st file a US Federal personal (1040 or 1040NR) or Business/Corporate returns and one or more state and local tax returns (if applicable) if one or combination of the following situations apply to you: • You are a US citizen or Green Card holder. • You have US source income (employment or investment) • You own property in the United States • You worked in the US as a co-op student. • Other situations may apply. Please call Fairtax Business Services For more information also see Canada-United States (US ) cross-border taxation (I) INDIVIDUALS U.S. citizens, Green card holders or residents are taxed on their worldwide income from all sources, both inside and outside of the United States. Form 1040 for U.S. personal Income Tax Return must be filed with the Internal Revenue Service (IRS), each year by April 15, for the previous year. 1040 personal income tax return may be filed either by an individual as separate, or in case of married couples as a joint return. Depending on your circumstances you may be eligible to file as single, married filing jointly, married filing separately, qualifying widow(er), or as head of household. Generally, it is better for a U.S. citizen living anywhere in the world to file a return regardless of their level of income. An application may be submitted to IRS asking for a six months extension of the filing deadline to October 15. Further extensions may be available in certain circumstances. All taxes owed must be paid by April 15th anyways, otherwise interest and penalty may apply. U.S. citizens, Green Card holders (or permanent residents) living outside the U.S. who have no U.S. source salary or wages income have an automatic two months extension of time (until June 15 each year) to file their returns and pay taxes, without filing an extension. Additional forms must be filed with the 1040 personal return. form 5471 for holdings of controlled foreign corporations. Foreign grantor trusts such as Canadian Tax Free Savings Accounts (TFSA) and Registered Education Savings Plans (RESP’s) must apply for an employer identification number (EIN) and file form 3520 and 3520A forms by March 15th deadline unless the six month extension to September 15 is applied for before the initial due date. 1040 filers are also required to report foreign financial assets on U.S. Treasury form TDF 90.22.1(by June 30 – no extensions) and form 8938, which is filed with the 1040 return. See our FBAR page for more information. (A). Types of Income 1- Gross Income Unless specifically excluded by Internal Revenue Code (IRS), gross income includes any income from any source, including (but not limited to) the following items: • Payments for services, including fees, commissions, fringe benefits, and similar items. • Business income. • Gains derived from property transactions such stocks, real estate. • Interest. • Rental income. • Royalties. • Dividends. • Alimony and separate maintenance payments. • Annuities. • Income from life insurance and endowment contracts. • Pensions. • Income from discharge of indebtedness. • Distributive share of partnership gross income. • Income in respect of a decedent. • Income from an interest in an estate or trust. • Unemployment compensation. • Prize received in a draw (church or any other organization). • Fair market value of an economic benefit (such as a free trip). • Punitive damages. Capital gain/loss, depreciation, amortization, recapture: (gains/loss, sale of personal residence, Alternative Minimum Tax or AMT) Capital asset, is almost everything a person owns and uses for personal or investment purposes. Examples include a home used a personal residence or for producing income, personal use items such as household furnishings, and stocks or bonds. When a capital asset is sold, the difference between the adjusted cost basis (ACB) in the asset and the amount it is sold for is a capital gain or a capital loss. Most of the time, an asset’s basis is its original cost. Capital gain is realized if a person sells the asset for more than the basis. The person has a capital loss if the asset is sold for less than the basis. Losses from the sale of personal-use property, such as a home or car, are not deductible against income from other sources . Sales and Other Dispositions of Capital Assets. Form 8949 – Sales and Other Dispositions of Capital Assets is a relatively new form. Many transactions that, in previous years, would have been reported by corporations and partnerships on Schedule D (Form 1040) must now be reported on Form 8949. Old Schedule D-1 is replaced by form 8949 which is used to: • The sale or exchange of a capital asset not reported on another form or schedule. • Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit. • Non-business bad debts. Corporations and partnerships also use Form 8949 to report: • The sale or exchange of a capital asset not reported on another form or schedule. • Non-business bad debts. • Undistributed long-term capital gains from Form 2439 – Notice to Shareholder of Undistributed Long-Term Capital Gains. Electing large partnerships and corporations also use Form 8949 to report their share of gain or (loss) from a partnership, S corporation, estate or trust. Schedule D, use it for: • To figure the overall gain or loss from transactions reported on Form 8949. • To report a gain from Form 2439 or 6252 or Part I of Form 4797. • To report a gain or loss from Form 4684, 6781, or 8824. • To report a gain or loss from a partnership, S corporation, estate or trust. • To report capital gain distributions not reported directly on Form 1040, line 13 (or effectively connected capital gain distributions not reported directly on Form 1040NR, line 14). • To report a capital loss carryover from last year to current tax year. Use Form 4797 – Sales of Business Property to report the following: • The sale or exchange of: • a- Property used in a trade or business. • b- Depreciable and amortizable property. • c- Oil, gas, geothermal, or other mineral property. • d- Section 126 property. • The involuntary conversion (other than from casualty or theft) of property used in a trade or business and capital assets held for business or profit. • The disposition of non-capital assets other than inventory or property held primarily for sale to customers in the ordinary course of a trade or business. • The disposition of capital assets not reported on Schedule D. • The gain or loss (including any related recapture) for partners and S corporation shareholders from certain section 179 property dispositions by partnerships (other than electing large partnerships) and S corporations. • The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less. • Gains