Tax Returns

Hi,

I'm new at this, I am working in Alabama on a L1A, started in July 2008, I know I have to file income tax returns for both countries. My question is:

Do I have to claim my canadian income in the USA from Jan to June?

Thx.

Depends how you file. You can either file as a resident of Canada and a non-resident of the US or vice versa.

The usual method would be to file as a resident of Canada and in the US you file a 1040NR and an 8840 to declare your US-source income.

You have to declare your US-source income on your T1 as well, and you claim a foreign tax credit for the tax paid in the US on it so you don't get taxed twice (but you will pay some extra tax in Canada as the income tax rates are higher usually). The general guide for the T1 for your Province explains how to claim a foreign tax credit, there is a similar procedure for State/Provincial taxes as well.

If you're going to be staying in the US for years then it might be a good idea to move your tax home to the US and file as a resident, however this has implications for your RRSPs, TFSAs etc. and it is a complicated procedure to move it back to Canada if you ever move back. The advantage though is you pay only pay US taxes on your salary which are usually lower. But it's not viable to do it for say, a couple of years.

Read this: http://www.cra-arc.gc.ca/E/pub/tg/p151/README.html

Same situation here, moved to the US, TN status.

I did get declared non-resident in Canada, so I'm avoiding paying Federal + Quebec taxes on my US income (a $10k+ difference in my case). I got the Canadian government to grant me the non-resident status retroactively, so all my US income is exempt from Canadian taxes.

Steven: you mentioned it might not be a good idea, could you elaborate on this? I am in the US for 2 years as a worker, than likely 2 years as a student (J-1).

Edit: on your question, my understanding is that Form 2555 would allow you to exclude your CDN revenues.

Form 2555 is only used by non-resident US citizens or LPRs, which you aren't. You would use Form 1116 to claim a foreign tax credit for Canadian taxes if you are a US resident taxpayer, however the tax credit most likely wouldn't cover the full amount as Canadian tax rates are higher, so you would still end up paying the total of the Canadian rate on Canadian-source income.

If you have Canadian-source income you still have to pay Canadian income tax on it and also CPP/EI withholding if it's employment income, the only difference is that you use the non-resident T1 instead of the resident one. Also your payroll claim code is 0 instead of 1, you have to submit a new TD-1 to your employer, I'm not quite sure how that affects your taxes though, there is a change but I can't remember what exactly. (This assumes the work is done in Canada, otherwise you would have to be on a US payroll).

You don't save any money by moving your tax home to the US though if your income is largely Canadian-source.

My personal view is that's not a good idea to move your tax home to the US if you're in TN-1 status for a number of reasons. The first is that TN-1 requires your stay to be temporary, which implies residence abroad. If you're filing as a resident in the US that plays against that and it could cause you problems.

The second problem is that if you are ever denied entry, you automatically revert to being a resident of Canada which means you have a sizable chunk of paperwork to do.

The third problem is that the amount of paperwork involved in moving your tax home to the US and then moving it out again is substantial, several times on here I've tried to cover all the forms you need and I'm still not sure I've got them all, but it's a lot. Just no point doing it for a stay that doesn't involve at least one full calendar year. There are also a lot of non-tax forms you may end up having to file like the FinCEN FBAR form to declare your foreign assets.

In your situation you've got another problem, because if you're a student (J-1) you usually receive money from abroad. If you're filing as a resident and someone sends you money from abroad (e.g. your parents) you have to pay US income tax on it. If you file as a non-resident using 1040NR and 8843 you're basically exempt from US income tax, except on US-source income, and even then, as a student you are exempt from social security and medicare withholding as well.

As a student you are definitely better off filing as a non-resident.

The only real advantage to filing as a resident is if your income is mainly US-source income, because US income tax rates are usually lower (but not always, if you're from BC and you live in MA or CA you may find the BC rate is actually lower depending on which bracket you're in). So you don't end up paying Canadian income taxes on top of what you've paid in the US (minus the foreign tax credit).

Whether that is a major advantage or not depends on your income. If you save huge amounts doing it that way then it's worth the hassle of all the paperwork and so on. If you're saving small amounts (or even losing money) then obviously it's not.

Other problems you might have moving your tax home to the US is that you can't contribute to your RRSPs and things like that anymore (not easily anyway, there might be a way of doing it) and TFSAs would become subject to Canadian income tax again as Canadian-source income as the tax exemption only applies to resident taxpayers.

Form 2555 is only used by non-resident US citizens or LPRs, which you aren't.

Got it.

My personal view is that's not a good idea to move your tax home to the US if you're in TN-1 status for a number of reasons. The first is that TN-1 requires your stay to be temporary, which implies residence abroad. If you're filing as a resident in the US that plays against that and it could cause you problems.

Agreed. That's why my employer is applying for H-1B in April. There are also concerns by the CBP around Management Consultant TN, they have been tightening control at the borders and it's harder to get a renewal if you're working for the same client.

The third problem is that the amount of paperwork involved in moving your tax home to the US and then moving it out again is substantial, [...] There are also a lot of non-tax forms you may end up having to file like the FinCEN FBAR form to declare your foreign assets.

Interesting. Wasn't aware of the form (and a lot of Canadian colleagues in NYC aren't either).

The only real advantage to filing as a resident is if your income is mainly US-source income, because US income tax rates are usually lower

That was the main driver in my case. It's about 10-15k for this year, and likely to be double as next year is a full year (80/20 approximation, using tax software, I'm sure an accountant could drive this down, but still significant).

I still undecided between tax software, vs. local CPA (recommended by a colleague) and Serbinski. My US tax situation is very simple for this year (W-2 + moving costs), the Canadian one very simple too (single employer, T4, etc.). I have no assets, house, etc.

Tried TurboTax, answered all the questions and seemed to cover everything. Will likely go on the safe side, use a CPA, just not sure that Serbinski will bring much more value vs. their fees.

Steven, reading from your previous post, you're of a great help to people on this forum!

Thanks for all this and repeating (over and over again) the same answers!

Honestly I never understand why people never say they'll just get the forms and fill them in, it's the cheapest option and often the simplest. If you get an accountant to do it, all they're going to do is ask you all the questions the forms ask you and then you're at the mercy of them getting it right and they often don't.

I would only ever consider using an accountant if you've got things like cross-border corporations involved and accountants charge thousands for that because it's so complex, which can often make you realize that it wasn't a smart way of setting the company up.

When I lived in the US it was back before the web so I only had one option really, which was to go to the IRS seminars to learn how to do it (or go through they yellow pages trying to find an accountant, which was hopeless for non-residents). I remember I used to go into the Federal building, get the forms, sit in the parking lot and do my return on the dashboard, walk back in and put it in internal mail.

If you're smart enough to qualify as H-1B or TN-1 you should be able to read a tax publication and fill in some tax forms!

If you're smart enough to qualify as H-1B or TN-1 you should be able to read a tax publication and fill in some tax forms!

lol, that's a lot of pressure, but thanks for the advice

I am going to work in NY on a TN visa. I have a family, own a home and a couple of cars in Ontario. While I receive an early retirement company pension in Canada (around 36K/year), my NY job will bring in substantially more income. Do I file a tax return in the US and one in Canada? Is it worth the paperwork (when I move back) to file as a resident? What are my best options?

Note: I spent 2 years in the US before on a TN visa and did file both US and Canadian taxes.

If you are going to keep all these ties in Canada, then filing as resident of both is probbaly easiest (though it would cost you a little more in taxes).