Your First US Tax Return After Moving From Canada: The Twelve Items That Make It Different From Every Return After
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The first US return after a move from Canada is not a normal 1040. It covers part of a year as a non-resident and part as a resident, it contains elections that can be made only in that year, and it starts the reporting obligations that follow for as long as the person is a US person. Get it right and the following years are routine. Get it wrong and the pre-departure gains Canada taxed are taxed again, the TFSA becomes a foreign trust with a missed filing, and the FBAR is late from the first year. Here are the twelve items that make the first return different.
Key takeaways
- The return is dual-status by default: a Form 1040-NR for the non-resident period and a Form 1040 for the resident period, filed together, unless a full-year election is available and advantageous.
- The residency start date is the earlier of the first day of substantial presence in the year (if the test is met) or the green card date, and can be pushed back by the first-year choice or a full-year election.
- The Article XIII(7) election steps up US basis to the departure-date value on assets Canada deemed sold; it is made on this return or lost.
- The FBAR and Form 8938 start with this year, and the FBAR covers the whole calendar year's account maximums.
- The TFSA, Canadian mutual funds, and any Canadian corporation each trigger forms that should be dealt with before the return, ideally before the move.
The twelve items
1. The residency start date. Under the substantial presence test, residency begins on the first day of presence in the year in which the test is met (with a de minimis exception for up to 10 days of earlier presence). Under the green card test, it begins on the admission date. A Canadian who moved on July 1 but spent two weeks in the US in March may have a residency start in March. The date determines which income is reported on which part of the return.
2. Dual-status or full-year. A dual-status return reports worldwide income only for the resident period and US-source income for the non-resident period, but denies the standard deduction and joint filing. A married taxpayer can elect under section 6013(g) or (h) to be treated as a full-year resident (both spouses) and file jointly with the standard deduction, at the cost of reporting worldwide income for the whole year, including pre-move Canadian income, with a foreign tax credit. The election is usually better for a mid-year mover with modest pre-move income and worse for one with a large pre-move gain.
3. The Article XIII(7) election. For every asset that was deemed sold on departure from Canada, the treaty lets the taxpayer elect to treat it as sold and reacquired for US purposes at fair market value on the departure date, stepping up US basis. The election is a statement attached to the first return with Form 8833; without it, US basis stays at historical cost and the pre-departure gain is taxed twice.
4. Wages. The employer's W-2 reports the full year if the employee started before the move, or from the start date. Wages for pre-move Canadian workdays are not US-source and are excluded on a dual-status return; on a full-year election they are included with a foreign tax credit. Canadian T4 income for the pre-move period is converted at the average rate.
5. Equity compensation. RSUs and options vesting after the move are split by working days between Canada and the US; the Canadian portion is not US-source on a dual-status return. A working-day schedule for each grant is required.
6. The RRSP. No US tax on the accrued income; the treaty deferral is automatic for eligible individuals. The account is reported on the FBAR and Form 8938. No election form is required since 2014.
7. The TFSA. Taxable in the US from the residency start date on its income; if still open, potentially a foreign trust requiring Form 3520 and Form 3520-A. The clean answer is to have closed it before the move.
8. Canadian mutual funds. PFICs from the residency start date; each requires Form 8621 annually with a QEF or mark-to-market election, or the punitive default regime applies. Sell before the move or in the non-resident period.
9. A Canadian corporation. A controlled foreign corporation from the residency start date; Form 5471 with schedules for the year. Wind up before the move if possible.
10. Canadian-source income after the move. RRSP withdrawals, Canadian dividends, Canadian rental income (under NR6 and Section 216), and Canadian pension income are reported on the resident portion with a foreign tax credit on Form 1116 for the Canadian withholding.
11. The FBAR and Form 8938. The FBAR covers every Canadian account at its maximum value during the calendar year (including the pre-move months), due April 15 with an automatic extension to October 15, filed with FinCEN. Form 8938 is filed with the 1040 above its thresholds.
12. The state return. Most states require a part-year resident return from the residency start date, with their own treatment of the RRSP (California taxes it), the foreign tax credit (most states give none), and the move-year split.
Worked example
A Toronto engineer moves to Austin on July 1 with a $250,000 unrealized gain deemed realized on departure, RSUs vesting in October, a $500,000 RRSP, a TFSA closed in June, and Canadian mutual funds sold in June.
- Residency start. July 1 (no earlier US days).
- Return. Dual-status: 1040-NR for January to June (no US-source income), 1040 for July to December. Married; the 6013(h) full-year election considered and rejected because the pre-move Canadian salary would be included.
- XIII(7). Election on Form 8833 for every deemed-sold asset, stepping up basis to July 1 values.
- RSUs. October vest split by working days over the vesting period; the US portion on the 1040.
- RRSP. Deferred; on the FBAR and Form 8938.
- TFSA and mutual funds. Closed and sold before July 1; no Form 3520, no Form 8621.
- FBAR. All Canadian accounts at their maximum values for the full year, including the closed TFSA.
- Texas. No state return.
Official sources
"You are a dual-status individual when you have been both a U.S. resident and a nonresident in the same tax year." — Internal Revenue Service, Taxation of Dual-Status Aliens, https://www.irs.gov/individuals/international-taxpayers/taxation-of-dual-status-aliens
"Taxpayers use this form to make the treaty-based return position disclosure required by Internal Revenue Code section 6114. Dual-resident taxpayers use this form to make the treaty-based return position disclosure required by Regulations section 301.7701(b)-7." — Internal Revenue Service, About Form 8833, https://www.irs.gov/forms-pubs/about-form-8833
Practitioner note
The first return is the one where the elections live. The XIII(7) basis election, the full-year residency election, the first FBAR, and the decision about the TFSA and mutual funds all happen once, on this return or before it. We prepare the first year as a project with a checklist, not as a return.
See also: For the dual-status return versus the full-year election in depth, read dual-status versus full-year election in your first US tax year. Planning the move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.
Next step
Fairlight prepares the dual-status or full-year first return, the Article XIII(7) election, the first FBAR and Form 8938, and the state part-year return. See cross-border pricing or book a call.
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