or losses treated as ordinary gains or losses, if the taxpayer is a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f). Use Form 4684 – Casualties and Thefts to report involuntary conversions of property due to casualty or theft. Use Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles to report any gain or loss on Section 1256 contracts under the market-to-market rules and gains and losses under Section 1092 from straddle positions. A Section 1256 contract is any: (173) • Regulated futures contract. • Foreign currency contract. • Non-equity option. • Dealer equity option. • Dealer securities futures contract. A Section 1256 contract does not include any interest rate swap, currency swap, basis swap, commodity swap, equity swap, equity index swap, credit default swap, interest rate cap, interest rate floor, or similar agreement. Use Parts I, II, and III of Form 8824 – Like-Kind Exchanges to report each exchange of business or investment property for property of a like kind. Certain members of the executive branch of the Federal Government and judicial officers of the Federal Government use Part IV to elect to defer gain on conflict-of-interest sales. Judicial officers of the Federal Government are the following: (174) • Chief Justice of the United States. • Associate Justices of the Supreme Court. Judges of the: • United States courts of appeals. • United States district courts, including the district courts in Guam, the Northern Mariana Islands, and the Virgin Islands. • Court of Appeals for the Federal Circuit. • Court of International Trade. • Tax Court. • Court of Federal Claims. • Court of Appeals for Veterans Claims. • United States Court of Appeals for the Armed Forces. • Any court created by Act of Congress, the judges of which are entitled to hold office during good behavior. See the instructions for the Schedule D the taxpayer is filing for detailed information about the following: (171) • Other forms he or she may have to file. • The definition of capital asset. • Reporting capital gain distributions, undistributed capital gains, the sale of a main home, the sale of capital assets held for personal use, or the sale of a partnership interest. • Capital losses, non-deductible losses, and losses from wash sales. • Traders in securities. • Short sales. • Gain or loss from options. • Installment sales. • Demutualization of life insurance companies. • Exclusion or rollover of gain from the sale of qualified small business stock. • Any other rollover of gain, such as gain from the sale of publicly traded securities. • Exclusion of gain from the sale of DC Zone assets or qualified community assets. • Certain other items that get special treatment. • Special reporting rules for corporations and partnerships in certain situations. Basis and adjusted cost basis (ACB) Basis is the accumulated amount of investment in the property for tax purposes. The basis of property the taxpayer buys is usually its cost. The cost is the amount he or she pays for it in cash, in debt obligation, in other property, or in services. The cost also includes: • Sales tax charged on the purchase. • Freight charges to obtain the property. • Installation and testing charges. If the taxpayer buys real property, such as a building and land, certain fees and other expenses he or she pays are part of the cost basis in the property. If the taxpayer agrees to pay real estate taxes on a property that were owed by the seller and the seller does not reimburse him or her, the taxes he or she pays are treated as part of the basis in the property. The taxpayer cannot deduct them as taxes paid. If the taxpayer reimburses the seller for real estate taxes the seller paid for him or her, the taxpayer can usually deduct that amount. Do not include that amount in the basis in the property. The following settlement fees and closing costs for buying the property are part of the basis in the property: (60) • Abstract fees. • Charges for installing utility services. • Legal fees. • Recording fees. • Surveys. • Transfer taxes. • Title insurance. – Any amounts the seller owes that the taxpayer agrees to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. The following are settlement fees and closing costs a taxpayer cannot include in the basis in the property: (60) – Fire insurance premiums. – Rent or other charges relating to occupancy of the property before closing. – Charges connected with getting or refinancing a loan, such as: a) Points (discount points, loan origination fees), b) Mortgage insurance premiums, c) Loan assumption fees, d) Cost of a credit report, and e) Fees for an appraisal required by a lender. Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 2- Adjustments to Gross Income: major items, allowed by IRS to be subtracted from gross income, some limitations may apply: – Certain business expenses of reservists, performing artists, and fee-basis government officials. – Archer MSA and health savings account deduction. – Moving expenses. – One-half of self-employment tax. – Self-employed SEP, SIMPLE, and qualified plans. – Self-employed health insurance deduction. – Penalty on early withdrawal of savings. – Alimony paid. – IRA deduction. – Student loan interest deduction. – No-punitive damages awarded for personal injuries involving physical injury or physical sickness. Adjusted Gross Income (AGI) is used for calculating deductions, tax credits, and other tax benefits that are based on or limited by income. Medical expenses, donations, casualty losses and miscellaneous itemized deductions are all computed based on or are limited by the amount of adjusted gross income. 3- Deductions from AGI: Some expenses of a personal nature are allowed to be deducted which are divided into five categories: 1. Certain Medical and Dental Expenses. 2. Interest and taxes paid on the home. 3. Charitable donations. 4. Casualty and Theft Losses. 5. Job Expenses and Certain Miscellaneous Deductions, including union dues, tax preparation fees, safe deposit box fees, and non-reimbursed employee business expenses. B. Standard and Itemized Deductions: There two types deductions 1040 fillers can claim (i) Standard deduction, calculated automatically based on filling statues. (ii) Or itemize deductions- Itemized deductions include: -Medical expenses (less a % of Adjusted Gross Income – AGI), state and local taxes, charitable contributions, investment expenses, and miscellaneous deductions such as non-reimbursed employee expenses (less a % of AGI) subject to AGI maximum threshold level, being phased out completely once AGI reaches a certain level. IRS changes the threshold and applicable percentages each years. C- Personal Exemption This is some minimal amount recognized by congress needed by everyone for the basic necessities of life and therefore, excluded from taxation. For tax year 2015 it has been set as equal to $4,000 for each eligible person including tax payer, spouse and all eligible dependents. 