Canada and Canadian Tax Issues

Gregory J. Cook, EA, CPA+ Accredited Tax Advisor Past President Alabama Society of Enrolled Agents Past President Alabama Association of Accountants

I recently married a Canadian citizen and am still in the process of getting her a social security number. Am I able to claim her as a dependent without her having a social security number? If not, what options do I have?


If you wish to file a joint return with a spouse who does not have a social security number and is not eligible to obtain one at the time you are required to file, or if you wish to claim her as a dependent, your spouse must obtain an Individual Taxpayer Identification Number (ITIN) from the IRS, by completing Form W-7 (PDF), Application for IRS Individual Taxpayer Identification Number. Otherwise you will have to file as married filing separately. If you do file as married filing separately, you may later amend your return to the filing status married filing jointly when your wife obtains her social security number, provided that happens within 3 years of the due date of the tax return.



References:
•Publication 519 (PDF), U.S. Tax Guide for Aliens
•Publication 1915 (PDF), Understanding Your IRS Individual Taxpayer Identification Number
•Form W-7 (PDF), Application for IRS Individual Taxpayer Identification Number
•Tax Topic 857, Individual Taxpayer Identification Number - Form W-7



Social Security Income: Canadian & Foreign Treaties

In addition to U.S. Social Security benefits, I receive monthly benefits from the Canada Pension Plan. I am a resident alien. Are my Canada Pension Plan benefits taxable? How do I report them?


Benefits paid under the Canada Pension Plan (CPP), Quebec Pension Plan (QPP), and Old Age Security (OAS) program to a U.S. resident or resident alien are taxable, if at all, only in the United States. These Canadian benefits are treated as U.S. social security benefits for U.S. tax purposes. Thus, under section 86 of the Internal Revenue Code, the portion of the benefits that is taxable will depend on your total income. If your total income is above certain limits, a maximum of 85% of your benefits will be subject to U.S. tax. Any benefit under the social security legislation of Canada that would not be subject to Canadian tax if paid to a resident of Canada is not subject to U.S. tax.

Canadian benefits that are treated as U.S. social security benefits are reported on line 20a and 20b of Form 1040 or line 14a and 14b of Form 1040A.



References:
•Publication 519 (PDF), U.S. Tax Guide for Aliens
•Publication 597 (PDF), Information on the United States-Canada Income Tax Treaty
•Publication 915 (PDF), Social Security and Equivalent Railroad Retirement Benefits
•Tax Topic 423, Social Security and Equivalent Railroad Retirement Benefits



For an American citizen residing in Canada using Form 1040A, should the taxable amount of U. S. social security benefits shown on line 14b be $0.00 due to the Canada-U.S. tax treaty?


Under the 1997 protocol the Canada - U.S. tax treaty, the Canadian and US governments agreed to return to a residence-based system under which social security benefits are taxable exclusively in the country where the recipient resides. As a result, the entry for line 14b would be $0.00.



References:
•Publication 597 (PDF), Information on the United States-Canada Income Tax Treaty
•Publication 915 (PDF), Social Security and Equivalent Railroad Retirement Benefits
•Tax Topic 423, Social security and equivalent railroad retirement benefits





I am a U.S. citizen. If I move to Canada to live and work there as a Canadian permanent resident, do I pay both U.S. and Canadian Taxes?


United States citizens living abroad are required to file annual U.S. income tax returns and report their worldwide income if they meet the minimum filing requirements for their filing status and age. You must contact the Canadian Government to determine whether you must file a Canadian tax return and pay Canadian taxes. For the United States income tax return, you will have several options available to you regarding claiming a foreign tax credit or excluding some or all of your foreign earned income.



References:
•Publication 54 (PDF), Tax Guide for U.S. Citizens and Resident Aliens Abroad
•Publication 514 (PDF), Foreign Tax Credit for Individuals
•Publication 597 (PDF), Information on the United States-Canada Income Tax Treaty
•Publication 901 (PDF) , U.S. Tax Treaties



I am a Canadian citizen living and working in the U.S. for a U.S. employer on a visa. Do I need to file both a U.S. tax return and a Canadian tax return?


