US Taxes for Canadian Residents
The income tax system in the United States, unlike Canada is based on either citizenship or residence. Therefore, Canadians who live or work in the United States may find themselves subject to taxation on their world-wide income in both Canada and the US. If you live in Canada and/or lived, arrived in the U.S. or departed the U.S. this tax year, and earned income in the United States, you may be required to file the Form 1040NR (U.S. Nonresident Alien Income Tax Return/Exempt Individuals) or a Form 1040 (Resident Alien). Your tax filing obligations will be different depending on your status. See below for a detailed description.
The income tax system in the U.S. is considered one of the most complex systems of taxation in the world with many legal reporting and compliance requirements that are considerably different from those under Canadian tax law. Find below some information regarding status and filing requirements. We also include information regarding identification numbers required and the Canada US Income Tax Convention (Treaty)
Contact our American Tax Specialist in Vancouver BC Canada, we can help you comply with the US tax law.
TESTS TO DETERMINE YOUR RESIDENCY
Green Card Test
You are a resident, for U.S. federal tax purposes, if you are a Lawful Permanent Resident of the United States at any time during the calendar year. This is known as the "green card" test.
You are a Lawful Permanent Resident of the United States, at any time, if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services (USCIS) issued you an alien registration card, Form I-551, also known as a "green card."
You continue to have U.S. resident status, under this test, unless:
If you meet the green card test at any time during the calendar year, but do not meet the substantial presence test for that year, your residency starting date is the first day on which you are present in the United States as a Lawful Permanent Resident. However, an alien who has been present in the United States at any time during a calendar year as a Lawful Permanent Resident may choose to be treated as a resident alien for the entire calendar year.
Substantial Presence Test
You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:
Days of Presence in the United States
You are treated as present in the United States on any day you are physically present in the country, at any time during the day. However, there are exceptions to this rule. For details on days excluded from the substantial presence test for other than exempt individuals, refer to Publication 519, US Tax Guide for Aliens.
Closer Connection Exception to the Substantial Presence Test
Even if you passed the substantial presence test you can still be treated as a nonresident alien if you qualify for one of the following exceptions;
An alien who meets either the green card or substantial presence test (described above) is considered a resident alien. However, there are exceptions to the substantial presence test for exempt individuals and for individuals with a “closer connection to a foreign country”.
For the substantial presence test, days of presence in the US do not count if an individual is temporarily present in the US as a:
Teacher or trainee under a “J” or “Q” visa (certain limits apply)
Filing requirements for exempt individuals. Generally, exempt individuals are considered nonresident aliens and file Form 1040NR. An individual who excludes days of presence under the definition of exempt individual must file Form 8843, Statement for Exempt Individuals and Individuals With A Medical Condition.
An alien is considered a nonresident alien unless either the green card or substantial presence (described above) test is met.
Dual Status—Arrival and Departure Year
An individual can be both a resident alien and a nonresident alien during the same year. This dual status usually occurs in the year of arrival into or departure from the US. The taxpayer’s residency status on the last day of the year determines the form to be filed.
Resident at the end of the year:
Resident files a tax return Form 1040 with “Dual-Status Return” across the top showing income from all sources for the residency portion of the year, plus US source income effectively connected wih a trade or business form the non-residency portion of the year.
Nonresident at end of year:
Nonresident taxpayer files a tax return Form 1040NR with “Dual-Status Return” across the top showing US sourced income for the non-residency portion of the year, plus income from all sources for the residency port of the year.
Restrictions for Dual-Status Taxpayers:
Tax Identification Numbers
Social Security Number
For US citizens and resident aliens, a valid Social Security Number (SSN) must be used. Persons who require a SSN must file form SS-5 with IRS to obtain a number. (Please note that applicants over 18 years of age applying for a SSN for the first time must attend in person and provide appropriate identification.)
Tax Identification Number for Aliens (ITIN)
Aliens who are required to have an individual taxpayer identification number (ITIN), but are not eligible to obtain a Social Security number, must file Form W-7, Application for IRS Individual Taxpayer Identification Number.
Taxpayers who are applying for an ITIN to file a tax return must attach original or certified copies, completed return to Form W-7 to get the ITIN. After Form W-7 has been processed, the IRS will assign an ITIN to the return and process the return as if it were filed at the address listed in the tax return instructions.
You may also apply using the services of an IRS-authorized Acceptance Agent or visit some key IRS Taxpayer Assistance Center in lieu of mailing your information to the IRS in Austin. Taxpayer Assistance Centers (TACs) in the United States provide in-person help with ITIN applications on a walk-in or appointment basis.
ITIN’s cannot be used for:
ITIN Policy Change Summary for 2013
Changes impacting individuals applying for an ITIN
The information below highlights improvements to the ITIN program. They go into effect January 1, 2013.
“If you are applying directly to the IRS for an ITIN, we will only accept original identification documents or certified copies of these documents from the issuing agency along with a completed Form W-7 and Federal tax return”.
In order to file your application, you will need to prove your claims of alien status and identity. The following copies of documents certified by the issuer are required for this purpose:
1) Passport or INS document establishing the non U.S. status and residence of the applicant; or
2 )Foreign birth record and one of the following, which must bear a photograph, has not expired, and is not older than three years:
3) If the applicant is residing in the United States, please provide the U.S. visa or other proof of ineligibility for an SSN.
Allow 6 weeks for the IRS to notify you of your new ITIN on Form 9844 (8 to 10 weeks if you submit documents. If you have not received your ITIN or correspondence at the end of that time, you can call the IRS to find out the status of your application.
Income Tax Treaties
CANADA US INCOME TAX CONVENTION
The major purpose of an income tax treaty is to mitigate international double taxation through tax reductions and exemptions for certain types of income derived by residents of one treaty country from sources within the other treaty country.
The Canada U.S. Income Tax Convention (Treaty) currently in force was first established in 1980, and since that time there have been five major alterations, or "protocols" adopted at various times. The latest, Fifth Protocol, contains some major changes, which could change the way in which tax law is interpreted in Canada and the United States. The Fifth Protocol, unless otherwise stated, is effective on January 1, 2008.
The benefits of the income tax treaty are generally provided on the basis of residence for income tax purposes. The treaty or its provisions does not result in an exemption from filing an US income tax return. Failure to file US income tax forms and elections in an accurate and prescribed manner and on a timely basis may result in a denial of the exemption being sought (therefore possibly resulting in double taxation if the person is also taxable in Canada), denial of otherwise deductible expenses, interest, and penalties for inaccurate, incomplete or non filed forms or returns.