TN Visa Tax Guide: How Canadians and Mexicans Are Taxed in the U.S.

Tax residency

How the substantial presence test applies to TN workers

TN is a work visa, not a student or exchange visa. There is no "exempt individual" carve-out for TN holders — every day you are physically present in the U.S. counts toward the substantial presence test. A TN worker who lives in the U.S. full-time will pass the test in their first year (since 365 days exceeds 183 by a wide margin) and become a resident alien.

However, some TN workers do not live full-time in the U.S. — cross-border commuters from Windsor to Detroit or from Tijuana to San Diego, for example. If you commute daily from Canada or Mexico, those commuting days do not count as days of presence under the IRS commuter exception. This means some TN workers can remain nonresident aliens indefinitely.

How income tax treaties prevent double taxation

Both the U.S.-Canada tax treaty and the U.S.-Mexico tax treaty contain mechanisms to prevent the same income from being taxed twice:

• Residency tie-breaker: If both countries consider you a tax resident, the treaty has tie-breaker rules (permanent home, center of vital interests, habitual abode, nationality) to assign you to one country for treaty purposes.
• Foreign tax credit: If you owe tax to both countries on the same income, you can credit the tax paid to one country against your liability in the other. On your U.S. return, you claim this via Form 1116.
• Specific income articles: The treaties define which country has primary taxing rights over specific types of income (employment income, dividends, interest, pensions, etc.).

If you claim treaty benefits on your U.S. return, file Form 8833 (Treaty-Based Return Position Disclosure) to document the position. For Canadian TN workers who are dual residents, the tie-breaker position is disclosed on Form 8833 attached to Form 1040 or 1040-NR.

Totalization agreements and Social Security

The U.S. has separate totalization agreements with both Canada and Mexico. These agreements serve two purposes:

1. Prevent double Social Security taxation. If a Canadian or Mexican employer temporarily sends you to work in the U.S., the totalization agreement can exempt you from U.S. Social Security if you obtain a Certificate of Coverage from your home country's social security agency (Service Canada or IMSS in Mexico). This is most common for short-term assignments.
2. Combine work credits. If you work in both countries but do not earn enough credits in either to qualify for benefits, the agreement lets you combine credits from both systems. You apply through your home country's social security agency.

Canadian TN workers: specific considerations

• Canada taxes worldwide income. If Canada still considers you a resident (which depends on factors like maintaining a home, family ties, and Canadian bank accounts), you must file a Canadian return reporting your U.S. wages. You then claim a foreign tax credit on the Canadian return for U.S. taxes paid.
• RRSPs and 401(k)s. Under the U.S.-Canada treaty, RRSP contributions can be deductible on your U.S. return if you elect treaty benefits. Conversely, 401(k) contributions are generally recognized by Canada under the treaty. The interaction is complex — consider professional guidance.
• Departure tax. When you leave Canada to work in the U.S. and are considered to have ceased Canadian residency, Canada may impose a deemed disposition (departure tax) on certain assets. Plan for this before relocating.

Mexican TN workers: specific considerations

• Mexico also taxes worldwide income for residents. If Mexico considers you a resident, you must file a Mexican return (declaración anual) and claim a foreign tax credit for U.S. taxes. Mexico determines residency primarily by where you have your principal home (casa habitación).
• IMSS vs. Social Security. The U.S.-Mexico totalization agreement coordinates between IMSS (Mexico's social security system) and U.S. Social Security. If you are posted by a Mexican employer, IMSS may continue to cover you instead of U.S. Social Security.
• Currency and reporting. Income earned in U.S. dollars must be converted to Mexican pesos for your Mexican return using the official exchange rate published by Banco de México for the relevant dates.

Common mistakes TN workers make

1. Assuming "I'm not a U.S. citizen so I don't owe U.S. tax." Residency for tax purposes is determined by the substantial presence test, not citizenship. Most full-time TN workers are U.S. resident aliens.
2. Not filing in the home country. Even if you leave Canada or Mexico, your home country may still consider you a tax resident for part or all of the year. Missing a home-country filing can trigger penalties.
3. Overlooking FBAR requirements. As a U.S. resident alien, you must file FinCEN Form 114 (FBAR) if your foreign financial accounts (including Canadian or Mexican bank accounts) exceed $10,000 in aggregate value at any point during the year.
4. Not coordinating treaty positions. The tie-breaker and foreign tax credit only work if you correctly report treaty positions in both countries. Inconsistent positions can trigger audits.
5. Ignoring the closer connection option. If you spend fewer than 183 actual days in the U.S. and maintain strong ties to your home country, Form 8840 may keep you a nonresident alien despite the weighted-day formula.