You must comply with both U.S. and Canadian filing requirements. In the United States, you generally are required to file a return if you have income from the performance of personal services within the United States. However, under certain circumstances, that income may be exempt from U.S. tax pursuant to the U.S.-Canada income tax treaty. You need to determine what type of visa you have, and how that impacts your residency status in the United States. If based on the code and your visa status you are treated as a U.S. resident, then your entitlement to treaty benefits will be impacted.



References:
•Publication 519 (PDF), U.S. Tax Guide for Aliens
•Publication 597 (PDF), Information on the United States-Canada Income Tax Treaty
•Publication 901 (PDF), U.S. Tax Treaties



I am a Canadian citizen who worked in the U.S. for 4 months. Do I have to file a U.S. income tax return as well as my income tax return in Canada?


That would depend upon whether you are a resident of the U.S. for purposes of U.S. tax law. There are several tests to determine residency, including the substantial presence test, which is based on how many days you are present in the U.S. over a period of three years. If you are simultaneously a U.S. resident under U.S. law and a Canadian resident under Canadian law, you should consult the U.S.-Canada income tax treaty for rules that would treat you as a resident of only one country. It is also possible that you may have to file a dual-status return in the U.S. if you qualify as a U.S. resident for only part of the year.



References:
•Publication 519 (PDF), U.S. Tax Guide for Aliens
•Publication 597 (PDF), Information on the United States-Canada Income Tax Treaty
•Publication 901 (PDF), U.S. Tax Treaties



Are the Canada Pension Plan and Canadian Old Age Security Benefits taxable? If they are, please tell me where they should be entered on Form 1040.


Benefits paid under the Canada Pension Plan (CPP), Quebec Pension Plan (QPP), and Old Age Security (OAS) program to a U.S. resident are taxable, if at all, only in the United States. According to the U.S. - Canada income tax treaty, taxation of these benefits is a residency-based issue. U.S. citizens or green card holders who reside in Canada are not subject to U.S. tax on this income.

These Canadian benefits are treated as U.S. social security benefits for U.S. tax purposes. Thus, under section 86 of the Internal Revenue Code, the portion of the benefits that is taxable will depend on your income level. If your total income is above certain limits, a maximum of 85% of your benefits will be subject to U.S. tax. Any benefit under the social security legislation of Canada that would not be subject to Canadian tax if paid to a resident of Canada is not subject to U.S. tax.

Canadian benefits that are treated as U.S. social security benefits are reported on line 20a and 20b of Form 1040, U. S. Individual Income Tax Return or line 14a and 14b of Form 1040A.



References:
•Publication 519 (PDF), U.S. Tax Guide for Aliens
•Publication 597 (PDF), Information on the United States-Canada Income Tax Treaty
•Publication 915 (PDF), Social Security and Equivalent Railroad Retirement Benefits
•Tax Topic 423, Social security and equivalent railroad retirement benefits



I am a U.S. citizen who lived in Canada and invested in Registered Retirement Savings Plans (RRSPs) which are similar to IRAs. Under the Canada - U.S. Tax Treaty, I am not sure how to treat the income on these investments. Is the income tax deferred or must it be claimed as earned?


Although Canadian registered retirement savings plans are similar to individual retirement accounts (IRAs), they do not meet the requirements for qualification as IRAs under section 408(a) of the Internal Revenue Code. As a result, the earnings of such a plan are includable currently in the gross income of the beneficiary of the plan for United States income tax purposes. However, a beneficiary of certain Canadian retirement plans may elect for a tax year (the current year) to defer United States income tax on certain current-year earnings of the plan that are not distributed to the beneficiary. An election to defer is made by the beneficiary attaching to the beneficiary's United States federal income tax return, a statement that contains for each plan the information specified in Rev. Proc. 2002-23, 2002-15 I.R. B. 744, or in any future Revenue Procedure that supersedes Rev. Proc. 2002-23.

