Cross-Border Tax Tips for Canada-U.S. Digital Nomads (Temporary remote workers)

A New Era of Work and Wealth

The rise of remote work since the COVID-19 pandemic has transformed the global workforce, with an estimated 40+ million digital nomads worldwide in 2025, including 18.1 million from the United States (Demandsage). For Canadians and Americans embracing this lifestyle—working remotely while living across the Canada-U.S. border—the promise of freedom comes with complex tax challenges. At Cardinal Point Wealth Management, we understand the intricacies of cross-border financial planning. This guide explores why tax residency matters, the differences between Canadian and U.S. tax rules, the Canada-U.S. Tax Treaty’s tie-breaker rules, and practical strategies to simplify tax obligations for digital nomads.

Why Tax Residency Matters

Tax residency determines where you pay taxes on your worldwide income, impacting how much you owe and where you file returns. Unlike citizenship, which is tied to your passport, tax residency depends on where you live and the strength of your ties to a country, such as your home, family, or business activities. For digital nomads, who may split time between Canada and the U.S. or work for a company in one country while living in another, understanding tax residency is critical to avoid double taxation, penalties, or missed deductions. Missteps can lead to costly audits or unexpected tax bills, making proactive planning essential.

Tax Residency Rules: Canada vs. U.S.

Canada and the U.S. have distinct approaches to determining tax residency, each with unique implications for digital nomads.

United States

The Internal Revenue Service (IRS), through the U.S. Tax Code Title 26, uses the Substantial Presence Test to determine tax residency, based on days spent in the U.S. in a single year or over a three-year period.  The magic number is 183 days, including partial days but excluding stop-overs where your flight originates and ends outside of the U.S.

If you are present in the U.S. for 183 or more days in a single year, you have “Substantial Presence” and are a U.S. tax resident.

The three-year test for substantial presence is as follows:

• You must be present for at least 31 days in the current year (e.g., 2025).
• The total days over three years (2023–2025) must reach 183 or more, counting all days in 2025, one-third of days in 2024, and one-sixth of days in 2023.
• Example: If you spend 120 days in the U.S. in 2025, 100 days in 2024 (counts as 33.33 days), and 90 days in 2023 (counts as 15 days), your total is 120 + 33.33 + 15 = 168.33 days, which is below the 183-day threshold. So, you’re not a U.S. tax resident unless other ties apply, such as having applied for a green card.

U.S. citizens, however, are taxed on worldwide income regardless of residency, requiring annual tax and foreign asset filings. Non-citizens meeting the substantial presence test must also file, reporting global income and the whole panoply of foreign (non-US) asset information.

Canada

The Canada Revenue Agency (CRA), through the Income Tax Act, determines tax residency based less on the day-count and more on a holistic evaluation of Center of Vital Interest (COVI) ties, including:

• Primary residence: Where you own or rent a home.
• Family and dependents: Where your spouse or children live.
• Business and employment: Where your work or business is based.
• Financial accounts: Location of bank or investment accounts.
• Social ties: Driver’s licenses, healthcare, or club memberships.

Spending over 183 days in Canada often triggers residency but is not definitive. Even fewer days can create tax residence if COVI ties are strong. Canada assumes everyone has a tax residency somewhere, so you must actively establish residency elsewhere to avoid being deemed a Canadian resident, per CRA guidelines.

Key Differences

• U.S.: Relies heavily on a day-count formula (Substantial Presence Test) for non-citizens and taxes citizens and green card holders on worldwide income, regardless of residence.
• Canada: Uses a broader, tie-based approach and assumes residency unless proven otherwise, with limited reliance on the 183 day-count threshold.
• Implications: Digital nomads splitting time between both countries risk dual residency, requiring careful tracking of days and ties to avoid unexpected tax obligations.

Tie-Breaker Rules Under the Canada-U.S. Tax Treaty

When a digital nomad is deemed a tax resident of both Canada and the U.S., the Canada-U.S. Tax Treaty (Article IV) provides tie-breaker rules to assign primary tax residency and prevent double taxation:

1. Permanent Home: The country where you have a permanent home available (e.g., owned or rented house) takes precedence.
2. Center of Vital Interests: If you have permanent homes available in both countries, the country with stronger personal and economic ties (e.g., family, primary job) is chosen.
3. Habitual Abode: If ties are unclear, the country where you spend more time (habitual abode) prevails.
4. Nationality: If you split time evenly, your country of citizenship determines residency.
5. Mutual Agreement: If unresolved, tax authorities from both countries negotiate a resolution through the Competent Authority.

