Cross-border tax checklist: 12 things Canadians with US income get wrong

Canadians earn US income in more ways than ever: a brokerage account, a contract with a US client, a rental in Arizona, royalties from a platform, a winter home. Each stream carries paperwork on both sides of the border, and the mistakes repeat with remarkable consistency. This checklist covers the twelve we fix most often. Work through it once a year, ideally before US payers close their books in December.

Withholding paperwork: W-8BEN, 1042-S and the 1099 that should not exist

1. No W-8BEN on file, so 30% comes off the top

A US payer must withhold 30% on dividends, royalties and certain other payments to a foreign person unless it holds a valid Form W-8BEN claiming treaty benefits. With the form, the Canada-US treaty cuts dividend withholding to 15% and reduces most royalty withholding to 0% or 10% depending on the type. The form goes to the payer, not the IRS, and it expires at the end of the third calendar year after you sign it. We see expired forms far more often than missing ones.

Do this: check every US brokerage, platform and client for a W-8BEN dated within the last three years, and re-sign when you change address or entity. Our answer on Form W-8BEN and when a Canadian needs one covers the fields that trip people up.

2. Ignoring the 1042-S that arrives in March

Form 1042-S is the US slip that reports what a payer sent you and what it withheld. It is the evidence for your Canadian foreign tax credit on Form T2209, so it needs to reach whoever prepares your T1. There is a catch that costs real money: the CRA only credits US tax up to the treaty rate. If 30% was withheld on a dividend because your W-8BEN had lapsed, Canada credits 15%, and the other 15% can only be recovered by filing a US non-resident return to claim the refund.

We explain the mechanics in what a 1042-S is and what to do with it.

3. Panicking over a 1099

US clients frequently issue Form 1099-NEC to Canadian contractors, usually because they never asked for a W-8BEN. A 1099 in your name does not by itself make the income taxable in the US. Services performed from Canada for a US customer are Canadian business income on your T2125 or T2, and the treaty protects them from US tax unless you have a permanent establishment there. Keep the slip, report the income in Canada, and answer any IRS letter with the treaty position rather than a payment; more in whether US companies send a 1099 to a Canadian contractor.

Reporting to the CRA: exchange rates and Form T1135

4. Converting everything at the year-end or average rate

The CRA accepts the Bank of Canada annual average rate for income that arrives steadily through the year, such as monthly rent or quarterly dividends. It does not accept it for capital transactions. When you buy or sell US shares or property, the cost and the proceeds are each converted at the rate on their own transaction dates, which means a stock that went nowhere in US dollars can produce a Canadian gain or loss purely from currency movement. Using December 31 for everything misstates the gain and, on a large sale, the tax.

Our answer on which exchange rate to use for US income gives the rules line by line.

5. Missing Form T1135

If the total cost of your specified foreign property exceeded CAD 100,000 at any point in the year, Form T1135 is due with your return. US brokerage accounts, US stocks held in a Canadian non-registered account, US bank balances and US rental property all count; a vacation home used only personally does not, and neither do RRSP or TFSA holdings. The penalty is $25 per day to a maximum of $2,500 for each year missed, and it applies even when every dollar of income was reported. Our T1135 guide walks through the simplified and detailed methods.

US filings people skip: state returns and Form 8833

6. Forgetting the state

The treaty is an agreement between Canada and the US federal government. States are not party to it, and several do not follow it. A Canadian with rental income, a property sale or services performed in a state with an income tax may owe a state return even where the federal position is fully protected. California is the example we cite most often, but the check applies to any state where the income arises.

Do this: for every US income stream, ask which state it is sourced to and whether that state taxes non-residents on it.

7. Claiming a treaty exemption without Form 8833

Treaty benefits are often claimed on a return rather than at source, and some of those claims must be disclosed on Form 8833. Residency tie-breaker positions and business-profits exemptions for a non-resident with US-source income are the common ones. Filing the return without the disclosure exposes an individual to a $1,000 penalty per failure, and the position itself is weaker if challenged. Reduced withholding on dividends reported on a 1042-S generally does not need the form, which is why people assume nothing does.

US real estate: rental withholding and the ITIN you needed last year

8. Letting 30% of gross rent be withheld

By default, US rent paid to a non-resident is subject to 30% withholding on the gross amount, with no deduction for mortgage interest, property tax, management fees or depreciation. Most Canadian landlords should instead elect under section 871(d) to be taxed on net rental income, give the property manager or tenant a Form W-8ECI so withholding stops, and file Form 1040-NR every year with a Schedule E. Depreciation is mandatory in the US calculation whether or not you claim it, which matters at sale. See the 871(d) net election and our full US rental property guide.

9. Applying for an ITIN after the sale is agreed

Selling US real estate triggers FIRPTA withholding of up to 15% of the gross price. The way to reduce it to the actual tax is a withholding certificate on Form 8288-B, and that application needs a US taxpayer identification number. ITIN applications on Form W-7 take weeks to process and cannot be rushed, so an owner who starts at the offer stage usually closes with the full amount withheld and waits until the following year's return for a refund. Start the ITIN when you list, not when you sell; our answer on getting a US ITIN from Canada covers the certified-copy passport requirement.

Structures and estates: the LLC and the brokerage account

10. Setting up an LLC because a US forum said so

For a US resident an LLC is a sensible, flow-through vehicle. For a Canadian resident it is a trap. The CRA treats an LLC as a corporation, so its income is taxed in the US in your hands and in Canada when distributed, the credits rarely line up, and the LLC itself is not a treaty resident. Canadians holding US rentals or operating businesses there generally do better with direct ownership, a limited partnership or a US corporation, depending on the facts.

Read how the CRA taxes income from a US LLC before signing anything. If you already have one, we can usually restructure without a sale.

11. Overlooking US estate tax on a US brokerage account

US-situs assets, which include shares of US companies wherever the account is held, US real estate and some US fund holdings, are subject to US estate tax for a non-resident once they exceed USD 60,000. The treaty lets a Canadian claim a prorated share of the US exemption based on the ratio of US assets to the worldwide estate, and as at the time of writing that exemption is large enough that most estates owe nothing. The filing obligation on Form 706-NA can exist even when the tax is zero, and the executor cannot release the account without dealing with it. Canadian-listed ETFs that hold US stocks are not US-situs, which is a simple planning lever; more in whether Canadians owe US estate tax on US stocks.

Time in the US: the day count that catches snowbirds

12. Counting only this year's days

The substantial presence test adds all of your US days this year to one-third of last year's and one-sixth of the year before. A steady four-to-five-month winter meets the 183-day threshold on that formula even though no single year comes close. Meeting it does not make you a US resident if you file Form 8840 by June 15 to claim a closer connection to Canada, but skipping the form or spending 183 actual days in one year removes that protection. Keep a border log, because the CBSA and CBP now share entry data and the count is not a matter of memory; our snowbird tax rules guide sets out the formula and the form.

The forms and dates on one page

Twelve items is more than most people want to manage alone, and the cost of one miss usually exceeds a year of professional fees. Our cross-border tax services cover both returns from one file, so the treaty positions, credits and slips agree with each other. Bring your US statements and we will run this list against them.

Sources: IRS — About Form W-8BEN · IRS — About Form 8833 · CRA — Form T1135.