Gross Income of a NRA subject to US taxation is either
- Gross income derived from sources within the US that is not effectively from a US trade or business in the US by that individual.
- Gross income, irrespective of whether such income is derived from sources in the US that is effectively connected to a trade or business in the US by that individual.
In general, ECI is reduced by allowable deductions and taxed at graduated tax rates, whereas income that is not ECI is taxed at a flat 30% or lower treaty rate.
Gross Income not connected to a trade or business is subject to 30% withholdings or lower treaty rate.
FDAP income and certain other gains not effectively connected with a trade or business.
Capital Gains for NRA if present in the US greater than 183 days.
Social Security Benefits. (Exempt under Canadian Residents - US Treaty)
FDAP includes Interest (not OID), mostly exempt under Treaty, Dividends (15% Canada Treaty), Rents, Salaries etc, Premiums, Annuities, Royalties, lump sum payments etc. Basically predetermined. Pension income from US Payor (ex 401k, IRA): Subject to 30% (15% Canada Treaty).
Can reduce withholdings to Treaty rate by filing Form W-8BEN with payor of income
•3.8% NIIT does not apply to US NR
An item of income is determinable (FDAP) if the amount to be paid is not known but there is a basis of calculation by which the amount to be paid may be ascertained at a later time. If an interest payment is contingent, in that its amount cannot be determined at the time of payment due to contingent factors, it is still considered determinable.
Capital Gains of Aliens Present in the US 183 days or More (subject to the 30% or less with Treaty withholdings):
- Capital gains on US sourced Capital assets are taxable regardless if the Alien was in the US or not at the time of sale. If they meet the >= 183 days then the prior year is also taxable but only if they met the 183 days in that year as well.
A flat tax of 30 percent was imposed on U.S. source capital gains in the hands of nonresident alien individuals physically present in the United States for 183 days or more during the taxable year. This 183-day rule bears no relation to the 183-day rule under the substantial presence test of IRC section 7701(b)(3).
- If the Alien does not meet the 183 day test then Capital Gains on Capital Assets are not considered for US taxes for US Sourced Capital Assets. The Alien doesn't have to consider Gains on Capital Assets on the prior year even if the alien met the 183 days in the prior year.
In terms of capital gains, NRA's are not subject to US Capital Gains Tax, and NO money will be withheld by the brokerage firm. You will most likely need to pay capital gains in your country of origin.
US tax law imposes special requirements regarding the sale of US real property by foreign sellers. When a foreign taxpayer sells an interest which is characterized both as (a) a capital asset and (b) a real property interest, a purchaser of the property is generally required to withhold from the sale proceeds delivered to the seller (and to pay over to the IRS) an amount equal to 10% of the gross sale proceeds
Gross Income Effectively connected to a trade or business or ECI:
Taxed at same rate as US citizens and residents. All income, gain, or loss for that year derived by that NRA from sources in the US which does not consist of FDAP is ECI.
Personal Services Income:
Wages, salaries, fees, compensations, bonuses for performing personal services.
Income received by a student or teacher is ECI.
Transportaion income is ECI if fixed place of business in US and 90% of the income is regularly scheduled transportation. NRA income which is not ECI is subject to 4% tax on gross transportation income (Section 887(a)).
Rental property: Rent is considered FDAP and subject to the 30% or lower treaty tax rent on gross rental income. An election can be made to treat the income as ECI which enables the expenses t be deducted against rents collected. Absent the election, the income would not be treated as ECI.