Last Updated on January 8, 2025 by Rashad Bolbol

Common Cross-Border Tax Mistakes to Avoid This Tax Season

Filing taxes across borders can be a complex task, especially when you’re navigating the differences between US and Canadian tax systems. Small errors can lead to costly penalties or missed opportunities for deductions and credits. To help you avoid these pitfalls, here are some common cross-border tax mistakes and how to address them.

Misunderstanding Residency Rules

One of the most frequent mistakes is not understanding how residency status impacts your tax obligations. Both the US and Canada have distinct rules for determining residency for tax purposes:

• In the US: The IRS considers both citizenship and residency. US citizens and green card holders must report their worldwide income, regardless of where they live. You may refer to our US Tax Residency Guide for further details here.
• In Canada: Residency is based on factual ties, such as where you live and work. Part-year residents may need to file returns for only part of the year.

Failing to correctly identify your residency status can lead to underreporting income or filing in the wrong jurisdiction.

Overlooking Foreign Tax Credits

Foreign tax credits are crucial for avoiding double taxation, but many taxpayers fail to claim them correctly. If you earn income in both countries, you may be eligible for a credit in one country for taxes paid to the other. Ensure you:

• Keep accurate records of taxes paid abroad.
• Use the appropriate forms, such as Form 1116 for the US or Schedule T2209 for Canada.

Not utilizing these credits can result in paying more tax than necessary.

Missing Reporting Requirements for Foreign Assets

Both the IRS and CRA require detailed reporting of foreign assets and accounts, but these rules are often overlooked:

• FBAR (FinCEN Form 114): US taxpayers with foreign accounts totaling more than $10,000 USD must file an FBAR. Failure to do so can result in severe penalties.
• Form 8938: US taxpayers may also need to file this for foreign financial assets exceeding certain thresholds.
• T1135 (Canada): Canadian taxpayers must report foreign property over $100,000 CAD.

Ensure you’re aware of the thresholds and deadlines to avoid non-compliance penalties.

Ignoring Currency Conversion Rules

When reporting foreign income, you’re required to convert it into the currency of the filing country. Many taxpayers neglect to use the proper exchange rates:

• For the IRS, yearly average exchange rates are often used for consistent income.
• The CRA typically requires you to use the Bank of Canada rates.

Incorrect conversions can lead to discrepancies in your tax return and potential audits.

Double Reporting of Income

It’s easy to accidentally double report income when you’re filing in both countries. For instance, US citizens living in Canada may report income on both their US and Canadian returns without properly offsetting it through tax treaty provisions or foreign tax credits. Always double-check your calculations to ensure the same income isn’t taxed twice.

Not Accounting for Treaty Benefits

The Canada-US Tax Treaty provides many benefits, such as exemptions for certain types of income, reduced withholding rates, and tax deferrals for RRSPs in the US or IRAs in Canada. Ignoring these provisions can lead to overpaying taxes. Familiarize yourself with the treaty or consult a tax professional to ensure you’re taking full advantage of these benefits.

Missing Filing Deadlines

Tax deadlines differ between the two countries:

• US Tax Deadline: April 15, with an automatic extension to June 15 for expats, though taxes owed are still due by April 15.
• Canadian Tax Deadline: April 30 for most taxpayers, with June 15 for self-employed individuals (though taxes owed are still due by April 30).

Missing deadlines can result in penalties and interest. Mark your calendar and prepare well in advance.

Assuming All Deductions Apply in Both Countries

Deductions and credits available in one country may not be recognized in the other. For example:

• Canada allows credits for expenses like medical care, childcare, and donations, but the US may have stricter rules.
• US filers can claim deductions for mortgage interest, but this is not available in Canada.

Understanding the differences will help you maximize your tax savings while ensuring compliance.

Not Seeking Professional Help

Cross-border taxation is highly specialized, and attempting to handle it alone can lead to costly mistakes. A tax professional experienced in US-Canada taxation can:

• Identify applicable credits and deductions.
• Ensure compliance with all filing requirements.
• Help avoid penalties for non-compliance.

Final Thoughts

Avoiding these common mistakes requires a proactive approach and a clear understanding of the tax rules in both countries. Whether you’re a cross-border worker, investor, or dual resident, proper planning and accurate filing are key to minimizing tax liabilities and staying compliant.

If you need assistance with your US-Canada cross-border taxes, feel free to reach out. Professional guidance can make all the difference during tax season.