Confused about TN Visa vs. non resident for tax purposes

[peters]

Hi Steve:

However you're obviously taking risks doing it that way, the way you're supposed to do it is to carry on filing taxes in Canada, file as a non-resident in the US and claim a foreign tax credit for the income/social security taxes you paid in the US, so effectively you pay the Canadian rate.

I thought that after 183 days in the US year you will pass the "substantial presence test" and you can't file as a non-resident. You have to file as a resident alien.

I am quite new to this. We came to US in Sept 08 on TN/TD visa. I figured that since we are here less than 183 days in 2008 we have to file US tax return as non-residents i.e. 1040NR (or 1040NR-EZ) disclosing only W2 income from the US for the last 4 months of the year. We can't file jointly, but unfortunately "married - filed separately".

In Canada, for 2008, we can file "regular" tax return disclosing our foreign income from the US and also deduct the tax paid in the us.

For 2009 we will meet the substantial presence test, we can file the next year's tax return in the US as resident aliens and use the advantage of filing jointly as married.

I heard something about "exit Canadian return" which should show that we had left Canada and now work in the US. I we file the Canadian exit return for 2008, we shouldn't need to file Canadian return for 2009, except maybe for income on RRSP. But then it comes the TN-1 clause that one has to show the ties to Canada, it's rather confusing.

Peter

[Steven]

I thought that after 183 days in the US year you will pass the "substantial presence test" and you can't file as a non-resident. You have to file as a resident alien.

You have the choice, because under the tax treaty you can claim non-resident status by filing Form 8833 with your 1040NR. But you have to maintain residential ties to Canada as provided for under Article IV of the treaty.

I am quite new to this. We came to US in Sept 08 on TN/TD visa. I figured that since we are here less than 183 days in 2008 we have to file US tax return as non-residents i.e. 1040NR (or 1040NR-EZ) disclosing only W2 income from the US for the last 4 months of the year. We can't file jointly, but unfortunately "married - filed separately".

You can file either as a non-resident by filing 1040NR with 8840 (covering the last portion of the year) or alternatively you can file dual-status which means you file 1040NR for the part of the year you were in Canada and a 1040 for the remainder of the year, with all the deductions, personal exemptions and so on pro-rated to those months.

FIling as a non-resident is simpler because you've still got to file a T1 anyway (so two tax returns instead of three) but it's more expensive because you have to pay the difference between the US and Canadian rates to Canada after you've claimed the foreign tax credit in Canada.

Also moving your tax home back to Canada when you leave the US can be a bit of a pig.

In Canada, for 2008, we can file "regular" tax return disclosing our foreign income from the US and also deduct the tax paid in the us.

Yes, on the Canadian end and a 1040NR and 8840 in the US. Or alternatively you can pro-rate it to the time you left and moved to the US and then file dual-status in the US.

For 2009 we will meet the substantial presence test, we can file the next year's tax return in the US as resident aliens and use the advantage of filing jointly as married.

For 2009 you once again have a choice. If you filed dual-status in 2008, then for 2009 you would file a 1040 like the average American. If you filed US non-resident for 2008, then you could tell the CRA you left on December 31st and file a 1040 for 2009, or you could file a T1 for 2009 and file a 1040NR and an 8833 for your US-source income for 2009.

Which method to use depends on how long you plan on staying in the US and how much you earn.

I heard something about "exit Canadian return" which should show that we had left Canada and now work in the US. I we file the Canadian exit return for 2008, we shouldn't need to file Canadian return for 2009, except maybe for income on RRSP. But then it comes the TN-1 clause that one has to show the ties to Canada, it's rather confusing.

Even the IRS aren't 100% sure how TN-1 should file so I wouldn't worry about it too much. There is confusion over the treaty provisions.

If you move your tax home to the US you may also be subject to Canadian departure tax: http://www.cra-arc.gc.ca/tx/nnrsdnts/nd ... n-eng.html

RRSPs aren't really a problem since the tax treaty changes last year. They're still treated as a tax shelter in the US, you just have to file Form 8891 with your 1040.

I strongly suggest you read the first 15 pages or so of IRS publication 519.

[peters]

You can file either as a non-resident by filing 1040NR with 8840 (covering the last portion of the year) or alternatively you can file dual-status which means you file 1040NR for the part of the year you were in Canada and a 1040 for the remainder of the year, with all the deductions, personal exemptions and so on pro-rated to those months.

Thanks Steve.

I read the booklet.

I was wondering what would be the advantage of making an election for a dual-status return (as resident for the end of the year filing 1040) as oppose to filing non-resident 1040NR. It seems to me from the booklet that on both returns you cannot make standard deductions or file as married.

