How can I minimize Cross-Border Taxes Legally?
A Forbes study found that 93% of businesses overpay on taxes. Many business owners just accept this as “just the way it is.” But in reality, there are several legal ways to reduce taxes, especially for businesses operating across the U.S. and Canada.
Without the right strategy, cross-border businesses can end up paying unnecessary taxes — sometimes even double. Understanding tax laws in both countries is crucial to avoiding these costly mistakes and keeping more of your hard-earned money.
What Are Cross-Border Taxes?
Cross-border taxes apply when a business or individual owes taxes in more than one country. These include corporate taxes, VAT, excise taxes, and other liabilities. They can affect many individuals and businesses, including:
- Expatriates: U.S. citizens or residents living and working in Canada (or vice versa) must report worldwide income.
- Dual Citizens: Individuals who are citizens in both the U.S. and Canada could be liable to pay taxes in both.
- Investors: Those with assets, properties, or business interests in both the U.S. and Canada.
- Business Owners: Companies with cross-border operations or investments.
- Multinational Corporations: Businesses operating in both countries.
- Non-Resident Businesses: U.S. companies with Canadian operations or Canadian companies with U.S. operations.
Do I Have to Pay Taxes in Both Canada and the U.S.?
It depends.The U.S. and Canada tax “worldwide income,” meaning individuals and businesses owe taxes on money earned outside their resident country. However, tax treaties, credits, and cross-border tax accountants can help prevent double taxation.
Key Ways to Avoid Double Taxation in Cross-Border Tax Planning:
- Tax Treaties: The U.S./Canada tax treaty helps determine where your income should be taxed based on where you live and where your business operates.
- Foreign Tax Credits (FTC): If you’ve already paid taxes in one country, you can get a credit to reduce your taxes owed in the other. This is a part of the U.S./Canada tax treaty to prevent double taxation.
What is the Best Way to Minimize Cross-Border Taxes Legally?
The best way to minimize taxes is by complying with the U.S./Canada tax treaty. Double taxation is often the biggest tax burden, so working with a cross-border tax accountant to reduce or eliminate it can result in significant savings.
9 Ways to Minimize Cross-Border Taxes
Need practical ways to lower your tax burden legally? Here are 9 strategies to keep in mind when corporate tax planning:
1. Qualify for US Canada Tax Treaty
You need to file on time and correctly to claim any treaty benefits. U.S. citizens in Canada need to file a U.S. 1040 tax return and necessary forms to claim exemptions. It can also help you be eligible for foreign tax credits and reduce withholding tax rates on dividends, royalties, and interest.
2. Know Your Residency Status
Your tax responsibilities depend on whether you’re considered a resident in Canada or the U.S.
- Canada: If you live in Canada, you must pay taxes on your worldwide income, even if you’re not Canadian. However, if you’re a non-resident, you only pay taxes on income earned in Canada. Canada determines your residency status based on things like where you live, whether you have a home, or if your family is in Canada. The Canada Revenue Agency (CRA) can help you figure out your status.
- U.S.: If you’re a U.S. citizen or resident alien, you must file taxes yearly, even if you live or work abroad. U.S. citizens and resident aliens are taxed on income worldwide. Still, you might be able to use tax treaty exemptions or credits to reduce what you owe. You’ll most likely pay tax on your U.S. income if you’re a non-resident alien.
There are special rules that can prevent double taxation for U.S. citizens working in Canada, short-term workers, daily commuters, and people with dual residency.
3. Foreign Tax Credits (FTC)
Foreign tax credits can offset U.S. tax liability with the taxes you’ve already paid in another country. But keep in mind, FTC carryovers can be tricky to navigate, so guidance during cross-border tax planning is essential.
4. Foreign Earned Income Exclusion (FEIE)
If you earn income abroad, the FEIE can reduce your U.S. tax bill by allowing you to exclude foreign-earned income from your taxable income. For the 2025 tax year, you can exclude up to $130,000 of foreign-earned income ($126,500 for the 2024 tax year). The FEIE only applies to earned income (wages, salaries, professional fees, etc.), not passive income (like interest, dividends, or rental income).
To qualify, taxpayers must meet specific residency tests (the bona fide residence test or physical presence test). It’s not automatic, either. You must file Form 2555 when cross-border tax planning.
5. Use Tax-Advantaged Accounts
Retirement accounts can offer tax savings across borders:
- RRSP (Canada): Tax-deferred for U.S. taxpayers if reported correctly.
- 401(k) (U.S.): Contributions may be deductible, but cross-border withdrawals require careful corporate tax planning.
- IRAs & Other Accounts: Cross-border tax accountants can help report and structure tax-efficient plans.
6. Choose the Right Corporate Structure
For businesses, structuring operations strategically when corporate tax planning can help reduce taxes:
- LLC vs. Corporation: U.S. LLCs may have different tax treatments than C-Corps or S-Corps, especially with foreign income.
- Canadian vs. U.S. Incorporation: Depending on where your income is coming from, incorporating in one country may offer tax savings.
- Hybrid Structures: Some businesses benefit from using a combination of entities in both countries.
7. Set Up Transfer Pricing Correctly
Transfer pricing is the set price for goods exchanged between organizations in different countries. If your business operates in both the U.S. and Canada, setting up strategic transfer pricing can allocate income efficiently between entities. This can minimize taxable profits in high-tax countries and help avoid audits by complying with international tax laws.
8. Tax-Efficient Payroll and Compensation Structures
Both Canada and the U.S. require employers to cover payroll taxes. The numbers may be similar, but the specific taxes and agencies differ. To minimize your obligations when cross-border tax planning, you may also consider stock options, bonuses, and contractors vs. staff employees.
9. Work with a Cross-Border Tax Accountant
Navigating taxes in both the U.S. and Canada is complicated, to say the least. The U.S. alone has the most complex tax system in the world. Hiring a cross-border tax accountant can help:
- Ensure you’re compliant with tax laws in both countries.
- Maximize available deductions and credits.
- Reduce your tax burden through strategic corporate tax planning.
Do I Need to Outsource a Cross-Border Tax Accountant?
Hiring in-house tax experts can be expensive. Outsourcing to an experienced cross-border tax accountant offers:
- Cost efficiency compared to hiring full-time staff.
- Scalability as your business grows past seven figures.
- Regulatory confidence to avoid penalties and audits.
Tax laws change frequently, so it’s always best to consult with a cross-border tax accountant to ensure compliance and optimize your corporate tax planning. Tax laws can be intricate.
Take Action to Reduce Cross-Border Tax for Your Business
Cross-border tax planning is not a one-size-fits-all approach. Working with a cross-border tax accountant who understands both U.S. and Canadian tax systems can help you navigate the complexities, reduce your tax burden, and keep more of your money where it belongs—in your business and personal finances.
At M7 Group, we specialize in helping businesses structure their finances for efficiency and clarity. Whether you’re expanding, hiring, or optimizing, let’s talk about how to keep your tax burden low, legally.