2015 personal exemptions: – $4,000 for the taxpayer, unless a dependent of another. – $4,000 for the taxpayer’s spouse. – $4,000 for each eligible dependent. What is New: 1- Beginning in 2015 taxable year, the personal exemption will start to phase out for taxpayers with adjusted gross income (AGI) above certain amounts. For taxable years beginning in 2015, the personal exemption phases out for taxpayers with the following adjusted gross income (AGI) amounts: Filing Status Beginning Phase-out AGI Completed Phase-out AGI – Married Filing Jointly, Surviving Spouses $309,900 $432,400 – Head of Household $284,050 $406,550 – Single (other than Surviving Spouses and Heads of Households $258,250 $380,750 – Married Filing Separately $154,950 $216,200 2- Net Investment Income Tax A new Net Investment Income Tax (NIIT) of 3.8% will be applied on investment income in excess of the following filing thresholds. NIIT be reported on form 8960 and will affect U.S. citizens and residents only: – Single, where income exceeds 200,000. – Married filing jointly, 250,000. – Married filing separately, 125,000 – Qualified widow(er) with dependent child, 250,000 Net investment income will include gains from property held for investment, such as stocks, bonds, mutual funds, etc., including gains on the sale of a principal residence in excess of the exemption amount, less expenses related to investments. For NIIT purposes, net losses from property dispositions cannot be less than zero (and therefore cannot offset other investment income), and are not available for carry forward to future periods. New Medicare Tax on Earned Income New form 8959, will be used to report the new Medicare tax of 0.9% of earned income in excess of the same income thresholds as for NIIT. In principle, employers must withhold the extra tax from wages exceeding $200,000 per year. Difficulty may arise with employees with multiple separate jobs, or spouse’s income on a joint return. (II) Self Employment and Income Tax Any one carrying business as a sole proprietor (unincorporated) in the United States is subject to income tax on his/her gross income less allowable deductions related to that income. A separate Schedule C must be filed the income tax return for each business. IRS uses strict and complex guidelines on how to calculate amount of investment “at risk”, level of actual participation in the enterprise, and the nature of the business to determine the degree of and the timing of the deduction of expenses and losses from self employment small business activities. Self-employment income is subject to the Self Employment Tax, which for tax year 2015,is equal to 15.3% the first $113,700 and 2.9% thereafter, and is on top of regular income taxes payable. The Self Employment Tax is the equivalent Canada Pension Plan contributions on self-employment . 50% of this tax is deductible from taxable income. Self employed tax payers may, depending on their income of the current year, be required by IRS to pay quarterly income tax installments in anticipation of the following taxation year. (III) Partnerships, Rental Income, Trust and Royalty Income In addition to reporting each individual’s partnership income on Schedule E of his or her1040 return; all partnerships operating in the U.S. must also file a separate form 1065 tax return annually. The partnership uses form K-1 to report allocation of its income, expenses and other items to partners. Rental and royalty income are also reported on Schedule E. U.S. residents who declare rental income on their Schedule E from sources outside United Sates including Canada, must follow U.S. guidelines in determining their income and expenses. In many cases the US rules can be significantly different from those used in Canada and in other courtiers. Losses from real estate rentals can generally be deducted against other income in Canada. In Canada capital cost allowance CCA cannot be used to generate or increase a loss from real estate operations. In the U.S., depreciation may be used to show loss. In fact, depreciation calculations are compulsory , but availability of the losses to be used as deduction, may be limited or deferred by the “passive activity loss” rules. (IV) Corporations and Taxation A corporation carrying on business in the U.S. must file corporate income tax return each fiscal year. Corporate taxes must be filed whether the company has been incorporated in the U.S. or outside United States. Form 1120 and its variations are used depending on whether the company is a Limited Liability entity (LLC), an S corporation or other type of registered business. Identification Numbers Every individual who files a U.S. tax return must enter their tax identification number in their income tax return. Such numbers are issued the Social Security Administration office and verified by the IRS. For U.S. residents, citizens, and work permit visa holders, a Social Security Number (SSN) is required, and can be obtained by completing form SS-5 (Social Security Card application). Spouses, children and other eligible non-resident dependents being claimed as dependents on a U.S. tax return but not permitted to work in the U.S., an Individual Taxpayer Identification Number (ITIN) must be applied for. An ITIN number can be requested by completing form W-7 (Application for IRS Individual Taxpayer Identification Number). Original certified copy of a passport, issued by the home country passport office must be attached to all W-7 applications. Tax forms which do not have the appropriate identification numbers or form W-7 and supporting documents attached, will be rejected by the IRS, and claims for dependents without proper ITIN numbers will not be allowed. . EIN is equivalent to the Canadian BIN number. Form SS-4 is used by Partnerships, corporations and self employed persons to request an EIN number. (V) State Taxes Several U.S. states have their own income tax administration for imposing state income tax to state residents or those with income from within the state or corporations, partnerships doing business in that state. Income tax laws, rates, methods of taxation, rules of computation and filing requirements vary from state to state and from entity to entity. Some states do not recognize foreign tax credits for taxes paid to foreign countries or international jurisdictions.

