Canadians with US Citizenship, Green Card, Living and/or Working, Owning Property in the United States Canada Revenue Agency (CRA) imposes income taxes on residents of Canada, in other words, Canadian income tax system is based on residency. CRA has a complicated way of determining residential ties for income tax purposes. Those who are planning to emigrate from Canada should seek professional advice at least six months prior to their departure. On the hand, United States taxation system is based on either citizenship, Green Card, or residency. Therefore, Canadians who are also US citizens either by birth or naturalization, or holding Green Card will have to file income tax for both Unites States and Canada. Also, if you are a Canadian who just live or work in the US or have any kind of US-source income may find yourself subject to taxation on your worldwide income in both Canada and the Unites States. For US 1040 filers, a limited exclusion applies to income earned from non-US sources (form 2555, foreign earned income). There are a number of exemptions from income taxation in the U.S. and foreign tax credits covered under provisions in the Canada-United States Income Tax Convention of 1980 and the successive Protocols such as the Fifth Protocol effective 2008. But, these do not mean exemption from submitting an income tax return. It is very important to file U.S. income tax forms and all applicable elections accurately and on time. Failing to do so may result in a denial of the exemption(s) applied for and possibly resulting in double taxation if the taxpayer is also taxable in Canada. The following sections are only introductory in nature and a very brief summary of some of the income tax topics related to Canadian and the U.S income tax filing systems. These discussions do not represent a full and complete coverage of the income tax code. Readers should not use the information contained herein for any kind of tax planning. Accordingly, it is highly recommended to seek knowledgeable professional tax advice prior to using any of the information contained in this website.
Form W-2 – Wages, salary and withholding taxes
All employers who pay compensation, cash or noncash of at least $600 or more in a year or any amounts if income, Social Security, or Medicare tax was withheld services provided by an employee must submit a Form W-2 for each employee (even if the employee is related to the employer).
W-2 must show:
– Gross income, Income tax, Social Security, or Medicare taxes withheld
The Federal and State income tax is based on a pay-as-you-go tax payment principle. Employers and other payers are required to withheld applicable income taxes from each pay check and remit it to the IRS. Self-employed tax payers must estimate their taxes payable and send installments.
Employees and other taxpayers can use form W-4 to determine amount of withholding taxes and the rate
based filing status, number of exemptions and allowable deductions.
Estimated Tax Payments
Estimated tax payment is the other method of pay-as-you-go tax payment. Estimated tax is the method used by income earners such as self-employed, interest, dividends, alimony, rent, capital gains, gambling, prizes and awards. Estimated tax also may apply if the amount of income tax being withheld from salary, pension, or other income is not sufficient.
If the payments through withholding or estimated method is not enough, the tax payer may be charged late payment penalty.
Estimated tax liability for tax year 2016 applies if both of the following exist:
1. Amount owing is expected to be at least $1,000 for 2016, after deducting taxes withheld at source and refundable credits.
2. The taxpayer estimates taxes withheld at source plus all refundable credits to be less than the smaller of either:
a. 90% of the tax to be shown on the taxpayer’s 2016 tax return
b. 100% of the tax shown on the taxpayer’s 2015 tax return (there are special rules for farmers, fishermen, and higher income taxpayers).
If the taxpayer is filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, he or she generally will have to make estimated tax payments if he or she expects to owe tax of $1,000 or more when filing the return.
If the taxpayer is filing as a corporation he or she generally has to make estimated tax payments for the corporation if he or she expects it to owe tax of $500 or more when filing its return.
No estimated tax are payable for the current tax year if the taxpayer meets all three of the following situations:
1. There was no tax liability for the prior year.
2. The individual was a U.S. citizen or resident the entire year.
3. His or her prior tax year covered a 12 month period.
Carry Overs to other year(s) tax returns
Some unused tax credits or deductions can be applied to previous or future tax years. It is called carry back to a previous tax year, or carry forward to an upcoming tax year.
