Do U.S. citizens living in Canada file both tax returns?

Two systems, one income

Canada taxes you as a resident; the U.S. taxes you as a citizen. The overlap is managed, not avoided: Canadian tax paid generally becomes a foreign tax credit on the 1040, and because Canadian rates usually exceed U.S. rates on the same income, most dual filers owe the IRS little or nothing — but the returns must still be filed, in the right order, every year.

The sequencing matters. Which country taxes first depends on the income type: employment income where you work, investment income by residence with treaty rates on U.S.-source amounts, pensions per treaty article. Doing the 1040 before the T1 (or vice versa) without that map produces credits claimed in the wrong place.

The accounts and funds that cause the trouble

Ordinary Canadian planning collides with U.S. rules. A TFSA is taxable to the IRS. Canadian mutual funds and ETFs are usually PFICs, with punitive default taxation unless elections are made on Form 8621. RESPs need care. Even the tax-free principal residence gain in Canada is a taxable gain (above the exclusion) on the U.S. side.

Alongside the 1040 sit the information returns: FBAR (FinCEN 114) once non-U.S. accounts exceed US$10,000 in aggregate, Form 8938 under FATCA at higher thresholds, 3520/3520-A for certain plans and trusts, 5471 for Canadian corporations you control. Penalties attach per form, not per dollar.

Behind on U.S. filings?

The IRS streamlined foreign offshore procedures let non-willful late filers catch up with three years of returns and six years of FBARs, penalty-free, with a certification of non-willfulness. Eligibility should be assessed before anything is filed — an ordinary late filing can foreclose the streamlined route.