United States (U.S.A)-Canada cross border taxation and Canadian Residents Going Down South for work or pleasure.

Read this article if you are a Canadian resident and spend part of the year in the United States (U.S.A) for health reasons, to vacation, work as a regular employee or co op student or for other reasons, and you still maintained residential ties in Canada.

This page contains valuable information about certain income tax requirements that may affect you. It will also help you understand the United States and Canada-U.S cross border tax laws that may apply to you.

Please see links at the bottom of this page to Canada Revenue Agency (CRA) and Internal Revenue Service (IRS) websites for more information about:

U.S. citizens; permanent resident of United States (U.S. Green Card holders, filing 1040 U.S.A tax returns); or individuals who have residential ties to a country other than the U.S. and Canada.

Residential ties:

If you maintain one or more of the following ties to Canada while leaving outside Canada, Canada Revenue Agency (CRA) will usually consider you a factual resident of Canada. Residential ties include things such as:

  • Having a home in Canada (owned or rented);
  • Having a spouse or common-law partner and dependants who stay in Canada while you are in the U.S.;
  • Leaving personal property, such as a car or furniture in Canada; and
  • Maintaining social ties in Canada.
  • Keeping your driver’s license.
  • Keeping a Canadian bank account or credit card.
  • Keeping your health card

When completing the “Identification” area on your return, do not enter a date of entry or departure. Only immigrants and emigrants need to use these spaces. If you enter a date of entry or departure, CRA may reduce your claim for federal and provincial or territorial non-refundable tax credits.

How Canadian income tax laws apply

As a factual resident, your income will be taxed as if you were present in Canada the entire year. When preparing your income tax, you will continue to:

You must report in your income tax return, all of your world income received from sources inside and outside Canada for the year.

You may also claim all federal and provincial or territorial non-refundable tax credits, deductions and expenses that apply to you.

Your province or territory of residence is where you keep residential ties   in Canada and all taxes and credits including GST/HST credit must be calculated accordingly.

You must report on your Canadian income tax return any NR4 or NR4‑OAS information slip which indicates income from Canada (such as Old Age Security pension, Canada Pension Plan benefits, and Quebec Pension Plan benefits).

Canada Revenue Agency (CRA) guide to Completing your Canadian Income tax (T1) return

The following link will take you to Canada Revenue Agency’s (CRA) website. The booklet contains a lot of valuable information that is very useful if you decide to prepare your income tax on your own – General Income Tax and Benefit Guide and forms book. However, this article includes some additional information you will need. If you are a factual resident of Canada, complete Form T1248, Information about Your Residency Status (Schedule D), and attach it to your return.

