Sailing Permit for TN Leaving the US

[dfish]

Speaking briefly with our CPA about leaving the US to return to Canada, he indicated that we would require a sailing permit from the IRS before leaving.

We have been living in the US for 14 years on a TN & TD status. We became non-residents of Canada for tax purposes. We are now thinking about establishing ties back with Canada, but still working part time in the US and residing between the 2 countries. If we do this do we need to obtain a sailing permit from the IRS?

Our current CPA is not up on cross border issues. He did not really know what a TN or TD was. And he thought we would need to see an immigration attorney before we left the US. I indicated that we are not Green Card holders or H1B Visa holders either, but a
TN or temporary guest workers.

Anyways I would appreciate clarification on this issue if anyone know about sailing permits.

[Steven]

You don't need to see an immigration consultant.

If you establish ties to Canada and you're Canadian citizens, basically your tax home moves back to Canada. It's very hard indeed to convince the CRA that a Canadian living in Canada who is employed in Canada is non-resident for tax purposes, as you will see if you read NR-73.

You need to have a read of IRS publication 519.

I have to say that moving your tax home out of the US and back to Canada involves a lot of paperwork and in various attempts to figure out what all the paperwork is I've never been able to pin it all down, there always seems to be yet another form to fill in and return.

The main thing you need to is file dual-status for 2009, i.e. a pro-rated 1040 for the number of days you were in the US and a 1040NR for the rest of the year, publication 519 explains how to do this.

A sailing permit is a 1040-C, which you'll probably also need to file, this basically is a calculation of your withholding up to that point and you have to pay up before you leave (if it's been done correctly it won't be much if anything, you might even get a refund).

If you're there for more than eight years you'll probably need to file 8854s for however long, depending on what your US-source income is, 519 explains this.

You may also need to file Form 8833 because you currently meet the substantial presence test for 2009, so the IRS may require you to make a formal tax treaty claim in order for you to be allowed to file non-resident for the rest of the year. Usually it comes up if your income is over $100,000, but they're not clear what that means, this year, last year, from what source, etc. You'd have to call them.

Under the 2008 tax treaty IRAs are treated as RRSPs in Canada, however you have to declare them to the CRA using some as yet unpublished form (the T1 instructions this year simply say to call them).

Of course you'll also have to file a pro-rated T1 for 2009 for the portion of the year after you move back to Canada.

Once you've moved back the 1040NR you file for the rest of the year will reflect any US-source income you then receive. You claim a foreign tax credit in Canada on T2209 and T2036 for any US income tax/FICA taxes.

If you're employed by a US company while living in Canada they must have a Canadian payroll, i.e. business number and so on and issue you a T4, or alternatively you can become a sub-contractor, i.e. set up your own company or register as self-employed. You then invoice them. Under the tax treaty you have to pay tax proportionally based on where the work is done, which is pretty complex but it boils down to the fact you file a T1 in Canada and a 1040NR in the US (as an individual, as a corporation it would be T2 and 1120-F). You can't register as a non-resident self-employed person on TN-1, so by far the best way is to be self-employed in Canada and directly employed by them in the US, i.e. they give you a W-2 for the work physically done in the US.

Any social security taxes you pay in the US count towards CPP under the totalization agreement.