As most US citizens living in Canada are aware, the US and Canadian tax systems differ greatly. The biggest difference is that Canada taxes only its residents on worldwide income, while the US taxes all US citizens on their worldwide income regardless of where they live. US citizens, therefore, have to make complex US tax filings, and they may have to pay tax to the IRS on their worldwide income. They are also exposed to the US estate and gift tax regime.
Fortunately, foreign tax credits available through the Canada-US Income Tax Treaty can ease the potential burden of being taxed by both countries on the same income. Frequently, Canadian tax rates exceed US ones. Americans living in Canada can receive foreign tax credits for tax paid to the CRA; these credits can then be used to either reduce or completely offset tax owed to the IRS. However, double taxation cannot always be avoided.
To avoid paying US tax and to ensure that all US tax obligations are severed, some US citizens living in Canada choose to relinquish their US citizenship.