[Steven]

The advantage is that you pay less tax, because once your tax home is in the US you no longer have to pay Canadian income taxes. The US rate is usually lower than the Canadian rate (but not always). However you may not want to file dual-status for a couple of reasons, the first is that if you're only in the US short-term, it's a hassle to then move your tax home back to Canada. The second is that you are unable to cut residential ties to Canada for whatever reason.

Your deductions and so on will be pro-rated to the number of days you were in the US.

You can file as married if your spouse is in the US with you and wants to move tax home, essentially you file a dual-status joint return. Tax treaty provisions allow you to do that, which are reflected in question 3 on 1040NR.

[peters]

Hi steve, thanks for the answer.

I had income in canada from 1/2008-8/2008 and then moved to us for the last 4 months and had not have any income from canada. Main portion of my income was from the us.

If I move my tax home to US for 9/2008-12/2008 period and file 1040 as married. Do I still need to file 1040NR for 1/2008-8/2008 period if I did not have any income in the us or connected to us in this period? If yes what income do I report on this form?

Also on the canadian side, do I report only income from 1/2008 to 8/2008 on T1 form with no mention of w2 income in the us? Is there in canada equivalent of dual-status ta report?


You mention that it is a problem (or dificult) to move the tax home back to Canada. Why?

[Steven]

If I move my tax home to US for 9/2008-12/2008 period and file 1040 as married. Do I still need to file 1040NR for 1/2008-8/2008 period if I did not have any income in the us or connected to us in this period? If yes what income do I report on this form?

You report zero. Different IRS agents say different things when it comes to this situation. You don't have to file it if your income is less than $3,400, but does that mean during that period, for the whole year, or do you pro-rate it (i.e. $3,400 divided by the number of days)? Given that it only takes five minutes to put your name and address on it and put zero on it, it's not worth worrying about. Read the 1040NR instructions (and confuse yourself further).

The other thing is if you decide to file non-resident for the whole year and claim a tax treaty provision, you don't have to fill in 8833 if your income is less than $100,000. But it doesn't hurt if you do file it, which is why I always tell people to phone the IRS and get it from the horse's mouth because if they decide you do need to file it, it's not the easiest form to fill in. This "$100,000" limit is a bit funky because it really means primarily from direct employment, but that's vague. If it's all from other sources it's a $500,000 limit but what is the break point between the two? Like I said, phone the IRS, because it's somewhat subjective.

Also on the canadian side, do I report only income from 1/2008 to 8/2008 on T1 form with no mention of w2 income in the us? Is there in canada equivalent of dual-status ta report?

Yes there is, if you have Canadian-source income after you left that is subject to reporting, you have to file a non-resident T1 pro-rated for that portion of the year.

You mention that it is a problem (or dificult) to move the tax home back to Canada. Why?

Because it's not clear what forms you have to fill in, there are many different ones depending on your circumstances. Once again you have to file dual-status but beyond that circumstances vary so the filing requirements vary. Most people need to file a W-8BEN with their bank. A lot of people need to file 1040-C. Some people need to file 8854 or maybe 8840 or 8833. Once your tax home moves to the US, if you have over $10,000 in a foreign bank account you have to file the FinCEN FBAR form - well you stop doing that but then FinCEN can get suspicious because they're not part of the IRS.

What happens to your RRSP? Well it's somewhat clear what happens if you move your tax home to the US and keep it, but even the CRA doesn't seem to know what happens if you move your tax home to the US and then move it back, what is your contribution amount, because you can't contribute while you're in the US, so can you carry over unused amounts from x point in time? This is an entirely new thing for the CRA because only the new US-Canada tax treaty has a provision protecting RRSPs.

If you're subject to departure tax, well it's obvious what your bill is if you permanently leave Canada, but the bill can be pro-rated if you then come back and then you have to get your money back from the CRA. And what is the capital gains tax liability, say on real property that you leave behind in the US? Because you haven't disposed of it, you still have it. Technically when you do dispose of it, you owe the US money up to the point that you left the US (assuming it wasn't your principal residence) and then the rest of it goes to the CRA based on the capital gain after moving back. Try calculating that. Try remembering to report it even, several years down the road.

And so on.

I dare say for Joe Average it's not too much of a major problem, but lots of people have RRSPs so it's not just a problem for Mr Moneybags with his mansion in Palm Beach.

Oh and if you're lucky enough to become a US citizen and then move back to Canada, you have to file a 1040 every year until you die and there is a foreign income exclusion cap of $87,600 - earn over that and it's subject to US income taxes even though you don't live there anymore.

Once you become entangled with the IRS it's quite difficult to disentangle yourself.