Carry over credits include:
1- Foreign Tax Credit
Any unused amount of qualified foreign tax credit is allowed to be carried back or carried forward to the taxpayer’s past or future income tax return. It can be carried back for one year or carryover for 10 years. To be eligible for carry over the credit must have been reported in Form 1116.
2- Home Office Deduction
Total expenses for home office deductions, including depreciation (must be taken last), must be more than the business gross income earned from the business use of the home. These type of expenses cannot be used to create or increase a business loss. Any loss exceeding eligible gross business income can only be carried forward and used next year,(same limitations apply). You must complete and file Form 8829, expenses for business use of home to calculate the allowable expenses.
Depreciations are over time long term partial deductions from cost of certain properties used in the business. Items such as computers, printers, furniture, tools and buildings can be depreciated over a certain period of time with a percentage of the basis (original cost) being deducted each year. Land is not depreciable, but .buildings, machinery, vehicles, furniture, and equipment are depreciable. Certain intangible assets, such as patents, copyrights, and computer software are also depreciable.
Depreciation starts just after the item is put into service for business use and ends after it has been removed, disposed, replaced or its initial cost has been fully recovered which may take several years.
Employees and Depreciation on Computers
An non self-employed (employee) taxpayer can claim computer depreciation deductions, if it is used in his or her work the computer’s use is for:
– The convenience of the employer.
– Required by the employer as a condition his or her employment.
Extension of time to file
A taxpayer may file Form 4868 asking an automatic extension of six months time for filing his or her return. Granting of the extension does not mean the tax payer can delay payment of taxes owed to him or her on time. Form 4868 must be submitted before the normal due date of the return. The form asking for extension may be filed over the phone or on line at the IRS website.
Partial payment of estimated tax liability can be done using a credit card at one of the approved IRS service providers. An automatic extension will be granted and a confirmation of such extension will be provided at the end of the credit card transaction.
If the amount of tax included with the extension request is less than sufficient to cover the taxpayer’s liability, the taxpayer will be charged interest on the overdue amount.
The taxpayer is considered to have reasonable cause for the period covered by this automatic extension if at least 90% of the actual tax liability is paid before the regular due date of the return through
if a tax payer finds out that mistakes or omissions have been made on the original return, he or she can file an amended 1040X return and correct the problem. 1040X cannot be e-filed. It must be filed on paper There are several reasons that one might find it necessary to file an amendment including:
– Change in filing status, income, deductions or credits. Generally, Form 1040X must be filed within three years from the date he or she filed the original tax return or within two years of the date he or she paid the tax.
A taxpayer cannot change his or her filing status from married filing jointly to married filing separately after the due date of the original return. An executor may be able to make this change for a deceased spouse.
Time for Filing a Claim for Refund
In order to claim a credit or refund, generally, a taxpayer must file the claim within 3 years after the date the taxpayer filed the original return or within 2 years after the date the taxpayer paid the tax, whichever is later. If a claim is not filed within allowed period, the taxpayer may find out the he or she is not entitled to the credit or refund.
The state tax situation may also be affected by changes arising from amending the Federal return.
Interest and Penalties
Interest may be charged on taxes not paid on time, even if he or she had filed an extension. The IRS will also charge interest on penalties imposed for failure to file, or filing an incomplete or fraudulent return. Interest is charged on the penalty from the due date of the return (including extensions).
If the filing of 1040X results in additional tax liability, it must be paid within 21 calendar days from the date of notice and demand for payment (10 business days from that date if the amount of tax is $100,000 or more. There might be penalties which are imposed in addition to interest charges on late payments. The taxpayer can ask for forgiveness of the penalty if he or she can show reasonable cause for late payment of tax.
In addition to any other penalties, the law imposes a penalty of $5,000 for filing a frivolous return. A
frivolous return is one that does not contain information needed to figure the correct tax or shows a substantially incorrect tax because the taxpayer takes a frivolous position or desire to delay or interfere with the tax laws. This includes altering or striking out the preprinted language above the space where the taxpayer signs.
A taxpayer’s refund may be reduced by any additional tax liability that has been assessed against the taxpayer. Also, a refund may be reduced by amounts a taxpayer owes for past-due child support or debts to another Federal or state agency.
Effect on State Tax Liability
If a taxpayer’s return is changed for any reason, it may affect his or her state income tax liability. This includes changes made as a result of an examination of the taxpayer’s return by the IRS.
The annual income tax return for individuals is due by the 15th day of the fourth month after the close of the tax year, usually April 15th. However, when the 15th falls on a weekend (Saturday or Sunday) or a holiday, the due date becomes the next regular working day. Therefore, if the 15th happened to be Saturday, the return would be due on Monday, April 17th.
If the taxpayer uses a fiscal year, the return is due the 15th day of the fourth month after the close of the fiscal year. For example, if the taxpayer’s fiscal year ends June 30, his or her tax return due date would be October 15.
If the return is mailed, it must be placed in the mail and postmarked on or before the due date. The practice of filing sooner is encouraged by the IRS. Generally, the earliest possible date is January 1, although few, if any, taxpayers are in a position to file this soon. Employees, for example, must wait for Form W-2 to be issued by the employer. The tax law allows the employer until January 31 to prepare and issue the necessary Forms 1099 or W-2.
If a taxpayer sends his or her return by registered or certified mail, the date of the filing is the postmark date. The registration receipt is evidence that the return was filed on the postmarked date. If a taxpayer sends a return by certified mail and has a receipt postmarked by a postal employee, the date on the receipt is the postmark date. The postmarked certified mail receipt is evidence that the return was delivered and postmarked on the date stamped by the United States Post Office. Most returns are filed at regional centers geographically dispersed across the United States. The address of the Internal Revenue Service Office serving the states in which the taxpayer lives can be found in the instructions to Form 1040.
Compensation, Dividends, Interest, Other Income, Social Security Compensation
Types of income subject to the Tax
The most common forms of income reported by the average taxpayer are compensation, dividends, and interest.
Compensation and Wages reported on Form W-2
All compensation for personal services is subject to the income tax. Compensation includes: salaries and wages, tips, commissions, fees for personal services, overtime pay, vacation pay and any other payment for providing personal services to an employer by an employee or to a customer, client. bonuses and performance awards are also usually taxable income.
Non taxable income
According to IRS the following list of income may not have to be reported as taxable income
– Adoption expense reimbursements for qualifying expenses.
– Child support payments.
– Gifts, bequests and inheritances (Subject to limits).
– Workers’ compensation benefits
– Meals and lodging for the convenience of the taxpayer’s employer.
– Compensatory damages awarded for physical injury or physical sickness.
– Welfare benefits.
– Cash rebates from a dealer or manufacturer.
Dividends Subject to Income Tax
Ordinary Dividends and Qualified Dividends
A taxpayer can assume that any dividend he or she receives on common or preferred stocks is an ordinary dividend, unless the paying corporation on its Form 1099-DIV – Dividends and Distributions states otherwise.
Qualified dividends are eligible to be taxed at a lower tax rate than other ordinary income.
Holding Period: The taxpayer must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Stock Options If the taxpayer receives an option to buy stock, he or she may have income, when the option is exercised, or when the stock is disposed. There are two types of stock options: statutory and non-statutory stock options.
Non-Non Dividend Distributions or return of the capital: A non-dividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. The taxpayer should receive a Form 1099-DIV or other statement showing the non-dividend distribution. On Form 1099-DIV, a non-dividend distribution will be shown in box 3. If the taxpayer does not receive such a statement, he or she reports the distribution as an ordinary dividend. A non-dividend distribution reduces the basis of the stock. It is not taxed until the basis in the stock is fully recovered. the non-dividend distribution, reduce the basis of the earliest purchases first. When the basis of the stock has been reduced to zero, report any additional non-dividend distribution the taxpayer receives as long or short term capital gain depending on how long you have been holding it.
Interest Subject to the Tax: With few exceptions, interest is fully taxable to the taxpayer receiving it.
Non-taxable or excluded Interest: Interest by a state, a territory, or any political subdivision of a state or territory, such as a city or a county, is excluded fully from Federal income taxation. However, tax-exempt interest must be reported on Line 8b, page 1, Form 1040 even though it is not taxed. Individual Retirement Arrangements (IRAs) Interest earned on an Individual Retirement Arrangement (IRA) is excluded from income until withdrawals are made from the account. This exclusion also applies to interest earned by Keogh retirement plans and other qualified pension or profit sharing plans. Education Savings Bond Program Interest income can be excluded on qualified U.S. Savings Bonds redeemed to pay for qualified higher education expenses. These are expenses for tuition and required fees at an eligible educational institution (such as an accredited college, university or eligible vocational school) or to a Coverdell education savings account for the taxpayer, his or her spouse, or his or her dependent(s).A qualified U.S. Savings bond is a Series EE savings bond that was issued after December 31, 1989, to an individual who has reached age 24 before the date of issuance and which was issued at a discount
Unemployment and Other Compensation
The term unemployment compensation means any amount received under a law of the United States, or of a State, which is in the nature of unemployment compensation. Thus, Section 85 applies only to unemployment compensation paid pursuant to governmental programs and does not apply to amounts paid pursuant to private nongovernmental unemployment compensation plans (which are includible in income without regard to Section 85). Generally, unemployment compensation programs are those designed to protect taxpayers against the loss of income caused by involuntary layoff. Ordinarily, unemployment compensation is paid in cash and on a periodic basis. The amount of the payments is usually computed in accordance with a formula based on the taxpayer’s length of prior employment and wages. Such payments, however, may be made in a lump sum or other than in cash or on some other basis.
If unemployment compensation was received during the year, the taxpayer should receive Form 1099-G – Sickness and Injury Benefits
In most cases, the taxpayer must report as income any amount he or she receives for personal injury or sickness through an accident or health plan that is paid for by his or her employer. If both the taxpayer and the employer pay for the plan, only the amount the taxpayer receives that is due to the employer’s payments is reported as income. However, certain payments may not be taxable.
Amounts in the nature of unemployment compensation also include cash disability payments made pursuant to a governmental program as a substitute for case unemployment payments to an unemployed taxpayer who is ineligible for such payments solely because of the disability. Usually these disability payments are paid in the same weekly amount and for the same period as the unemployment compensation benefits to which the unemployed taxpayer otherwise would have been entitled. Amounts received under workmen’s compensation acts as compensation for personal injuries or sickness are not amounts in the nature of unemployment compensation.
Amounts the taxpayer receives as workers’ compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers’ compensation act or a statute in the nature of a workers’ compensation act. The exemption also applies to his or her survivors.
Pay a taxpayer receives from his or her employer while he or she is sick or injured is part of his or her salary or wages. In addition, the taxpayer must include in his or her income sick pay benefits received from any of the following payers:
– A welfare fund.
– A state sickness or disability fund.
– An association of employers or employees.
– An insurance company, if his or her employer paid for the plan.
However, if the taxpayer paid the premiums on an accident or health insurance policy, the benefits he or she receives under the policy are not taxable.
Life Insurance and Disability Insurance Proceeds
A taxpayer must report as income any amount he or she receives for disability through an accident or health insurance plan paid for by his or her employer:
– If both the taxpayer and the employer have paid the premiums for the plan, only the amount he or she receives for disability that is due to his or her employer’s payments is reported as income.
– if the taxpayer pays the entire cost of a health or accident insurance plan, do not include any amounts he or she receives for disability as income on the tax return.