You can also call Fairtax Business Services (see our contact page for phone numbers, email and a map of our location) and we will be more than happy to prepare your Income Tax Returns (T1) for a reasonable fee

Foreign property:

You may have been in one of the following situations:

  • at any time in during the tax year, you held foreign property with a total cost of more than CAN$100,000;
  • in 2014 or a previous year, you loaned or transferred funds or property to a non-resident trust; or
  •  you received funds or property from, or you were indebted to, a non-resident trust under which you were a beneficiary.
  • If any of these situations apply to you, special rules may apply. For more information, see your income tax guide or call us.

Did you receive U.S. lottery or gambling winnings?

These winnings are not taxable in Canada, so you do not have to report it on your Canadian return. Additionally, you cannot claim a credit for the taxes withheld on your winnings. But you may want to consider filling a US income tax return (1040NR) to claim a refund on some or all of the taxes taken off from your winnings. Please contact Fairtax Business Services for more details and eligibility.

Did you have rental income from property in the U.S.?

If so, keep records to support your income and expense claims. For more information, see Canada Revenue Agency’s (CRA) Guide T4036, Rental Income or call Fairtax Business Services.

Claiming medical expenses paid in the U.S.

You can claim eligible expenses that were paid for yourself, your spouse or common-law partner, and certain other individuals who were dependent on you for support. You can claim medical expenses that were paid in any 12-month period ending in the year, if they were not claimed in the previous year.

For more information, call us or see lines 330 and 331 in your General Income Tax and Benefit Guide or see Interpretation Bulletin IT-519, Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction in CRA’s website.

Premiums paid to private health-services plans?

You can claim most of them as a medical expense on your return.

For more information, call Fairtax Business Services or see line 330 in your General Income Tax and Benefit Guide, or see Interpretation Bulletin IT-519, Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction.

Donating to U.S. charities

If you are including U.S. income on your return, you can claim a credit for donations to U.S. charities that would be allowed on a U.S. return. The total donations to U.S. charities you can claim cannot be more than 75% of the net U.S. income you report on your Canadian return.

Federal foreign tax credit

If you paid U.S. tax on U.S. income that you are reporting on your Canadian return, you may be able to claim a federal foreign tax credit to reduce your Canadian federal tax payable.

For more information on how to claim the foreign tax credit please call Fairtax Business Services, or see line 405 in your General Income Tax and Benefit Guide. For more information please call us, or see CRA’s Form T2209, Federal Foreign Tax Credits, or see Interpretation Bulletin IT-270R3, Foreign Tax Credit.

Need more information?

If you need more information, you can call Fairtax Business Services or visit the Canada Revenue Agency Web site, or you can call CRA at 1-800-959-8281 or CRA’s International Tax Services Office at 1-800-267-5177 (calls from Canada and the U.S.).

How United States ( U.S. ) tax laws apply

As a Canadian resident who is not a U.S citizen or Green card holder, who spends part of the year in the U.S., you are considered either a resident alien or a non-resident alien of the U.S. for tax purposes.

Resident aliens are generally taxed in the U.S. on income from all sources worldwide (should file a 1040 tax return), and non-resident aliens are generally taxed in the U.S. only on income from U.S. sources (should file 1040NR tax form). Therefore, it is important for you to determine if you are a resident alien or a non-resident alien.

Resident alien

You are considered a resident alien if you meet the substantial presence test.

If you were in the U.S. for 183 days or more in 2020, you meet the substantial presence test. If this is your situation, you are considered a resident alien of the U.S. Although the comments in this section and the following section do not apply to you, you should read “Residence under the treaty” and “Do you have to file a U.S. tax return?”.

If you were in the U.S. for less than 31 days in 2020, you do not meet the substantial presence test. If this is your situation, you are considered a non-resident alien of the U.S. Although this section does not apply to you, you should read “Do you have to file a U.S. tax return?“.

If you were in the U.S. for 31 to 182 days in 2020, you may meet the substantial presence test. Please call Fairtax Business Services for more information.

Substantial presence test

To determine if you are a U.S. resident alien or a non-resident alien that is to see if you meet the substantial presence test use the following example:

For 2020 tax year:

  • days you were present in the U.S. during 2020 times 1
  • days you were present in the U.S. during 2019 times 1/3
  • days you were present in the U.S. during 2018 times 1/6

The days do not have to be consecutive, and you are treated as being present in the U.S. on any day you were there for part or all of the day.

If your total is at least 183 days, you have met the substantial presence test and you are considered a resident alien for 2020 taxation year. If this is your situation, call Fairtax Business Services or see CRA’s site “Are you a non-resident alien?” for more information.

If your total is less than 183 days, you are considered a non-resident alien for 2020. If this is your situation, call us or see CRA’s site “Do you have to file a U.S. tax return?“.

