Personal Services Income means something completely different in Canada
Canada - Personal Services has to do with:
Who is a US CITIZEN?
1.Born in the US = US Citizen
2.Born in Canada to two US Citizens = US Citizen
3.Born in Canada to one US Citizen = US Citizen if:
• Born on or after November 14, 1986:
◦ -US Parent resided in US for 5 years
◦ - 2 of which were after that US parent’s 14th birthday
• Born on or after December 24, 1952, and before November 14, 1986:
◦ -US Parent resided in US for 10 years
◦ - 5 of which were after that US parent’s 14th birthday
There are exceptions to the above...
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.
If you are married to a NRA then you have to file a 1040 and spouse has to file a 1040NR. You may not want to do this. You can file a 1040 joint if you want to:
You must be married,
One spouse has to be a US citizen or resident. The other is NRA.
An election is made. You can't claim that you are not a US tax resident to claim any Treaty benefits. Must file joint in year of election, but can file separate going forward.
You may be able to delay your residency by up to 10 days if you can show that you had a closer connection to your original country. This won't reduce days for Substantial Presence calculation, however. A statement needs to be filed.
NRA at beginning of the year,
Resident Alien at end of year.
Married to a US citizen or resident alien at end of the year.
Spouse is on board with making the election.
Must file joint tax return.
Only applies to first year.
two NRA's can file a return like this (only residency at end of year not citizenship) .
Must include election statement.
You can only do this once in your life.
You can voluntarily be considered a resident even though you may not qualify under the Green Card test or the Substantially Present test. You would need to be in the US for 31 consecutive days and meet a continuous presence of 75% of your time in the US and this individual was not a resident in the current or previous year and must be a resident in the next year. A statement needs to be attached for this election. The date of residence would be the date that of arrival (first 31 days)
U.S. Source Interest Income that is not connected with a U.S. trade or business is excluded from income if it is from:
If you qualify as a US resident under Substantial Presence, then residency begins the first day of the tax year. If you qualify as a US residence under the Green Card, then it's your first day of the year as a permanent lawful residence. If you qualify for both then take the earliest date.
It is the timing of the receipt of income, not when you earned it. If you earned the money while you were a non resident but received it as a resident then that it's taxable as a resident.
Cannot use the HOH filing status.
Married residents of Canada and Mexico or South Korea or married US nationals can file as single if they lived apart from their spouse for 6 months.
Standard deduction is not allowed, only itemized and must match the period being reported.
Regular commuters from Canada or Mexico:
For the Substantial Presence Test do not count the days on which you commute to work in the United States from your residence in Canada or Mexico if you regularly commute from Canada or Mexico. You are considered to commute regularly if you commute to work in the United States on more than 75% of the workdays during your working period.
"A" Visa - diplomats, foreign government officials - days are exempt unless green card holder
"G" Visa International organization employee - days are exempt unless green card holder.
"J" Visa teacher or trainer -Days are not exempt and must be included if the teacher/trainer was a student, teacher or trainer in any two years in the past 6 calendar years.
The taxation of foreign nationals living in the US depends on whether they qualify as resident or non resident aliens. Aliens are individuals who are not US citizens. Aliens are considered non residents unless they qualify as residents under one of two tests:
The Green Card Test
The Substantial Presence Test
Just sharing a common experience with the IRS. Client receives letter from the IRS saying that deductions or adjustments were not allowed on tax return and the taxpayer owes X amount of money with interest and penalties and response is due by Y. Usually Y is in a few days and the taxpayer is highly anxious.
If you have children and taking foreign tax credits, you may get a tax refund:
If you withdraw from an Education Savings plan here are some considerations:
"Unlike the Canadian RESP, where withdrawals can be used for any expense, 529 withdrawals must be used for eligible college expenses. If they are not, you will generally be subject to income tax on the withdrawal and an additional 10% federal tax penalty on the earnings."
"U.S. Citizens and Resident Aliens Abroad - Head of Household
If you are a U.S. citizen married to a nonresident alien you may qualify to use the head of household tax rates. You are considered unmarried for head of household purposes if your spouse was a nonresident alien at any time during the year and you do not choose to treat your nonresident spouse as a resident alien. However, your spouse is not a qualifying person for head of household purposes. You must have another qualifying person and meet the other tests to be eligible to file as a head of household."
The Treaty rate for Real Property is 30%.
You should be filing a US tax return each year - 1040NR
Income from Real Property
1. Income derived by a resident of a Contracting State from real property (including income from agriculture, forestry or other natural resources) situated in the other Contracting State may be taxed in that other State.
2. For the purposes of this Convention, the term "real property" shall have the meaning which it has under the taxation laws of the Contracting State in which the property in question is situated and shall include any option or similar right in respect thereof. The term shall in any case include usufruct of real property, rights to explore for or to exploit mineral deposits, sources and other natural resources and rights to amounts computed by reference to the amount or value of production from such resources; ships and aircraft shall not be regarded as real property.
3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting or use in any other form of real property and to income from the alienation of such property.
" V-day elections (1972)
Because capital gains did not become taxable until 1972, there are special rules for computing the tax cost of capital property owned on December 31, 1971 (Valuation Day). Generally, the tax cost of capital property owned on December 31, 1971, is established by the median rule, which deems the tax cost of the property to be the median of three amounts (i.e. the amount which is not the greatest nor the least): • the actual cost of the property; • the fair market value of the property on Valuation Day; and • the proceeds of disposition of the property. Where two of the amounts are the same, the tax cost is deemed to be that amount. The rules provide that for publicly traded shares only, the Valuation Day is December 22, 1971. Taxpayers had the choice of simply electing the tax cost for all capital property to be the fair market value on Valuation Day. Once the election was made, it could not generally be changed. The gain or loss from selling property owned before 1972 is calculated on Form T1105, “Supplementary Schedule for Dispositions of Capital Property Acquired Before 1972.”
http://www.johnmott.com/files/pdf/chapter_15.pdf PDF 9
The Net Election
In order to make the Net Election, the income tax regulations provide that a statement should be attached to the nonresident individual’s tax return (Form 1040NR). The statement should include the following:
• A schedule of all U.S. real property in which the taxpayer owns a beneficial interest;
• The extent of the taxpayer’s direct and beneficial interest in each item of U.S. real property;
• The location of each item of U.S. real property;
• A description of any substantial improvements on each item of U.S. real property; and
The election should be made on the first U.S. tax return for which the net election is to apply. The election need only be made once, and it remains in effect until it is revoked.
If you are US person and control a Canadian Corporation, the corporation is considered a Controlled Foreign Corporation (CFC). This triggers filing
Form 5471, (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) which should be an information reporting return, but can have tax implications.
FBAR's apply to U.S. persons and believe it or not a U.S. corporation is a person. If this corporation/person has financial accounts outside of the U.S., then an FBAR may be needed.
"A U.S. person includes U.S. citizens, as well as permanent legal residents, i.e. green card holders. U.S. persons also include legal entities such as partnerships, corporations, and LLCs formed under U.S. law. It also includes trusts or estates formed under U.S. law."
Feel free to ask any questions.
If you are a U.S. citizen and run your own business you may want to incorporate.
Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) really is something to consider.
Capital gains are given favourable tax treatment in Canada.
Only half (50%) of the capital gain is taxed all at your marginal tax rate (which varies by province).
Capital losses can be carried back three years and carried forward indefinitely.
To avoid paying too much tax (or incurring penalties) here are some of the things to consider: