Tax Query, Fed Withholding, ITIN, Canada/US

First, this is a great forum. Hats off to Canucksabroad and Steven the tax Guru for such knowledge sharing.
My family (my wife and two dependent kids) and I moved to the US from Canada in August, 2008. I came on a TN visa and the family on TD visa.
Income in Canada (as a university student) was about Canadian $25,000 from Jan 2008 to July 2008 and income in US (as a teacher) was US $35,000. As per the substantial presence test, I am a non-resident alien in the US. My tax withholding was higher in the US (for federal taxes I was considered a “single”) and the deduction also included Medicaid and Social Security. In Canada, I received Child Care benefit for both my kids (both under 5 years old) for the whole year 2008.

My taxation question as to filing is:

1. Should I file in Canada, report my US income in my worldwide income. And to claim refund in the US, fill the 1040NR and 8843. Should I be requesting for ITIN in US for my family, since they do not have a social security number. Will the ITIN help me for a higher return in the US (ie. consider me as a married rather than single? Any chance of getting a portion of FICA back since I am in US for a temporary period.
2. Any other way to maximize my tax return? Can I be deemed a resident in US for tax purposes (even though I do not pass the test) but because of the Canada-US treaty. This way I can add the Canadian income to the US return. After August, my ties to Canada were severed for taxation purposes unless the Child Care benefit and a bank account counts.

Thanks Steven and other fellas for their pearls of wisdom. I am a confused wreck right now.

You can file jointly on 1040NR, it does help to have an ITIN for your spouse, you file a W-7 with the 1040NR to request one for her. You can't get FICA back on TN-1, nor would you want to because your social security contributions count in Canada under the totalization agreement.

The substantial presence test is largely irrelevant for Canadians in non-immigrant classifications because of the tax treaty. Regardless of how long you are in the US (as a non-immigrant) you can choose to be resident or non-resident, it's just a matter of filing the right paperwork.

The Child Care benefit certainly does count, so you'll either have to sort this out with the CRA and refund the portion from August, or file as a resident of Canada for the whole year and a non-resident for the US for the period from August.

Generally I suggest to people not to move their tax home to the US unless you're certain you're going to be staying for a while, i.e. more than one complete calendar year. If you moved back to Canada, say, next August you're just going to be creating an enormous headache for yourself and unless you're earning large amounts there is little benefit. Only you know the answer to that one.

Anyway you have two choices for 2008 - you file a 1040NR (jointly if you want) together with Form 8840 and declare your US-source income to the IRS. In Canada you file a T1 as per usual, the only difference is that you claim foreign tax credits on T2209 and T2036. If you plan on filing as a resident of the US for 2009 you simply put on page 1 of the T1 that you left on 31st December. The general guide for the T1 explains how to claim foreign tax credits.

The other choice is to file dual-status. This requires you to file a pro-rated T1 for 2008, i.e. you reduce your deductions and credits and so on to the number of days you were in Canada and state the day you left on page 1.

In the US you will probably have to file a 1040NR covering the first portion of the year and then you file a pro-rated 1040 for the second part of the year. IRS publication 519 explains how to do this, there is a fairly comprehensive example in there.

Moving your tax home into the US is relatively straightforward although you usually end up filing three tax returns for that year, the trick is moving it out again when you leave. If you read further into publication 519 it explains this as well.

If you do decide to file as non-resident in the US you're supposed to declare this to your employer in the answer to question 6 on W-4 and you must say you're single (even if you're married). Nowhere on W-4 does it say this, although I'm told the 2010 W-4 will be revised to include it. The reason why is that the withholding calculations are different for non-resident aliens as they have less deductions available so the IRS decided to withhold slightly more.

Thanks Steven

-- Sat Apr 04, 2009 5:54 pm --

Tax Calculations for Canadians filing in the US as non-resident aliens: Married filing jointly or married filing separately.
For calculating the tax on form 1040NR, I just wanted to confirm if calculations for married Canadians uses the table for "married filing jointly" or "married filing separately". The instruction booklet accompanying the form states that if the "filing status box 3, 4, or 5, you must use the Married filing separately column". Box 3 is for married Canadians. Though the instruction booklet stresses using the "married filing separately" column there are posts on the Internet that state Canadians use "married filing jointly" column in the instruction booklet for Form 1040 (not 1040 NR).
Any help in this regard is appreciated. Thanks!

Thanks for the great information steven , In my case i followed according to what you wrote, since i came in mid july, i am treated as non resident alien,I have couple of questions if you can help me
1)My wife who is canadian citizen used to work in canada till july and on dependent TD visa in us, so as far as her case is concerned just file the canada tax till july and claim as dependent in US for rest of the year and file w7 for itin?
2) which method is straight forward like file T1 and then file 1040NR in US and claim foriegn tax credit in canada T1
or File as dual status (prorated method), which method is better in saving money because i think canada taxes are more than us.
3) since the US dollar is very high, should we convert US tax paid in canadian dollars and then claim in for foriegn tax credit in canada,


thanks
chan

Here is my son's situation:

He is a single Canadian on TN1 since July 26, 2008 in California.