Example (2020 tax year):

Albert and Lori are residents of Canada and own a mobile home in Florida, where they spend part of the year. They are not a United States citizen or Green card holder. Although they have no U.S. source income, they still need to determine their U.S. residency status for income tax purposes. To do this, they have to calculate how many days they were present in the U.S. during 2014, 2015, and 2012 in total.

Number of days present in the US :

2020: 160

2019: 180

2018: 120

Total = (160*1) + (180*1/3) + (120*1/6)

= (160) + (60) + (20)

= 240 days

Since this total is at least 183 days during the three-year period, they meet the substantial presence test, and they are considered resident aliens by the U.S. for 2020 and may have to file 1040 U.S. income tax return.

For more information on this subject, cal Fairtax Business Services or  Internal Revenue Service (IRS) Publication 519, U.S. Tax Guide for Aliens.

Non-resident alien

You are a non-resident alien if you do not meet the substantial presence test. Please call us or read Do you have to file a U.S. tax return for more information.

Exception:

If you have figured out that you are a resident alien because you meet the substantial presence test, you can be considered a non-resident alien if:

  • you were present in the U.S. for less than 183 days during the tax year.
  • your tax home was in Canada; and
  • you had a closer connection to Canada than to the U.S. during the year.

Tax home

Your tax home is the location of your principal place of business (for self-employed people) or employment, regardless of where you maintain your family home.

If you are not employed or self-employed, your tax home is where you regularly live. It can be a house, an apartment, or a furnished room, and you can rent or own it. It must have been available to you continuously and at all times throughout 2014, and not just for short stays during the year.

Closer connection to Canada

You are considered to have a closer connection to Canada than to the U.S. if you maintain more significant ties to Canada. Some important ties include the location of the following:

  • your permanent home and business activities;
  • your family;
  • personal belongings, such as cars, furniture, clothing, and jewellery;
  • social, political, cultural, or religious organizations to which you belong;
  • the jurisdiction where you vote; and
  • the jurisdiction where you hold a driver’s licence.

If you have applied to the U.S. Citizenship and Immigration Services for Lawful Permanent Resident status in the U.S. (i.e., applied for a “green card”), or you have been granted permanent residency status (i.e., granted a “green card”), you will not be eligible to claim the closer connection exception.

Advising the IRS about your closer connection to Canada?

You have to file IRS Form 8840, Closer Connection Exception Statement for Aliens, to advise the IRS that your tax home is in Canada and that you maintained more significant ties in Canada than in the U.S. during 2020.

If you have to file a U.S. income tax return for 2020, attach Form 8840 to it. If you do not have to file a return, send Form 8840 by June 15, 2021, to:

Internal Revenue Service Center

Austin TX 73301-0215

USA

Each individual claiming the closer connection exception has to file Form 8840. Therefore, if you have a spouse and children, each of them must file Form 8840 to claim the exception.

Note

if you do not file Form 8840 by June 15, 2021, you will not be eligible to claim the closer connection to Canada, and you will be considered a resident alien. However, if you tried to comply with this filing requirement but were unable to do so for a valid reason, attach an explanation to Form 8840 when you file it.

Example

Albert and Lori have determined that they are resident aliens for 2020 because they meet the substantial presence test. However, they file Canadian returns as residents of Canada, and their family, belongings, and permanent home are in Canada. Also, they maintain social and religious ties in their home town in Canada.

Since Albert and Lori have closer ties to Canada than to the U.S., and they were present in the U.S. for less than 183 days during 2020, they may be considered non-residents of the U.S. under the closer connection exception.

Albert and Lori each have to submit Form 8840 by June 15, 2021, to advise the IRS of their closer connection to Canada, or they will not be eligible for the exception. If they do not file on time, they may be subject to U.S. income tax on their worldwide income.

Each year, you have to determine if you are a resident alien or a non-resident alien. And each year, if you are a resident alien with closer ties to Canada than to the U.S., you have to file a new Form 8840.

Residence under the treaty

If you are a resident alien because you met the substantial presence test and you cannot claim the closer connection exception, you may be able to determine your residency status under Article IV of the Canada-United States Income Tax Convention.

You may be treated as a non-resident alien under Article IV, for the purposes of calculating your U.S. income tax liability, if you meet the following conditions:

  • you are considered a resident of both the U.S. and Canada under each country’s tax laws (i.e., you are a Canadian resident and a U.S. resident alien); and
  • your permanent home is in Canada .

If you also have a permanent home in the U.S., you may be treated as a non-resident alien if your personal and economic ties are closer to Canada than to the U.S.