Copies of Internal Revenue Bulletins can be obtained by writing to:

Superintendent of Documents, U.S. Government Printing Office


P.O. Box 371954,


Pittsburgh, PA, 15250-7954


or by calling 202-512-1800 (There is a charge for copies of bulletins), by web site at Superintendent of Documents or by modem (the Federal Bulletin Board) at 202-512-1387. You can also download the most recent Internal Revenue Bulletins by visiting our Tax Info For Business section.





References:
•Publication 597 (PDF), Information on the United States - Canada Income Tax Treaty
•Revenue Procedure 2002-23, 2002-15 I.R.B. 744 (April 15, 2002)



I need to convert Canadian dollars to U.S. dollars. What is the foreign currency exchange rate I should use?


Foreign currency needs to be translated into U.S. dollars to determine the amount of income (such as income from the sale of goods or services, dividends or interest) to report on a taxpayer's U.S. return and to determine gain or loss when foreign currency is disposed of. The proper translation rate depends on the item of income and whether the taxpayer is a cash or accrual method taxpayer.

. Dividends. Dividends are translated at the spot rate on the date receive.

. Interest. Interest income that is not required to be accrued (because, for example, the taxpayer is an individual holding a debt instrument that does not have original issue discount) is translated at the spot rate on the date received. Interest income that is required to be accrued is translated at the average rate for each accrual period. When such interest is received the taxpayer will realize foreign currency gain or loss based on the difference in exchange rates used to accrue the interest and the spot rate on the date such interest is received. ( A taxpayer may also realize foreign currency gain or loss on the principal when the instrument is sold or matures.)

. Payable and receivables. An accrual basis taxpayer may also realize foreign currency gain or loss with respect to a foreign currency denominated payable or receivable. Generally, foreign currency gain or loss is computed by reference to the change in exchange rates between the time the payable or receivable arises and when it is paid or received. For example, if an accrual basis taxpayer L100 when L1= $1 with payment to occur in 90 days and receives payment of L100 when L1 = $1.20, the taxpayer will realize $20 ($120 - $100) of foreign currency gain. It should be noted that in certain circumstances, taxpayers may use spot rate conventions if consistent with the taxpayer method of financial accounting.

You can generally get the exchange rates from banks and U.S. Embassies. Other possible sources of exchange rate would be publications, such as the Wall Street Journal. If there is more than one exchange rate, use the one that most properly reflects your income.



References:
•Department of Commerce
•Federal Reserve Board



I won money at a Las Vegas casino and my winnings were subject to a 30% withholding tax. I am a Canadian citizen. How can I get the withholding tax back?


Generally, you must file a tax return to claim a refund of withholding. Gambling winnings by nonresidents of the U.S. are taxed at a flat 30% tax rate. However, under the U.S./Canada Tax Treaty, residents of Canada may claim gambling losses, but only to the extent of gambling winnings. You should report both your total gambling winnings and your total gambling losses on page 4 of Form 1040NR (PDF), U.S. Nonresident Alien Income Tax Return on the dotted portion of line 79. If you have net gambling winnings (after offsetting your total losses against your total winnings), you should include this net amount on line 79, column (d) of the Form 1040NR. You should also attach a copy of the Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, showing the taxes withheld to your Form 1040NR.

A diary of your losses should be kept for your records.

To file a Form 1040NR you must have a valid identification number. For most people this is a social security number (SSN). However, if you do not have and cannot obtain a SSN you may use an Individual Taxpayer Identification Number (ITIN). If you do not have an ITIN you may apply by filing Form W-7 (PDF), Application for IRS Individual Taxpayer Identification Number. Along with the completed Form W-7, you must submit document that verify both your identity, that is, contain your name and a photograph, and your foreign status. If you have one document that verifies both, such as a passport, then one document is enough. You may, however, have to provide a combination of documents, for this purpose.