You've got to love the U.S. tax system. In the summer of 1992, Peter Maxwell, the owner of Hi Life Products of Chino, Calif., sued his own company for negligence when he was injured at work in a 1977 accident. He had hired a lawyer to represent himself as an employee, then hired another lawyer to represent the company, then worked with the two lawyers to arrange a settlement satisfactory to both Maxwell the corporate owner and Maxwell the employee. The U.S. Tax Court ruled Maxwell could keep the $122,000 (U.S.) settlement he won. The company got a $122,000 deduction, and Maxwell the employee received the payment tax-free.
If that's the kind of tax planning possible south of the border, count me in. I think I'll call the Canada Customs and Revenue Agency (CCRA) and cancel my subscription. I'll subscribe with the Internal Revenue Service (IRS) instead. The fact is, thousands of Canadians are required to file a tax return in the United States each year. Here are the most common situations.
1. U.S. citizens
and green card holders.
If you're a U.S. citizen, you're required to file a tax return (Form 1040) in the United States every year -- regardless of where you live. The usual deadline is April 15, but you've got an automatic extension to June 15 if you're resident outside of the United States.
If you fail to file, you'll lose the right to claim certain exemptions, which can provide tax relief in the United States. This requirement also applies to green-card holders since they are treated as U.S. citizens for U.S. tax purposes.
2. Owners of U.S. real estate.
If you own a U.S. rental property, you'll be subject to a 30-per-cent withholding tax on rents, which your tenants are required to remit to the IRS. Instead of facing this steep 30-per-cent tax, you can elect to file a U.S. tax return and report your actual rental income and expenses, using the "net rental income method" (NRIM) of reporting. This will usually save you tax. Here's the key: You must file a U.S. tax return (Form 1040NR) to be entitled to use the NRIM.
The due date? June 15 for the prior year. Finally, if you sell a U.S. property, whether it's a rental or a personal-use property, you should file a U.S. tax return to report that sale. Use Form 1040NR, and file by that same June 15 deadline.
3. Those carrying on business
in the United States.
You could be considered carrying on a business in the United States if: You ship goods to the United States and title passes there; you actively solicit business in the United States; you send employees to the United States on consulting contracts; or you establish an office in the United States.
If so, you'll be required to file a U.S. tax return (form 1040NR for individuals and form 1120F for corporations, both due the 15th day of the sixth month after the business year-end).
The good news? Our tax treaty with the United States exempts you from paying tax down south unless you have a permanent establishment there (an office, warehouse, etc.) To claim this treaty exemption, you must file that tax return, along with U.S. Form 8833 disclosing that you're exempt under the treaty. You may also have a requirement to file in the specific states where you carry on business. Visit a tax pro to find out more.
4.Those spending time
in the United States.
If you spend time in the United States each year, you might have a requirement to file a tax return there. Specifically, if you meet the "substantial presence test," you'll be deemed a U.S. resident for tax purposes with a requirement to file.
Here's the test: Add the number of days you spent in the United States in the current year, plus one third of the days in the prior year, plus one sixth of the days in the second prior year. If that total is 183 or more days, and you're present in the United States in the current year for more than 30 days, then you'll meet the test. If you spend more than 122 days (four months) on average in the United States each year, you'll meet the test. Even if you meet the test, you could escape filing a full-blown U.S. tax return if you have a closer connection to Canada and file Form 8840 with the IRS setting out this fact. The deadline for Form 8840 is June 15 for the prior year.
If you've got to file a U.S. tax return, be sure you have a U.S. Individual Taxpayer Identification Number (ITIN). You can obtain a number by filing Form W-7.
Tim Cestnick, CA, CFP, TEP is author of Winning the Tax Game 2001 and the Estate Planning Game. He is managing director, Tax Smart Services, at AIC Group of Funds.
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