He was in Canada from April 15, 2008 to July 26, 2008 having previously left Canada on holiday on November 15, 2007 until April 15, 2008.

For 2007 he filed his income tax return in Canada. For 2008 he has had no income in Canada. No drivers licence or health card, no property in Canada and no RRSP.

He has been promoted this year by his company and they have also filed H1B for him in the hope of applying for a green card in due course, failing which their lawyers will get a new TN.

I read from your replies that he could file as a resident alien in the US for 2008. So does he just file 1040 NR-EZ?

Thanks for your help.

San

1)My wife who is canadian citizen used to work in canada till july and on dependent TD visa in us, so as far as her case is concerned just file the canada tax till july and claim as dependent in US for rest of the year and file w7 for itin?

I'm assuming you're filing jointly in Canada, so yes basically. She cannot work in the US on TD so you can file jointly on 1040NR as well. Essentially you file T1 as per usual and a 1040NR for the time you were in the US as well as an 8840. And you can get her an ITIN at the same time.

2) which method is straight forward like file T1 and then file 1040NR in US and claim foriegn tax credit in canada T1
or File as dual status (prorated method), which method is better in saving money because i think canada taxes are more than us.

Well this is a different situation, yes you can file dual-status, but it depends on what both your earnings were earlier in the year as to whether it makes sense to file a pro-rated return, or file as non-resident for the whole year and also file a T1. Read IRS publication 519.

3) since the US dollar is very high, should we convert US tax paid in canadian dollars and then claim in for foriegn tax credit in canada,

Up to you, depends on how it works out for you, you have to sit and do the math and work out whether it makes more sense to file as a resident of Canada for the whole year or dual-status. Generally it is cheaper to do dual-status but it depends on what bracket you're in and what deductions you qualify for, e.g. there may be ones you can claim in Canada but not the US.

Filing as dual-status on TN-1 also has the problem that TN-1 is a non-immigrant category that requires the work to be "temporary", so what that means is at some point you'll probably have to file dual-status again to move your tax home back to Canada unless you can move it at year end.

You do have a choice in doing the exchange rate, you can either use the rates on the days you were paid using the rates from www.bankofcanada.ca or you can use the CRA yearly rate.

Yeah, I kind of suspected this sort of thing happens, which is why I keep hinting at people that they should check box "a" on the form so they can get an ITIN to fill in W-8BEN at a bank. Then you can apply for it immediately.

You should phone the non-resident dept. in PA for tax questions like this, although imx they aren't much better than the regular 1-800 number.

Couple of errors:

1. One simply cannot under any circumstances file a joint return on 1040NR, neither by IRS regs nor by treaty. It is incorrect to use any other tax table than the ones provided by IRS for 1040NR, which does not include MFJ. You can file single and use the single table, if you are single; or file MFS, using the MFS table if married. Period.


2. Cdns residents do not have some special benefit of using any table from 1040 when they file 1040NR.

What Cdns can do, by IRS regs (backed-up by treaty), is include spouse and children living in canada as dependents for the purpose of the exemption. So can Mexicans and Koreans.

Maybe the confusion comes from the right a married Cdn resident working in US has of filing a non-discrim 1040NR, (based on treaty Article XXV) whereby -- in addition to preparing a normal MFS 1040NR using the MFS table -- the couple prepare a pro forma (fake) 1040 MFJ (not 1040NR) and report ALL world income, and use all the exemptions, deductions and credits available on 1040 (except foreign tax credit) to come up with a preferential taxrate. That taxrate is then applied to the US-source income reported on the 1040NR, and if favourable, the final US tax is calculated on that taxrate, overriding the 1040NR tax calculated from the 1040NR MFS table.

Final note: Remember that this applies only to a Cdn working in US who is still resident in canada, and thus is still filing a Cdn tax return, so it is not always necessary to squeeze one's US tax rate to its absolute minimum, since at some point, lowering one's US tax is merely raising one's cdn tax by the same amount.

Couple of errors:

1. One simply cannot under any circumstances file a joint return on 1040NR, neither by IRS regs nor by treaty. It is incorrect to use any other tax table than the ones provided by IRS for 1040NR, which does not include MFJ. You can file single and use the single table, if you are single; or file MFS, using the MFS table if married. Period.

You can if one person has no income. Or is below the reporting limit. Pretty common for e.g. students to do it because their spouse will be F-2 and not have work authorization so their income will likely be minimal.

Have to say I haven't read further back in this thread so I'm not entirely sure what the original question was!

This is not considered a joint return, it is an MFS return, where the other spouse simply does not file their own MFS return.

The MFS table is used, which typically yields higher taxrate than for an MFJ return with the same total income.