Do I need to file a U.S. income tax return?
Yes, if you are a U.S. citizen or resident…
- Every year you must file a U.S. income tax return if you are a U.S. citizen or resident (unless your worldwide income is below the threshold for filing).
- A U.S. resident is a person who:
- Is a Green Card holder, or
- Was in the U.S. for 183 days or more under the rules of the substantial presence test.
- This test applies if you were in the U.S. on at least 31 days in the tax year in question.
- If so, the rules add all your days in the U.S. in the tax year, plus 1/3rd of your days in the year before, plus 1/6th of your days in the year before that.
- For example:
- All the days in the U.S. in 2024
- + 1/3rd of the days in the U.S. in 2023
- + 1/6th of the days in the U.S. in 2022
- If the total is 183 or more, you are a U.S. resident under the substantial presence test.
- In some cases you may be treated as a non-resident even if you had 183 days or more under the substantial presence test, for example, if you qualify for a closer connection to Canada.
Maybe, if you have U.S. sourced income…
- You may need to file a U.S. return if you have U.S. sourced income (even if you are not a U.S. citizen or resident).
- U.S. sourced income may include:
- Wage income from a U.S. company or from a Canadian (or non-U.S.) company for work done in the U.S.
- Rental income from a U.S. vacation home that you rent out when you are not using it yourself.
- Gain from the sale of a U.S. home or other U.S. real property.
- U.S. gambling income.
- The terms of the Canada-U.S. Income Tax Treaty may result in no requirement to file a U.S. return.
No, if you are not a U.S. citizen or resident, and you do not have U.S. sourced income…
- No U.S. filing is needed if you are not a U.S. citizen or resident, and you do not have U.S. sourced income.
- However, be sure to review the substantial presence test definition of U.S. resident for income tax purposes under the “Yes” FAQ above.
What other U.S. filing obligations might apply?
- FBAR and Form 8938 – If you are a U.S. citizen or resident, you may also have to file the FBAR (FinCEN Form 114 Report of Foreign Bank and Financial Accounts).
- The FBAR is required if your non-U.S. financial accounts all together had a balance greater than US $10,000 during the year.
- Non-U.S. financial accounts include (for example) Canadian:
- checking and savings accounts,
- TFSA accounts,
- RESP accounts,
- RRSP accounts,
- RRIF accounts,
- non-registered investment accounts, and
- accounts over which you have signature authority (for example, as a treasurer of a church or charity).
- Similar to, but separate from the FBAR is Form 8938 Statement of Specified Foreign Financial Assets.
- The account balance threshold for filing this form is higher than the FBAR, but similar information is reported.
- Form 3520 – If you are a settlor or beneficiary of a non-U.S. trust, you may also have to file Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts and Form 3520-A Annual Information Return of Foreign Trust With a U.S. Owner.
- Form 5471 – If you are an owner of a non-U.S. corporation, you may also have to file Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
What should I do if I haven’t been filing the required U.S. returns?
- Contact us.
- You may be eligible to participate in the I.R.S.’s Streamlined Filing Compliance Procedures.
- If eligible, you must file:
- Form 14653 Certification by U.S. Person Residing Outside of the United States for streamlined Foreign Offshore Procedures.
- A minimum of three years of Form 1040 Individual Income Tax Return and, if applicable, Forms 3520, 3520-A, 5471, and 8938.
- Six years of FinCEN Form 114 Report of Foreign Bank and Financial Accounts (commonly called the “FBAR”).
I’m a Canadian snowbird. Does the I.R.S. care how long I am in the U.S.?
- Yes. You may be considered a U.S. resident for income tax purposes, even if you are not a resident under U.S. immigration law.
- You are a U.S. resident for income tax purposes if you are in the U.S. for 183 days or more under the rules of the substantial presence test.
- This test applies if you were in the U.S. on at least 31 days in the tax year in question.
- If so, the rules add all your days in the U.S. in the tax year, plus 1/3rd of your days in the year before, plus 1/6th of your days in the year before that.
- For example:
- All the days in the U.S. in 2024
- + 1/3rd of the days in the U.S. in 2023
- + 1/6th of the days in the U.S. in 2022
- If the total is 183 or more, you are a U.S. resident under the substantial presence test.
- The way the math works, even if you are in the U.S. only 122 days in each of three years in a row, your days under the substantial presence test add up to 183.
- For example:
- 122.00 (All the days in the U.S. in 2024)
- + 40.67 (1/3rd of the days in the U.S. in 2023)
- + 20.33 (1/6th of the days in the U.S. in 2022)
- = 183.00 days
- If you are at or over 183 on your days in the U.S. or if you are uncertain, contact us!
What if a non-resident of Canada owns Canadian real property?
Do you have rental income?
- If your Canadian property is rented out, Canadian income tax must be withheld from every rent payment you receive and remitted to Canada Revenue Agency.
- Contact us so we can ensure this is set up properly, including possible arrangements to reduce the amount of withholding tax.
- If your Canadian property is rented out, you may want to file an annual Canadian non-resident income tax return to claim rental expenses and to recover a portion of the withholding tax.
- Don’t forget to report your Canadian rental income on your home-country income tax return and to claim any available foreign tax credit for taxes paid to Canada. (Foreign tax credits help to avoid double-taxation.)
Are you subject to Underused Housing Tax?
- If you own Canadian residential real property you may have to file an annual Form UHT-2900 Underused Housing Tax Return and Election Form.
- If you don’t qualify for an exemption, the underused housing tax is 1% of the value of the property.
Are you selling Canadian real property?
- Certificate of compliance – No later than 10 days after the closing date for the sale of your Canadian real property, you have to file Form T2062 Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property (“Form T2062”).
- Among other information, this form reports the sale proceeds, cost base, and the gain or loss on the sale.
- You are required to remit to Canada Revenue Agency withholding tax of 25% of the gain in order to get the certificate of compliance.
- The lawyer for the purchaser of your property will holdback 25% of the gross sale proceeds until you provide a copy of the certificate of compliance.
- If you have a gain on the sale of the property, you must file a non-resident Canadian income tax return by April 30th of the year following the date of sale.
- On this return you are able to reduce the gain for any closing costs (such as realtor’s commission).
- The income tax payable is calculated using the normal graduated rates. Usually this results in a refund of a portion of the 25% tax that was withheld.
- We can prepare both the Form T2062 and the non-resident income tax return for you.
I’m thinking about immigrating into Canada. What tax considerations should I be aware of?
- Determining your residence for income tax purposes is not always a simple matter, because there are many variables and everyone’s situation is different. Contact us.
- We recommend that you familiarize yourself with your Canadian tax obligations before you immigrate to avoid big surprises of the wrong kind after you arrive.
- The point from which most immigrants are subject to Canadian tax is the date of immigration. The Income Tax Act (Canada) deems you to have disposed of most assets immediately before immigrating for fair value, and to have reacquired them for the same amount.
- The effect of this is that the fair value of those assets on the date of your immigration becomes the cost base for Canadian income tax purposes. That cost base is used at the time of any future sale to calculate your gain or loss for Canadian income tax.
- It is important to obtain and keep records of the fair value of your assets as of the date of your immigration. The easiest time to collect this information is right around the immigration date.
- If you continue to hold foreign assets, you may have additional forms to file with your Canadian income tax return.
- Contact us to identify any other significant matters.
I’m thinking about emigrating out of Canada. What tax considerations should I be aware of?
- Determining your residence for income tax purposes is not always a simple matter, because there are many variables and everyone’s situation is different. Contact us.
- Canada’s income tax primarily applies to Canadian residents. Therefore, the day that a person emigrates is often the point from which the person is no longer subject to Canadian tax.
- The Income Tax Act (Canada) deems you to have disposed of most assets* immediately before emigrating for fair value, and to have reacquired them for the same amount.
- The effect of this is that any gain or loss on those assets is reported on your Canadian income tax return for the year of your emigration.
- It is important to obtain and keep records of the fair value of your assets as of the date of your emigration. The easiest time to collect this information is right around the emigration date.
- * Some assets are excluded from the deemed disposition, including Canadian real property, TFSAs, RESPs, RRSPs, RRIFs, and pensions.
- If you borrowed from your RRSPs under the Home Buyers Plan or the Lifelong Learning Plan, those loans either have to be repaid or included in income on your tax return for the year of emigration.
- After you become a non-resident of Canada, you cannot make TFSA contributions, but you can leave your account invested.
- You should notify each of the financial institutions where you continue to have accounts and any payers of pension income that you are becoming a non-resident of Canada. Be aware that some financial institutions may require you to close your accounts, since they do not provide service to non-residents.
- Contact us to identify any other significant matters.