For more information on this subject, see Chapter 9 of Publication 519, U.S. Tax Guide for Aliens. If you are claiming to be a resident of Canada under Article IV of the Canada-United States Income Tax Convention, you should complete and attach Form 8833, Treaty-Based Return Position Disclosure Under Section 6614 or 7701(b), to your U.S. income tax return.

Do you have to file a U.S. tax return (Form 1040 or 1040NR)?

Resident aliens

Generally, resident aliens have to file a U.S. tax return to report worldwide income for the year if their annual gross income exceeds certain U.S. dollar amounts. For more information, see the section called “Filing Requirements” in the Instructions for Form 1040.

If you are a resident alien who cannot be considered a non-resident alien under Article IV of the Canada-U.S. Income Tax Convention or under the closer connection exception, you should file Form 1040 as a resident alien if you meet the filing requirements described in the Form 1040, Instructions.

Non-resident aliens

If you are a non-resident alien, your income that is subject to U.S. income tax is divided into two categories:

  • income that is effectively connected with a trade or business in the U.S. (including income from the sale or exchange of U.S. real property); and
  • income that is not effectively connected with a trade or business in the U.S., but is from U.S. sources (including interest, dividends, rents, and annuities).

Effectively connected income, after allowable deductions, is taxed at the same rates that apply to U.S. citizens and residents. Income that is not effectively connected is taxed at 30% or a lower treaty rate.

As a non-resident alien, you have to file a U.S. tax return (Form 1040NR) by June 15, 2021, if:

  • you are engaged in a trade or business which would produce income that is effectively connected (even if you had no income in the tax year from that trade or business);
  • you have U.S. source wage income which is greater than one personal exemption (no more credit for 2020); or
  • you have income that is not effectively connected and that did not have sufficient tax withheld at source.

If you have income that is not effectively connected and had too much tax withheld at source, you should file a U.S.  Tax return to claim a refund of the overpaid tax.

You have to file your U.S. return by April 15, 2021, if you were an employee in the U.S. and received wages subject to withholding.

For more information, call us or see IRS Publication 519, U.S. Tax Guide for Aliens, or contact the IRS.

Did you receive U.S. gambling or lottery winnings?

As a non-resident alien, you are subject to tax on gross U.S. gambling or lottery winnings at the rate of 30% at the time of winning. However, winnings from blackjack, baccarat, craps, roulette, and Big-6 wheel are exempt from tax.

If you received tax-exempt winnings, or if the correct tax was collected at the time of winning, you do not have to file a U.S. tax return if this is your only U.S. income.

Under the Canada-U.S. Income Tax Convention, you can claim your U.S. gambling losses up to the amount of your U.S. gambling winnings for the year using the same rules that apply to U.S. citizens and residents. To claim a refund of taxes withheld from gambling winnings, you must file Form 1040NR, U.S. Non-resident Alien Income Tax Return. Please call us for more details, we can help.

Since proceeds from blackjack, baccarat, craps, roulette, and Big-6 wheel are exempt from tax, you cannot claim any wagering losses you incur from these games. Be sure to keep an accurate record of your U.S. gambling losses and winnings.

Do you own U.S. property?

If you own U.S. property, such as a condominium or house, you should be aware of the tax consequences of renting out or selling U.S. real estate.

Did you receive rental income from this property?

As a non-resident alien, you are subject to U.S. income tax on rental income you receive from U.S. real property. You are considered to have received the income from a U.S. source, even if it was paid to you while you were in Canada. Rental income is not effectively connected with the conduct of a U.S. trade or business and, as such, is subject to a 30% tax on the gross income, with no expenses or deductions allowed.

However, under the Internal Revenue Code, you can elect to treat rental income as income that is effectively connected with the conduct of a U.S. trade or business. If you make this election, you are taxed on the net income. You can claim expenses related to owning and operating the rental property during the rental period, including a mandatory depreciation charge.

To make this election, attach a letter to Form 1040NR, U.S. Non-resident Alien Income Tax Return, stating that you are making the election. Include the following information:

  • the location of all your real property in the U.S.;
  • the extent of your ownership in the property;
  • a description of any major improvements to the property; and
  • a list of any previous taxable years for which you made an election, or revocation, to treat U.S. real property income as effectively connected with a U.S. trade or business.

For more information on this election, please see IRS Publication 519, Tax Guide for Aliens, under the section called “Income from Real Property.”

For information on rental income and expenses, get IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes).

If you have not made an election to treat your U.S. rental property income as effectively connected with a U.S. trade or business, then tenants or management agents (withholding agents) have to withhold a 30% non-resident tax from the gross rent and send it to the IRS using Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Person’s, and Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.

If you want to be exempt from the 30% non-resident withholding tax and are making the election to treat the U.S. rental properties as effectively connected with a U.S. trade or business, then you have to give the tenant or management agent Form W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States.

