THE INTERNATIONAL TAX ADVISOR

by:  Douglas J. Kingston, CPA/MBA  • Mailing Address: 16443 N 59th Place; Scottsdale, AZ 85254

• Telephone: +1 (602) 595-5885 (GMT-7) • E-Mail: doug@iTaxCPA.com • URL: http://www.iTaxCPA.com/

U.S. TAX FILINGS FOR CANADIAN VISITORS TO THE U.S.

 

Background

 

 

Resident Status Under U.S. Tax Law

 

 

Canada-US Tax Treaty Protection

 

 

 

Sample Picture

 

It is important for Canadian visitors in the U.S. to be aware of their U.S. tax filing requirements.

 

Background

 

The U.S. imposes its income tax on foreigners under two separate regimes: one for resident foreigners and the other for nonresident foreigners.  In general, nonresidents are taxed only on their income from U.S. sources, but residents are taxed (as are U.S. citizens) on their worldwide income.  Worldwide income means income arising anyplace in the world (including Canada, the U.S. or third countries).   Even though Canadians visiting the U.S. are typically subject to Canadian income tax on their worldwide income (because Canadian tax authorities consider them resident in Canada), U.S. tax laws consider certain long-term visitors to be resident in the U.S. as well.  Such individuals are referred to as “dual resident taxpayers.”   Many Canadian winter visitors have filed the annual Internal Revenue Service (“IRS”) Form 8840 “Closer Connection Exception Statement for Aliens” and probably most have been uncomfortable doing so (however, less so since 2006 because IRS has revised the form to omit questions about social, religious, political and charitable issues). Although not evident in the form’s instructions, individuals qualifying under the Canada-U.S. tax treaty as tax residents of Canada may consider not filing that form; however, this alternative has pitfalls so it is recommended that an experienced tax adviser be consulted with your particular situation in mind.  

Resident Status Under U.S. Tax Law

 

Under U.S. tax law, a Canadian is treated as a resident of the U.S. if: 1) he meets either the “Green Card Test” or 2) the “Substantial Presence Test.”

1. Green Card Test - An individual is a resident of the U.S. under this test if, under immigration rules, he or she is a lawful permanent resident of the U.S. at any time during the calendar year.  Individuals generally have this status if they have entered the U.S. with an alien registration card (also known as a “greencard”).

2. Substantial Presence Test - An individual is a resident under this test if physically present in the U.S. at least 31 days during the current calendar year and 183 or more days during the current and two prior calendar years computed under a “weighted presence formula” (i.e., counting each whole or partial day in the current year as one day, each whole or partial day in the first prior year as 1/3rd of a day, and each whole or partial day in the second prior year as 1/6th of a day).  A foreign visitor spending on average four months and two
days a year in the U.S. during a

 

Resident Status Under U.S. Tax Law (continued)

 

three year period is considered a U.S. tax resident under this test.

Closer Connection Exception - An individual is not treated as a U.S. resident under the substantial presence test if he is present in the U.S. fewer than 183 days in the current year, has a “tax home” in Canada and has a “closer connection” to Canada than to the U.S.  An individual cannot assert this exception if he has or intends to apply for a greencard.   Even if the requirements of this exception are met, the individual must also timely file a Form 8840 with the IRS.  For an individual with a closer connection to Canada, filing Form 8840 merely avoids the “penalty” of not being allowed to assert the exemption (properly filled out it indicates, but does not prove, existence of the closer connection).  For an individual without a closer connection to Canada, or with a closer connection to Canada and one other foreign country, filing does not provide any protection at all.   Once the IRS receives the Form 8840 it is stamped and returned to the individual.  IRS says it does not keep record of forms having been filed so it is important to keep the returned copy in a safe place (for at least three years, but preferably forever) since the burden of proving timely filing is on the taxpayer.

  

Canada-US Tax Treaty Protection Taxes

 It is very important to note that the tax treaty provisions override or modify U.S. (and Canadian) tax laws.  Thus, even though a long term Canadian visitor may be considered a U.S. resident under U.S. tax law, dual resident status may be avoided by invoking the treaty.   The treaty mandates that a dual resident taxpayer be treated as resident in only one, not both, countries under the “tie-breaker” rule set forth in Article IV.2. which provides that: the individual is deemed a resident of the country in which he has a “permanent home;” if he has a permanent home in both or neither, he is a resident of the country in which he has his “center of vital interests;” if he has his center of vital interests in both or neither, he is a resident of the country in which he has his “habitual abode;” if he has his habitual abode in both or neither, he is a resident of the country of which he is a citizen;” and finally, if he is a citizen of both or neither, he is a resident of the country as agreed to by U.S. and Canadian tax authorities.   Form 8833 Required - Even though this alternative may avoid having to rely on timely filing Form 8840, the IRS requires timely filing of Form 8833 “Treaty-Based Return Position.”
 

Douglas J. Kingston is an Arizona certified public accountant (CPA) specializing in international tax planning and compliance for U.S., Canadian, European, Latin American and Asian business and individual clients and may be reached by:

Telephone: (602) 595-5885E-Mail: doug@iTaxCPA.com • URL: http://www.iTaxCPA.com/