F1 Student - Various Tax Questions

[SueParker]

I am currently living in the US on an F1 student visa. I have been here since December and will be remaining as a student until the end of 2011. My intention is to remain permanently, on a TN visa initially and eventually on to permanent residency. I have a few tax questions that I'm hoping you may be able to answer, or at least point me in the right direction.

First my situation. I am on a 20-hour a week research assistantship at my university for which I receive a tuition credit and monthly stipend. I pay taxes on my stipend, (about 10-12%) and will be filing a US tax return this year. My income is greater than the $10,000 allowed by the Canada-US tax treaty. I am technically still an employee of my previous Canadian employer, though I am on an unpaid leave of absence. I receive no income, but continue to pay my monthly LTD and pension contributions and receive 100% pension matching. I co-own a home in Canada which I plan on selling in the spring of 2010. I may purchase a home in the US this year. I have significant RRSP investments and pension contributions in my Canadian accounts.

1. What if any federal/provincial taxes will I have to pay on my US income?
2. Will I be subject to any taxes when I sell my home in Canada next year?
3. What is the best way to withdraw my RRSP investments and pension contributions so as to pay the lowest withholding amount? I currently have no Canadian income, and very little international income. I know you can withdraw $10,000 per year tax free to pay for university, but it has to be payed back once you finish school, and as I don't plan to return to Canada am not sure the consequences of this. I would like to withdraw some of this money this year if possible as I am considering buying a small house or condo.

Appreciate any help

[Steven]

The treatment of international students is unique in US tax law, I suggest you have a good read of IRS publication 519.

Essentially your earnings are exempt from FICA withholding and your employer should not be doing this withholding, however they commonly mistakenly do withholding. (They still must withhold income tax, just not FICA).

On your W-4 under question 6 you should write: "non-resident alien student" when you start work.

When you get your W-2 you file 1040NR together with Form 8843. The 8843 is to notify the IRS that you are a student.

If your employer has mistakenly withheld FICA you need to claim it back on Form 843. Another thing that sometimes causes confusion is non-resident alien withholding - as a Canadian you are exempt from this under the tax treaty.

This is all really great until you realize you're still liable to the full whack of Canadian income tax and CPP so the FICA exemption doesn't really help, all it does is reduce your foreign tax credit claim. The general guide for the T1 explains how to claim a foreign tax credit on T2209 and T2036.

You use your W-2 in the same way as you would use a T4 to complete your T1.

As your tax home remains Canada, your house is still your principal residence so you owe no taxes on it if you sell it. If you move your tax home to the US however it would become subject to capital gains tax.

There's no need to do anything about your RRSP, while your tax home is Canada it's the same as if you lived here, and under the 2008 tax treaty you can also keep it if you move your tax home to the US, you just have to declare it every year to the IRS on Form 8891. If you move your tax home to the US it does become next to impossible to contribute to your RRSP anymore, it's better to just start an IRA.

IRS publication 519 explains how to move your tax home to the US (if you want to do that), however the key point is that you need to sever residential ties to Canada as Canada is very keen on not allowing their tax revenue to move south. If you read CRA form NR-73 it will give you an idea what the CRA looks at, but mainly you need to ditch ties only a resident can have, such as a DL and healthcare card.

[SueParker]

Thanks for the great help Steve, just a few follow up questions.

If I sell my home in Canada in the same year that I move my tax home to the US, do I still have to pay capital gains? Where would I find out more information about that, and how much it would be?

Would I have a problem moving my tax home to the US if I am on an F1, or a TN visa, as these visas are only temporary? I intend to pursue permanent residency once I am finished school in a few years and have a permanent employer.

Once my tax home is in the US, would I still have to pay withholding if I wanted to withdraw on my RRSPs, or transfer them to an IRA? I'm afraid I'm not too familiar with how IRAs work yet, I'm just trying to figure out any way to move my money from Canada to the US (eventually) with the least amount of tax possible.

Thanks again, I'll start looking for those publications you mentioned!

[Steven]

If I sell my home in Canada in the same year that I move my tax home to the US, do I still have to pay capital gains? Where would I find out more information about that, and how much it would be?

It depends on the specific date you leave, so say you sell the house on June 30th and move your tax home on July 1st there's no CGT. Even if you moved say, in March and sold the house in September it would be trivial as the house would increase in value very little over that period. Probably zero. It's just you can avoid paperwork doing it the other way around. Have a read of the CRA capital gains tax guide for more info.

Would I have a problem moving my tax home to the US if I am on an F1, or a TN visa, as these visas are only temporary? I intend to pursue permanent residency once I am finished school in a few years and have a permanent employer.

The IRS will be more than happy to tax your worldwide income at the earliest available opportunity. The real problem is moving your tax home back to Canada if you decide to leave. Read IRS publication 519, specifically the bit about dual-status returns.

Once my tax home is in the US, would I still have to pay withholding if I wanted to withdraw on my RRSPs, or transfer them to an IRA? I'm afraid I'm not too familiar with how IRAs work yet, I'm just trying to figure out any way to move my money from Canada to the US (eventually) with the least amount of tax possible.

I'm not sure frankly and I'm not sure anyone is because this is a new thing that only started last year and I think it's the only situation in which the US recognizes a foreign govt. tax shelter for individuals so it's very rare as well.

Under the treaty an RRSP is treated as an IRA, and an IRA is a very similar concept to an RRSP, i.e. if you withdraw money from it prior to retirement at the required age, you have to pay income tax on it. But this is why you shouldn't close out your RRSP until after you've moved your tax home if you want to get rid of it, because US income tax rates are lower. Just remember you must file (the current) Form 8891 with your 1040.

Getting hold of someone at the IRS to help you with this is no mean trick, you need to talk to the tax treaty division, there are specialists there in the Canadian tax treaty. What you need is the 2009 edition of IRS publication 597. Good luck with that.