For more information on U.S. withholding taxes, see IRS Publication 515, Withholding of Tax on Non-resident Aliens and Foreign Entities.

Did you dispose of U.S. real estate?

As a non-resident alien, gains or losses you have from disposing of U.S. real property interests are considered to be effectively connected with a U.S. trade or business. If you sell or otherwise dispose of U.S. real estate, the purchaser, or his or her agent, is generally required to withhold 10% of the gross sale price at the point of sale. However, there are exceptions to this rule. For more information, see the section called “U.S. Real Property Interest” in IRS Publication 515, with holding of Tax on Non-resident Aliens and Foreign Entities or cal Fairtax Business Services.

You then have to file Form 1040NR, U.S. Non-resident Alien Income Tax Return, and the required schedules, to report the gain or loss. Call us for a free no obligation quote.

If you own the real property with another person such as your spouse, each of you has to file a Form 1040NR.

Stock in a U.S. corporation or an interest in a partnership may be treated the same as real estate if the corporation owns a certain amount of U.S. real estate or if the partnership owns U.S. real estate.

For more information on gains and losses from the sale of U.S. real property, see the section called “Real Property Gain or Loss” in IRS Publication 519, U.S. Tax Guide for Aliens.

U.S. estate tax for non-resident aliens

The U.S. imposes an estate tax on the transfer of a deceased person’s taxable estate. The taxable estate of a Canadian non-resident alien includes the following assets located in the  U.S. :

  • real estate and tangible personal property;
  • stock in a U.S. corporation;
  • debt issued by, or enforceable against, a U.S. entity (but most corporate debt instruments issued after 1984 are exempt from U.S. estate tax); and
  • interest in a partnership, if the partnership’s principal place of business is in the U.S.

The U.S. estate tax is based on the fair market value of the asset on the date of death, so there is no impact from a profit or loss because of a deemed disposition on the date of death. Non-resident aliens cannot claim foreign tax credits on a U.S. estate tax return for deemed-disposition capital gains income taxes paid to Canada.

For the transfer of a decedent’s U.S. assets, the IRS requires Form 706NA, United States Estate (and Generation-Skipping Transfer) Tax Return if the value of the U.S. assets exceeds $60,000 on the date of death.

The Canada-U.S. Income Tax Convention provides significant changes to the U.S. estate tax provisions if you own U.S. property. These provisions are retroactive to November 10, 1988.

For more information, see Form 706NA and instructions from the IRS.

Individual Taxpayer Identification Number (ITIN)

If you are a non-resident alien who has to file a U.S. tax return, you must have a taxpayer identification number. Generally, this is a Social Security Number from the United States. If you were issued a Social Security Number, you should use it. You must not use your Canadian social insurance number.

A non-resident alien who does not have a taxpayer identification number must apply for one. Generally, non-resident aliens are not eligible to apply for Social Security Numbers unless they have been authorized to be employed in the United States. If you are ineligible to apply for a U.S. Social Security Number, then you must apply for an IRS Individual Taxpayer Identification Number (ITIN).

Individual Taxpayer Identification Numbers (ITINs) will expire if not used on a federal income tax return for any year during a period of five consecutive years, the Internal Revenue Service announced today. That is, the IRS will not deactivate an ITIN that has been used on at least one tax return in the past five years. To give all interested parties time to adjust and allow the IRS to reprogram its systems, the IRS will not begin deactivating ITINs until 2016.

If you were issued a U.S. temporary identification number by the IRS for a tax year before 1996, you can no longer use that temporary number and must apply for an ITIN. ITINs are intended for tax use only. They have no effect on being allowed to work or live in the U.S.

Use IRS Form W-7, Application for IRS Individual Taxpayer Identification Number, to apply for an ITIN. Under new procedures which went into effect in December 2003, your Form W-7 must be attached to a U.S. tax return. For further information on ITINs please visit the IRS Web site.

State and local taxes

You may be required to file a state or local income tax return for the state or city you were in while visiting the United States. Different states and cities have different filing requirements. For more information, contact the state or city authorities where you stayed. For further information, on state and local taxes in the United States please refer to the State and Local Government on the Net Web site.

Need more information from the Internal Revenue Service (IRS)?

While you are in Canada, if you need more information about U.S. tax laws or tax-filing procedures, write to:

Internal Revenue Service

P.O. Box 920

Bensalem PA 19020

USA You can also contact the IRS office in Pennsylvania by telephone at 215-516-2000.

If you are in the U.S., contact the IRS office in your area.

You may also get forms, publications, and tax information by visiting the IRS Web site.

On this site you can also find U.S. tax information for foreign nationals.