U.S. Tax Returns for Canadian Residents
Canadian residents who are not U.S. citizens file Form 1040NR U.S. Nonresident Alien Income Tax Return to report their U.S earned income in these circumstances:
- If you have carried on business in the U.S. (self employed) you are subject to the same rules that apply to Canadian corporations carrying on business in the U.S. See U.S. Corporate Returns for details. You will file Form 1040NR to report the U.S. income or proof of exemption from tax, rather than the corporation tax return.
- If you earned rental income from U.S. property, you must elect in the first year of rental to report the rental income and applicable expenses, including depreciation, in Form 1040NR and continue to report the income and expenses thereafter. Absent the election and tax returns, the IRS may withhold 30 per cent of the gross rent before any expenses.
- If you sold U.S. property.
- If you worked in the U.S. generally, U.S. federal and, if applicable, state income tax would have been withheld from your employment income; however, a tax return is still required. The Canada- U.S Tax Treaty provides exemptions for the tax (though not for filing a return) on income under $10,000, or where you worked less than 184 days in the U.S. for a Canadian employer with no permanent establishment in the U.S.
The U.S. filing deadline for Canadian residents is June 15 for rental, gains, and business income returns and April 15 for employment income. The deadline may be extended on application and payment of 90 per cent or more of the estimated U.S. taxes owing.
U.S. Tax Returns for U.S. Citizens Living in Canada
The U.S. bases tax filing for individuals on citizenship. U.S. citizens must file a U.S. tax return to report their worldwide income, no matter where in the world they live. (To contrast, Canada taxes individuals based on residency, so those who move from Canada may no longer have to file Canadian tax returns.) Even if you’re a U.S. citizen who has never lived or worked in the U.S., you are required to file U.S. individual tax returns.
A U.S. expatriate files the U.S. tax return in U.S dollars, reporting income and expenses under U.S. law. The U.S. allows a foreign tax credit for the tax paid to the home country—they recognize the right of the expatriate’s residence – their “tax home“ – to tax the residence country’s income first. Generally, then, a U.S. citizen should not be double taxed. However, U.S. tax law treats certain income and expenses differently than Canada, such as stock options, RRSP deduction, and the sale of your principal residence. Consequently, you may unexpectedly find yourself owing U.S. taxes.
The penalty for failing to file a U.S. tax return is based on the tax due. There may be no penalty for a return that shows no tax after foreign tax credits. However, the U.S. tax returns include reporting of foreign (non- U.S.) accounts and investments; there are several foreign reporting forms that can carry severe penalties if you fail to file them in a timely manner.
The U.S. filing deadline for U.S. citizens living and working in Canada is June 15 of the year following the tax year. Any tax is due April 15. The June deadline may be extended on application and payment of 90 per cent or more of the estimated tax.
Tax planning by a Canada/U.S. tax expert will help you understand your requirements and minimize your overall tax liability.