced to 15% instead of 25%.
Interest: Some Canadian debt, like bonds, may qualify for tax exemptions.
Royalties: Royalties on patents, trademarks, and resources get a 10% reduced rate.

Retirement Accounts

The treaty offers special provisions for retirement accounts:

RRSPs: US taxes on withdrawals can be deferred until you take money out.
TFSAs: Gains in TFSAs are taxable in the US since they’re considered foreign trusts.

Cross-Border Worker Protection

Cross-border tax reporting is a big deal. Tax residency rules ensure you aren’t taxed as a resident in both countries. For example, tie-breaker rules help determine your primary tax home, saving you from double taxation.

Common Mistakes to Avoid in US Tax Reporting for Canadian Income

There are some mistakes you may make while reporting your Canadian income on a United States tax return. Fortunately, our experienced bookkeepers always prevent them, but it is still better to be aware of them. Here are the most common ones:

Not Reporting All Income

Failing to report all Canadian income can lead to penalties. For example, forgetting to include $5,000 in dividend income could result in fines for underreporting.

Not Reporting Ownership of Foreign Companies

If you own a foreign company, you must file Form 5471 with your U.S. taxes. Missing it can mean fines starting at $10,000 per year, and ignoring an IRS notice can add $25,000 or more.

Case Study: Missing Form 5471 Filing Costs Big

The Issue: A lot of people don’t know they have to file Form 5471 with their U.S. tax return if they own a foreign company. This mistake can lead to surprise penalties from the IRS—anywhere from $10,000 to $50,000 for each year they miss.
The Solution: The problem is simple—most don’t realize it’s required. Owning or controlling a foreign company means you must file Form 5471. Filing on time avoids these huge fines.
The Outcome: Though we didn’t file for them, these cases show the need to know and follow IRS rules. We can keep you informed to prevent penalties, big tax bills, and audits.

Wrong Currency Conversions

Using incorrect exchange rates can throw off your return. Use the IRS or Bank of Canada’s average rate for regular income, and always document the rates you use.

Skipping FBAR Filing

If you have foreign bank accounts and don’t file an FBAR when required, you could face hefty penalties.

Case Study: Client’s Costly FBAR Oversight

The Issue: John D., a client, came to us after realizing his U.S. accountant, who didn’t handle foreign accounts, hadn’t filed his FBARs for years. He didn’t know that if the total of all his foreign accounts exceeds $10,000, filing is required. This is a common mistake—30% of taxpayers with foreign accounts miss this step, risking penalties of up to $16,117 per year.
Our Solution: We reviewed all of John’s account details and filed the missing FBARs, ensuring everything was accurate. Salman, our CPA, explained that the $10,000 rule applies to the combined total of all accounts, not individually
The Outcome: By filing the overdue forms, John avoided hefty penalties and is now fully compliant with IRS rules. With his filings in order, he’s relieved and no longer worried about future compliance.

Missing Treaty Benefits

Overlooking treaty benefits could mean overpaying US taxes. For instance, ignoring the Foreign Tax Credit (FTC) for taxes paid to Canada might result in paying double.

Ignoring Foreign Tax Credits

The FTC prevents double taxation. If you forget to claim it, you might pay unnecessary taxes on the same income.

Misreporting Retirement Accounts

Incorrectly reporting RRSPs or TFSAs can cause IRS headaches. Report RRSP withdrawals as income and treat TFSAs as foreign trusts to stay compliant.

Compliance Checklist for Canadian Income

To make sure you’re on track with your tax filings, here’s a simple checklist to guide you through the process:

Gather your Canadian tax documents: T4, T3, T5 slips, Canadian tax return.
Convert Canadian dollars to US dollars using the average exchange rate.
Complete Form 1040 to report worldwide income.
File Form 1116 for the Foreign Tax Credit (FTC).
File Form 2555 for the Foreign Earned Income Exclusion (FEIE), if applicable.
Report foreign financial accounts with FinCEN Form 114 (FBAR).
Ensure compliance with Canadian tax obligations (T1 General, T1135 if applicable).
Claim tax treaty benefits where applicable (dividends, interest, royalties).
Check deadlines: US tax return by April 15, FBAR by April 15, extended to October 15.

Why Choose SAL Accounting?

We make cross-border taxes simple. With deep expertise in US-Canada tax laws, we handle everything—from filing forms to maximizing credits like the Foreign Tax Credit (FTC). Our personalized advice ensures compliance and helps you save money. Contact our cross-border tax specialists now so you can focus on what matters most.

Frequently Asked Questions (FAQs)

Yes. US citizens and green card holders must report worldwide income, including Canadian income, on their US tax returns. To avoid double taxation, you can use the Foreign Tax Credit (FTC) or the Foreign Earned Income Exclusion (FEIE), which can reduce or eliminate your US tax liability.

The FTC lets you reduce your US taxes by the amount paid to Canada. To claim it, complete Form 1116. The credit is limited to the US tax amount on the same income, so accurate calculations are vital.

Typically, the filing deadline is April 15. However, if you’re living abroad, you may receive an automatic extension to June 15. Note that taxes owed are still due by April 15 to avoid interest charges.

Withdrawals from Canadian pensions like RRSPs are taxable in the US. Report this income on Form 1040 under the Pension section. You may claim the FTC for taxes already paid to Canada on this income.

Yes. If your foreign accounts exceed a combined total of $10,000 USD at any point during the year, you must file FinCEN Form 114 (FBAR). This ensures compliance with US tax laws regarding foreign assets.

The treaty prevents double taxation by providing clear guidelines. It allows you to claim credits for taxes paid to Canada, exclude certain income types, and use tie-breaker residency rules when applicable.

Yes, up to $120,000 of foreign-earned income may be excluded under the FEIE if you pass the Physical Presence or Bona Fide Residence Test. Use Form 2555 to report this exclusion.

Final Thoughts

Reporting Canadian income on your US tax return doesn’t need to be stressful. Use the Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE) to reduce your tax burden and stay compliant with both countries’ rules.

Pro Tip: Consult a cross-border or international tax expert to ensure accurate filings, maximize benefits, and avoid penalties.

Need help?

SAL Accounting specializes in cross-border taxes and can make your filing process seamless and accurate. Contact us today!

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