Canadians must file a tax return and pay taxes in the United States even if they are residents of Canada if they meet certain criteria that is determined by American tax law and by the Canada-U.S. Income Tax Convention, a treaty that generally deals with citizens of either country earning income or capital in the other country.

For the 2009 tax year, you generally have until Thursday, April 15, to file U.S. tax returns and pay any taxes due.  If you can’t meet the April deadline, you can request a six-month extension to file your tax return by sending Form 4868 to the U.S. Internal Revenue Service.  However, keep in mind that this is simply an extension of time.  You must still pay your taxes by the April deadline.

Under the U.S. tax law, Canadians must file tax returns if they are:

  • Deemed residents of the U.S.
  • Non-residents doing business and employees working for wages in the U.S.
  • Students or scholars visiting the country on an F, J, M or Q visa, have taxable income and are classified as nonresidents for U.S. tax purposes
  • Receiving other U.S. source income.

Your Tax Home and Canadian Income Tax Connection

You must file a U.S. tax return if you have a “substantial presence” there, in other words, if you are present in the country for a certain number of days.

Substantial Presence”

There are two ways to determine whether you have “substantial presence” in the United States:

  1. You are present in the U.S. for 183 days or part days in the calendar year.  Generally, you will be able to deduct foreign taxes paid.
  2. You are present in the U.S. for 31 days or more in the calendar year, and were present for sufficient days in the U.S. in the past two years.

Under the second method, you have a substantial presence if the days you were in the U.S. in the current year plus one-third of the days in the previous year plus one-sixth of the days in the year before that equal at least 183 days.  Using that formula, you are not a resident alien if you spend 120 days a year in the U.S.; 120 plus 40 plus 20 equals 80 days.

You are a resident alien if you spend 123 days in the U.S. each year; 123 plus 41 plus 20 equals 184 days.

There is an exclusion from the substantial presence test if:

  • You were present less than 183 days in the current year.
  • If your tax home is in Canada.
  • You can establish that you have a closer connection to Canada than the U.S.

In that case, you still have to file U.S. tax return, including a special form – the Closer Connection Exception Statement for Aliens – but you do not have to pay U.S. tax on your worldwide income.

Canada and the U.S. share tax information with each other, so Canada Revenue Agency and the Internal Revenue Service can each request your complete tax file from the other country.  Real estate transactions, dividends, interest and government pension payments are among the types of information the agencies exchange regularly.  Both countries also allow each other to use the “long arm of the law,” which means the Canada Revenue Agency can ask the Internal Revenue Service to help collect taxes, and vice versa.

For U.S. tax purposes, your tax home, if you are employed or self-employed, is the location of your principal place of business or employment, regardless where you maintain your family home.  If you are not employed or self-employed, your tax home is where you regularly live.  It can be a house, apartment, or furnished room, and you can rent or own.  It must have been available to you continuously and at all times throughout the current year, not just for short stays during the year.

Another factor that can affect whether you must file a U.S. tax return is whether you have a closer connection to Canada than the U.S.  Establishing the Canada connection involves several factors, including:

  • Your permanent home and business activities.
  • Your family.
  • Personal belongings, such as cars, furniture, clothing, and jewelry.
  • Social, political, cultural, or religious organizations to which you belong.
  • The jurisdiction where you vote and hold a driver’s license.

If you are a U.S. citizen or have been granted permanent residency in the U.S., (i.e., you have a Green Card), you cannot use the closer connection rule to avoid filing a U.S. tax return.

The following shows how U.S. tax law and the tax treaty affect various types of income.

Business Income

Non-residents engaged in business or trade in the U.S. during the year must file a tax return, even if they do not have any taxable income from the business or trade, or the income is tax-exempt.  Engaging in trade or business means you have a permanent establishment in the U.S. – ordinarily an office or agent in the country.  Having a U.S. post office box for mail does not mean you have a permanent establishment and simply have customers in the U.S. does not constitute carrying on a business there.

Capital Gains

Capital gains connected with business activity in the U.S. are reported on the tax return along with the business activity.  Capital gains on real property not connected with business activity (for example, the sale of a vacation home in the U.S.), must also be reported.

Employment Income

The tax treaty allows Canadian residents to earn as much as $10,000 in U.S. source employment income without having to file a U.S. tax return.  In some circumstances the treaty allows for a tax exemption on amounts exceeding $10,000, but the employee still must file a U.S. tax return to claim the exemption.

Non-Business Income

If you earn rental income from real property, dividends, interest, royalties, alimony, pensions, scholarships, grants, prizes, awards and commissions, a 30 per cent tax is withheld on the gross income and you don’t have to file a tax return.  But you also cannot claim deductions.

Rental Income

Rents from real property in the U.S. are taxable as non-business income, and a 30 per cent non-resident tax is withheld from gross rental revenue.  In this instance, however, you can choose to file a tax return and claim deductions.  Tax then will be paid at the graduated rates available to U.S. residents.

Estate Taxes

Non-RESIDENTS are subject to U.S. estate tax on property owned in the U.S. at the time of death.  The tax treaty has a number of complex special provisions affecting U.S. estate tax, which may affect the situation.

Consult with your tax accountant regarding these rules if you think you are affected by U.S. filing requirements.  The rules can be complex, and the penalties for failing to file the required returns can be expensive.

Conclusion

If you have any questions about your particular US income tax issues, please do not hesitate in calling Joe Truscott at 905-528-0234 or email Joe at [email protected].