Taxation of Canadians in America. David Levine
and tax laws are not congruent. For example, if you are out of the country without permission for more than six months, the green card can be revoked. However, you continue to be subject to US tax until the green card is turned in.
Many treaties, including the US-Canada treaty, provide that when you are a resident under the laws of both countries, residence is determined under a series of tie-breaking rules determined as follows:
• You are a resident of the country in which you have “a permanent home.”
• If you have a permanent home in both or neither of the countries, residence is in the country in which the economic ties are closer (center of vital interest).
• If the center of vital interest cannot be determined, residence is in the country of your “habitual abode.”
• If you have a habitual abode in both or neither of the countries, residence is determined by citizenship.
• If all of the foregoing rules fail, the residence is determined by agreement between the “competent authorities” of the two countries.
If you are taking advantage of any treaty benefits, you must attach IRS Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) (Form 8833) to your return to disclose the treaty position taken.
In nearly all respects, a resident alien is taxed exactly like a US citizen. The exceptions are the year of arrival and the year of exit from the US. In these cases, the resident alien is a dual-status alien. The taxpayer is called a dual-status alien because for part of the year he or she will be a resident of the US and for part of the year the taxpayer will be resident of a foreign country. In these cases, the taxpayer will be required to file what is known as a dual-status income tax return. The following are important things to remember with a dual-status income tax return:
• Only the income earned while a resident in the US will be subject to US tax.
• If married, you must file as married filing separately.
Itemized deductions are limited to the following:
• State and local income taxes
• Gifts to US charities
• Casualty and theft losses
• Miscellaneous deductions
1.1 First year elections
An important first year election is to step up the basis of your assets for US tax purposes. We discuss this in more detail in Chapter 3, but essentially the Treaty says that if you pay a deemed disposition tax upon emigrating from Canada (which you will do in nearly all cases), you can elect to step up the basis in your assets to the fair market value of the assets on the day before you emigrate. The purpose is to have you avoid paying tax in the US, at some point in the future, when you have already paid tax in Canada on the same assets. Any appreciation after your date of emigration from Canada will be subject to tax when sold.
You must make the election on your first US tax return, using Form 8833. Failure to make the election will result in you being liable for tax on the entire gain, not just the post-exit gain, which will result in double tax. This election is not available to US citizens. We recommend that you actually sell any assets that are subject to the deemed disposition, before you leave Canada if possible.
If you do not meet either the green card or substantial presence tests, you may be able to meet to be treated as a resident alien taxpayer as long as you met the substantial presence test in following year (year X+1, where X = the tax year in question) and —
• you are present in the US for at least 31 days in a row in year X; and
• be present in the US for at least 75 percent of the time you were in the US in year X, beginning with the first day the 31-day period and ending 12/31/X.
If you make this election, you cannot file the tax return until you have met the substantial presence test for year X+1. For example, if you first came to the US on December 1, 2011, and remained in the US constantly thereafter, you would meet the substantial presence test on May 1, 2012, because February had 29 days in 2012, otherwise it would have been May 2. If you were out of the country at any time during the period, those days absent would increase the time required to meet the test. If you came to the US late in the year, you will have to file an extension and wait the necessary amount of time before filing the return. Under this election, the date of residency will generally begin your first day in the US. You will report only the income earned from that date to the end of the year on the tax return. The income before that period is reported on your Canadian return.
However, if the taxpayer is a dual-status taxpayer (remember, this is part year as a nonresident and part year as a resident), you can choose to be treated as a US resident for the entire year if all of the following apply:
• You were a nonresident alien at the beginning of the year.
• You were a resident at the end of the year.
• You are married to a US citizen or resident alien at the end of the year. If you are single at the end of the year, the election cannot be made.
• Your spouse also joins you in making the election.
When the election is made, both you and your spouse are treated as if you were resident of the US for the entire year, meaning you will have to report and pay tax on worldwide income for the entire year. There are two possible elections to be made:
• One that allows for you to file jointly.
• One that allows the resident spouse to treat the nonresident spouse as a resident.
You are probably thinking to yourself, why would I want to report all of my income to the US when I would normally have to report only the income I earned since moving to the US; wouldn’t that cost me more in taxes? As we mention throughout the book, you will nearly always pay less tax as a US taxpayer than as a Canadian taxpayer. We go into the specifics as to why this is true in Chapter 9.
You might be saying, even if the US is less expensive, won’t I be paying tax twice since I will be reporting the income earned in Canada, to Canada and to the US as well, if I make this election? The answer is that you will be reporting the income twice, but you will only be paying tax once because of the Treaty and foreign tax credits. While there can be unusual circumstances where it would not be better to make the election to be a US resident for the full year and report all of your income in the US, the large majority of the time the election will be to your benefit.
As a resident alien, you frequently continue to have income from Canada. Which country gets to tax that income and how it is taxed is spelled out in the Treaty. For example, the Treaty will prescribe the withholding rates for the different types of income. It will also spell out situations in which you or various types of income may be exempt from tax in one country or the other. (See Chapter 3, for a detailed discussion of the Treaty.)
Individuals generally cannot enter the US without being a US citizen, green card holder, or visa holder. The following are common immigration visas:
• Business Visitor Visa (B-1)
• Visitor for Pleasure (B-2)
• Treaty Trader (E-1)
• Treaty Investor (E-2)
• Student Visa (F-1)
• Dependent of Student (F-2)
• Professionals (H-1B)
• Seasonal Agricultural Work (H-2A)
• Unskilled Worker (H-2B)
• Nonimmigrant Trainees (H-3)
• Dependents of H Visa Holder (H-4)
• Exchange Visitor (J-1)
• Executive or Manager of Foreign Company (L-1)
• Listed in Treaty (TN)*