In the coming weeks, we are going to be exploring U.S. individual taxation matters that are relevant to Canadians. This first short article of the series focuses on who must file a U.S. Tax return.
Who Must File a U.S. Tax Return?
By: Jeff Fortin CA, CPA (IL) -Tax Partner & James Luo CPA, CA, CPA (MA) – Senior Tax Manager
United States citizens and lawful permanent residents (“Green Card holders”) are required to file U.S. federal income tax and certain information returns regardless of country of residence. If, however, the individual’s gross income is less than a certain threshold then the filing is optional. Generally, if the worldwide income exceeds the standard deduction amount, a return is required. This rule doesn’t apply if the taxpayer has earnings from self-employment of at least $400.
Individuals other than U.S. citizens or Green Card holders should be aware of the “substantial presence test” which can deem other individuals to be residents in the U.S. Canadian residents who travel in and out of the United States frequently must be careful about inadvertently meeting this test to avoid U.S. tax reporting. An individual generally meets the substantial presence test if:
- the individual is present in the United States for 31 days in the year; and
- the sum of:
- Current year days in US X 1
- First preceding year days in US X 1/3
- Second preceding year days in US X 1/6
=183 days or more.
If both of the conditions are met AND the individual has less than 183 days of presence in the U.S. in the current year, the individual may file Form 8840 with IRS to establish “closer connection” and, therefore, residency in the home country (Canada, for example) rather than the U.S. for the year. Form 8840 can either be filed with the 1040NR or separately.
Individuals exceeding 183 days of presence in the U.S. in a calendar year, or who are Green Card holders, and who are also considered to be a resident in Canada under Canadian domestic income tax law, may look to the Canada-U.S. Tax Treaty (the “Treaty”) to resolve the residency in favor of one country or the other. That said, even such individuals who are considered to be tax residents of Canada under the Treaty are still required to file a US federal income tax return (claiming such Treaty exemption) and various other disclosure returns such as FinCen Form 114 (FBAR – foreign bank account reporting), Form 5471 (Information return of US persons with respect to certain foreign corporations) etc. Penalties for non-compliance may exceed $10,000.
Additionally, nonresidents of the U.S. (referred to as nonresident aliens) earning income from US sources may be required to file federal and/or state tax returns. Earnings are not limited to salaries or wages. Individuals earning U.S. source income such as dividends, rents and royalties may be required to file a US federal income tax return (Form 1040NR) if inadequate tax was withheld at source. Alternately, if the withholding is in excess of the statutory tax liability, taxpayers have the option to file federal or state returns voluntarily to claim refunds for the excess. Nonresident aliens who have disposed of US real property are also required to report the disposition on Form 1040NR.
Please don’t hesitate to contact your trusted Catalyst Advisor if you have any questions. You can reach Jeff at (403) 767-1503 or James at (403) 767-1511.