Cross-Border Tax Traps: A 2026 Guide for Dual Citizens

The United States is one of only two countries that taxes its citizens on worldwide income regardless of residence. Estimates from the State Department and earlier US Treasury filings put the number of US citizens living in Canada somewhere between 900,000 and 1.3 million, a sizeable share of whom acquired the status by birth to a US-citizen parent and have never filed a Form 1040. The rules that apply to them did not change in 2025, but enforcement infrastructure built around FATCA, in force since 2014, continues to make the obligation harder to ignore.

FATCA, codified at IRC §1471 through §1474, requires foreign financial institutions to report accounts held by US persons to the IRS, generally through their home-country tax authority under an intergovernmental agreement. Canada's IGA with the US, in force since 2014, routes the reporting through the CRA. Most Canadian banks now ask new account holders whether they are US persons at onboarding for that reason.

FBAR and Form 8938

The two reporting obligations that catch most dual citizens are distinct and stack on top of each other. The FBAR, FinCEN Form 114, is required under 31 USC §5314 when the aggregate value of foreign financial accounts exceeds USD 10,000 at any point in the calendar year. The civil penalty for a non-willful failure is statutorily capped at USD 10,000 per violation, adjusted for inflation, and the Supreme Court's 2023 decision in Bittner v. United States confirmed that the cap applies per report, not per account. Willful failures carry materially higher penalties.

Form 8938, Statement of Specified Foreign Financial Assets, is a separate IRS filing under IRC §6038D with higher reporting thresholds that vary by filing status and residence. A taxpayer can be required to file both. The two forms ask for overlapping information but are not interchangeable, and filing one does not satisfy the other.

Where Canadian-registered accounts get complicated

The Canada-US tax treaty, at Article XVIII, recognizes RRSPs and RRIFs as pensions, and Revenue Procedure 2014-55 removed the old Form 8891 election so that tax deferral inside an RRSP is now automatic for US tax purposes. TFSAs, RESPs, and RDSPs do not enjoy the same treaty cover. Most cross-border practitioners report TFSAs and RESPs as grantor trusts on Forms 3520 and 3520-A, taxing the inside buildup as it accrues and treating Canadian government grants and bonds inside an RESP as taxable income to the US person.

Canadian mutual funds and most Canadian-listed ETFs are also classified as Passive Foreign Investment Companies under IRC §1297. PFICs are taxed under one of three regimes — the default §1291 excess-distribution rules, a qualified electing fund election, or mark-to-market under §1296 — and require an annual Form 8621 for each fund. For a US person who is a Canadian resident, holding US-domiciled ETFs inside a non-registered account or an RRSP is generally the cleanest way to avoid the PFIC overlay.

“The cross-border traps are not in the income tax itself; they are in the information returns that sit alongside it.”

Coming back into compliance

The IRS Streamlined Filing Compliance Procedures, available to non-willful taxpayers, remain the most common path back into compliance. The foreign offshore version requires three years of amended or delinquent returns and six years of FBARs, plus a signed certification that the prior failure to file was not willful. Penalties are waived for taxpayers who meet the eligibility criteria. The procedures are administrative, not statutory, and the IRS has reserved the right to modify or end them, which is part of why practitioners encourage eligible filers to use them sooner rather than later.

Renunciation of US citizenship is a separate question with its own tax consequences. Long-term residents and citizens above the asset or income thresholds in IRC §877A are subject to an exit tax that marks specified assets to market on the day before expatriation. This is general reporting and not personal tax advice; dual citizens with material assets should review their position with a practitioner who is licensed in both jurisdictions before filing or expatriating.