– If the taxpayer pays the premiums of a health or accident insurance plan through a cafeteria plan, and the amount of the premium was not included as taxable income to him or her, the premiums are considered paid by the employer, and the disability benefits are fully taxable.
-If the amounts are taxable:
o The taxpayer can submit a Form W-4S – Request for Federal Income Tax Withholding From Sick Pay, to the insurance company.
o Make estimated tax payments by filing Form 1040-ES – Estimated Tax for Individuals.
Amounts a taxpayer receives from an employer while he or she is sick or injured are part of his or her salary or wages.
Prizes and Awards
Almost all contest awards and prizes are now taxable compensation.
Prizes and awards in goods or services must be included in income at their fair market value.
Employee Achievement Awards
If an individual receives tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, he or she generally can exclude its value from income. However, the amount he or she can exclude is limited to the employer’s cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards the person receives during the year. The employer can tell the individual whether the award is a qualified plan award.
Winnings or gains from gambling, betting, and lotteries must be included in gross income. Even winnings or gains arising from illegal transactions (such as bootlegging, extortion, embezzlement, or fraud) are includible in the taxpayer’s gross income.
Income tax is withheld at a flat 25% rate from certain kinds of gambling winnings. Gambling winnings of more than $5,000 from the following sources are subject to income tax withholding:
-Any sweepstakes; wagering pool, including payments made to winners of poker tournaments; or lottery.
-Any other wager if the proceeds are at least 300 times the amount of the bet.
Winnings not paid in cash are taken into account at their fair market value.
Gambling winnings from bingo, keno, and slot machines generally are not subject to income tax withholding. However, the taxpayer may need to provide the payer with a Social Security number to avoid withholding. If the taxpayer receives gambling winnings not subject to withholding, he or she may need to pay estimated tax.
If a payer withholds income tax from a taxpayer’s gambling winnings, he or she should receive a Form W-2G – Certain Gambling Winnings, showing the amount he or she won and the amount withheld. The taxpayer should report the tax withheld on his or her 2015 Form 1040, along with all other Federal income tax withheld, as shown on Forms W-2 and 1099.
If a taxpayer has any kind of gambling winnings and does not give the payer his or her Social Security number, the payer may have to withhold income tax at a flat 28% rate. This rule also applies to winnings of at least $1,200 from bingo or slot machines or $1,500 from keno, and to certain other gambling winnings of at least $600.
Gambling losses can be deducted to the extent of taxpayer’s winnings. Gambling winnings are reported on Form 1040 line 21. For year 2015, gambling losses are deducted as an Itemized Deduction on line 28 of Form 1040 Schedule A. Only taxpayers that itemize can claim gambling losses.
It is important to keep an accurate diary or similar record of gambling winnings and losses. To deduct losses, the taxpayer must be able to provide receipts, tickets, statements or other records that show the amount of both winnings and losses.
When employees receive cash tips of $20 or more in a calendar month, they are required to report to their employer the total amount of tips they received.
Allocated tips are tips that an employer assigned to an individual in addition to the tips he or she reported to the employer for the year. The employer will have done this only if
1. The taxpayer worked in an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees.
2. The tips the taxpayer reported to the employer were less than his or her share of 8% of food and drink sales.
Penalty for Not Reporting Tips
If a taxpayer does not report tips to his or her employer as required, he or she may be subject to a penalty equal to 50% of the Social Security and Medicare taxes or railroad retirement tax owed on the unreported tips. The penalty amount is in addition to the taxes the taxpayer owes.
The most common types of royalties are from copyrights and patents. Additional common royalties are from oil, gas, and mineral properties extracted from the taxpayer’s property. Royalties from copyrights on literary, musical, or artistic works, and similar property, or from patents on inventions, are amounts paid to the taxpayer for the right to use his or her work over a specified period of time. Royalties generally are based on the number of units sold, such as the number of books, tickets to a performance, or machines sold.