For example, a Canadian digital nomad working for a U.S. company but living in Vancouver with a family would likely be deemed a Canadian resident under the permanent home and vital interests rules. These rules, outlined in the Canada-U.S. Tax Treaty, ensure you’re taxed as a resident in only one country, with foreign tax credits available to offset taxes paid in the other.

Tax Relief Mechanisms

Digital nomads can leverage specific tax relief options to minimize their tax burden:

• U.S. Foreign Earned Income Exclusion (FEIE): U.S. citizens or residents can exclude up to $130,000 (2025) of foreign-earned income from U.S. taxes if they meet the Physical Presence Test (330 days outside the U.S. in a 12-month period) or Bona Fide Residence Test, per IRS guidelines.
• Foreign Housing Exclusion: U.S. citizens can deduct certain housing expenses abroad if they qualify for the FEIE, further reducing U.S. tax liability.
• Foreign Tax Credits: Both countries allow credits for taxes paid to the other, reducing double taxation. For example, a Canadian resident paying U.S. taxes on U.S.-sourced income can claim a credit on their Canadian return.
• Canada – U.S. Totalization (Social Security) Agreement  Briefly, if your relocation is for the convenience of the employer – for instance, to keep you on the team while you care for a family member in the other country – the employer may apply to have you remain as a contributor to your home country Social Security/Canada Pension Plan regime for up to five years.

State Tax Complications for U.S. Digital Nomads

U.S. digital nomads face additional complexity from state tax rules, particularly in “sticky states” like California, New York, and Virginia, where the burden of proof of non-residency is placed on the former state resident. Specific examples include:

• California: Does not recognize the FEIE for state taxes, so even if foreign income is excluded federally, you may owe state taxes if considered a resident. Proving non-residency requires severing ties (e.g., selling property, closing accounts).
• New York: Conducts residency audits, deeming you a resident if you spend 184 days or more in the state, even if your primary home is elsewhere. The burden of proof lies with the taxpayer.
• Mitigation Strategies:
  • Track days spent in each state meticulously.
  • Formally change your state of residence if moving permanently.
  • Consult a tax professional familiar with state tax laws.

Permanent Establishment (PE) Risk

A significant but often overlooked issue is the risk of creating a permanent establishment (PE) for employers, which can trigger corporate tax liabilities in the nomad’s work country. A PE may arise if:

• A home office is used regularly for employer business and to meet with clients.
• The employee exercises decision-making and contracting authority abroad.
• Revenue-generating activities occur in the foreign country.
• A fixed place of business exists for extended periods.

Article V of the Treaty gives clear guidance on what creates a Permanent Establishment for different types of businesses.

Consequences for Employers:

• Corporate income tax liability in the nomad’s work country.
• Registration and compliance with local tax authorities.
• Payroll tax obligations for employees working remotely.

Mitigation: Employers should limit employees’ authority abroad, use remote worker visas with tax exemptions (e.g., Spain’s Beckham Law), or structure contracts to avoid PE triggers. Employees should clarify their work location with employers to minimize risks. (Tonge, 2025)

Practical Strategies for Cross-Border Digital Nomads

To navigate the complexities of cross-border tax obligations, digital nomads can adopt these proactive strategies:

1. Establish Clear Tax Residency: Strengthen ties to one country (e.g., maintaining a primary home, registering a business) to avoid dual residency. Consider filing Form NR73 with the CRA (caution: their ruling is binding) and consult a tax advisor to confirm residency status.
2. Robust Record-Keeping: Track days spent in each country using apps like Days In, and document income, expenses, and taxes paid. This is critical for claiming credits or proving non-residency, especially for sticky states.
3. Regular Professional Review: Engage cross-border tax advisors, like those at Cardinal Point Wealth Management, to optimize treaty benefits, to determine if claiming FEIE or foreign tax credits is the better strategy for you, and to ensure compliance with forms like T1135 or FBAR and 8938.
4. Plan for Long-Term Implications: Consider retirement planning and estate planning to ensure tax strategies remain sustainable, especially for nomads with fluctuating incomes.

Conclusion

The digital nomad lifestyle offers unmatched flexibility, but navigating Canada-U.S. tax residency rules requires careful planning to avoid costly pitfalls. By understanding the Substantial Presence Test, CRA’s tie-based approach, and the Canada-U.S. Tax Treaty’s tie-breaker rules, remote workers can clarify their tax obligations. Leveraging tax relief mechanisms, tracking days, and consulting cross-border experts ensures compliance and financial optimization. At Cardinal Point Wealth Management, we’re here to guide digital nomads through these complexities, helping you focus on your work and adventures while maintaining peace of mind.