Double Taxation US and Canada: How to Avoid It in 2025

Understanding Cross-Border Taxation

Earning income or operating a business in both the U.S. and Canada can result in double taxation, where the same income is taxed by both countries. However, tax treaties and strategic tax planning can help minimize or eliminate this issue.

This guide explains how double taxation U.S. Canada works and the most effective ways to avoid it in 2024.

What Is Double Taxation?

Double taxation occurs when two countries tax the same income. This typically affects:

• U.S. citizens living in Canada
• Canadians earning income in the U.S.
• Businesses operating in both countries

There are two types of double taxation:

1. Personal Double Taxation – When individuals owe taxes in both countries.
2. Corporate Double Taxation – When a company owes taxes in both countries.

The US – Canada Tax Treaty: Key Provisions

The US – Canada Tax Treaty helps prevent most cases of double taxation through key provisions, including:

• Foreign Tax Credits (FTC) – Taxes paid in one country can often be credited against taxes owed in the other.
• Residency Tie-Breaker Rules – Helps determine which country the individual has closer ties to when being a dual resident
• Permanent Establishment (PE) Rules – Defines when a business is considered taxable in the other country.
• Lower Withholding Taxes – Reduces tax rates on cross-border dividends, interest, and royalties.

Applying these treaty benefits ensures you do not pay more taxes than required.

How Individuals Can Avoid Double Taxation

Claim Foreign Tax Credits (FTC)

• If you pay tax in Canada, you may be able to claim a credit on your US tax return (or vice versa).
• This offsets taxes owed in your home country.

Use the Foreign Earned Income Exclusion (FEIE) (For US Expats in Canada)

• US citizens living in Canada may be able to exclude up to $126,500 (2024 limit) of foreign-earned income from US taxation.

Avoid Dual Tax Residency

• Follow the tax treaty’s tie-breaker rules to determine residency in only one country to prevent unnecessary tax filings.

Plan Retirement Savings Correctly

• Earnings in RRSPs (Canada) and 401(k)s (US) shall be tax exempt for both the home country and the other country

How Businesses Can Avoid Double Taxation

Choose the Right Business Structure

• US  entities owned by Canadians – a flow through entity like LLC tends to cause double taxation, so structuring a C-Corp may be preferable.
• Canadian Corporations Doing Business in the US – Avoid permanent establishment (PE) triggers to prevent US taxation.

Reduce Withholding Taxes

• The US – Canada tax treaty reduces tax rates on cross-border transactions:
  • Dividends: Reduced from 30% to 5%-15%
  • Interest and Royalties: Often reduced to 0%-10%

Structure Payroll Properly

• Employees working in both countries may be subject to payroll taxes in both unless structured correctly (i.e. limiting the number of days the employee is present in the other country).

Common Mistakes That Lead to Double Taxation

• Not claiming foreign tax credits properly, resulting in full taxation in both countries.
• Triggering permanent establishment (PE) for a business, leading to unexpected corporate taxes.
• Failing to determine tax residency properly, which can lead to unnecessary dual taxation.
• Overlooking tax treaty benefits, leading to excessive withholding taxes.

How TMP Can Help

Navigating double taxation US and Canada can be complex, but TMP’s tax experts can:

• Identify areas to reduce double taxation
• Advise proper tax residency classification
• Optimize foreign tax credits claims
• Structure your business for tax efficiency

Contact us today for expert guidance on US and Canada tax planning.