Do Canadians working in the US pay tax in both countries?

Which country taxes you depends on where you are resident, not where the paycheque comes from

Canada taxes its residents on worldwide income. The US taxes its citizens and residents on worldwide income and taxes everyone else only on US-source income. Employment income is sourced where you physically do the work, so days spent at a desk in Detroit are US-source even if your employer is in Windsor. A Canadian earning US wages therefore falls into one of three patterns:

• Canadian resident working in the US — a commuter, a short assignment, or a remote worker who visits the US office a few weeks a year. Canada taxes everything; the US may tax the US-source wages.
• Former Canadian resident who moved south — a TN, H-1B or green card holder who sold or rented out the house and took the family along. The US taxes everything from the move date; Canada taxes only Canadian-source income after that.
• Dual resident — someone who qualifies as a resident of both countries under each country's own rules. The treaty tie-breaker assigns one country and the other steps back.

If you stay a Canadian resident, you report everything here and credit the US tax

A Canadian resident reports US wages on the T1 in Canadian dollars, converted at the Bank of Canada rate for the pay dates or at the annual average. The W-2 is your source slip, and the US tax withheld on it is not lost: you claim a foreign tax credit on form T2209 for the federal share and on form T2036 for the Ontario share. Under Article XXIV of the treaty the credit covers US federal income tax, state income tax, and the Social Security and Medicare tax taken from your pay.

The credit is capped at the Canadian tax on the same income. Because Canadian combined rates are usually higher than US rates, most people recover the full US tax and then pay a top-up to Canada. Nothing is taxed twice; you end up paying the higher of the two rates once. Our answer on how the Canadian foreign tax credit works walks through the mechanics and the common reasons a credit comes up short.

Contributions follow their own rule. The Canada-US Totalization Agreement means you pay into CPP or into US Social Security, not both; a Canadian employer sending you south for up to five years can keep you on CPP with a certificate of coverage. We explain that on paying into both CPP and Social Security.

When the treaty keeps short US work stints out of the US system

Article XV of the Canada-US tax treaty exempts a Canadian resident's US employment income from US tax in two situations. The first is where your total US employment pay for the calendar year is US$10,000 or less. The second is where you are present in the US for no more than 183 days in any twelve-month period starting or ending in the year, and your pay is neither paid by a US-resident employer nor charged to a US permanent establishment of your employer.

In practice, an employee of a Brampton company sent to a US client site for three months is normally exempt. An employee hired directly by a US company is not, because the US employer bears the cost, so the US-source wages go on a 1040-NR from the first day. The exemption is not automatic at payroll either: the employer withholds US tax unless you give it Form 8233 claiming the treaty, and otherwise you recover the withholding by filing.

State income tax is a separate question. States are not parties to the treaty, and several tax wages earned within their borders from the first day of work while others apply a day or dollar threshold. Which state you work in matters as much as the federal rules, and any state tax you do pay counts toward your Canadian credit. Our guide for Canadians working in the US sets out the wider picture before a discovery call.

If you moved south for good, Canada taxes you to the departure date and the US takes over

Once you sever your Canadian residential ties — the home, your spouse and dependants, and secondary ties such as provincial health coverage and a driver's licence — you become a non-resident of Canada from the departure date. Your final T1 reports worldwide income only to that date, and the CRA treats most of your capital property as sold at fair market value on the day you leave. That deemed sale is the departure tax; RRSPs and Canadian real estate are excluded, and you list what you own on form T1161 if the total is above $25,000.

After the move, Canada taxes only Canadian-source income — rent from a Canadian property, RRSP withdrawals, Canadian dividends — mostly through flat withholding rather than a return. The US, meanwhile, taxes you on everything from your residency start date, usually through a dual-status return for the year of the move, and your Canadian bank and investment accounts become reportable on the FBAR. TN professionals have particular timing questions, which we take up in our TN visa tax guide.

How we handle Canadians earning US wages

We start by settling residency, because every other answer flows from it. For a Canadian resident with US pay we prepare the T1 and the 1040-NR together, so the exchange rates, the foreign tax credit and any Article XV claim line up across both returns, and we file the state return where one is due. For someone who has moved, we prepare the departure-year T1 and the US dual-status return as one project. Fees are fixed and quoted after a discovery call; our cross-border tax services page describes what is included.

Source: IRS — Taxation of Nonresident Aliens.