Before we begin make sure you’ve handled the pre-move checklist and if not you should act on those items as soon as possible.
US taxes will be very unfamiliar territory for Canadians but if you’ve handled most of the checklist it will be surprisingly straightforward. I’ll be advocating for doing your own return here and under the assumption you don’t do business or anything that complicates the tax return.
Residency is the most important status that affects your tax returns, it determines which country you have to report income and pay taxes to. Correspondingly each country has their own resident and non-resident tax returns. For the US that is 1040 for residents and 1040NR for non-residents. The day of non-residency in Canada is also critical because that day determines when you are no longer subject to tax on your world income by Canada.
The IRS and CRA have different guidelines on how to determine residency and the overlap has the potential to become pretty confusing.
The US has two criteria (note Green Card / US Citizens are taxable regardless of residence):
- Green Card Test
- Substantial Presence Test
Canada on the other hand has a checklist of “ties to Canada” and asks how much ties you have. Then there’s the deemed residency rules which are to make sure soldiers, diplomats and government workers stay Canadian residents. Canadian residency comes in four types factual resident (you lived there for more than a year), deemed reisdent, deemed non-resident and non-resident. See below
Not only is it confusing, but if both countries claim you as a resident there, you’re in for double tax. Fortunately that’s why there’s the US – Canada tax treaty, to help determine residency and avoid double taxation. These rules supersede what the CRA/IRS rules. Should you be double taxed you can use any tax you paid one country to subtract from there other (so you only pay the max of the two not both).
Usually from the treaty we can conclude where you work is your economic interest but if you have dependants like a spouse or child in the other country it can be considered a tie or even a permanent home. If you packed your bags and came to the US the situation is simple, if you kept your family in Canada and flew back to visit you’ve caused yourself a lot of residency ambiguity that you should do some deep research on.
Often it is is cited not to file form NR73 to determine residency because it can be used against you. If your situation is clear an NR73 is completely unnecessary and if it isn’t you should seek tax advice because once an NR73 result is returned it’s practically set in stone that you are or aren’t a resident and you’ll have a much harder time fighting it.
US Tax Return
Make sure you have your SSN (Social Security Number) before you start (Not sure how you made it so long in this country if you didn’t have one). You can get one by walking into a Social Security office with your passport and I-94 form.
A Canadian can have up to 3 options with regard to their US tax return
1040, 1040NR and Dual Status (Both 1040 & 1040NR)
First, do the two US residency tests above to see if 1040NR is even an option. If you meet the substantial presence test but haven’t been in the US 183 days or more then you can still file 1040NRs provided you’ve had ties to Canada but you’ll need to file form 8840. Now of your options I’d avoid dual status because it’s double the return with the 1040 tax reporting requirements for the resident time period with not that many benefits except a few itemized deductions. If you’ve been in the US less than 183 days and had less than $10000 income there you can be exempt in which you pay only Canadian taxes, but you still need to file the forms.
Now, if you were a normal non-resident alien you’d be forced to file dual status, but as a Canadian you can file ordinary 1040 by way of US-Canada tax treaty. The advantage of 1040 is the standard deduction and married filing jointly deduction while you can use 2555 to exempt foreign income. The advantage of the 1040NR is that you’re only taxable on US based income, no need to report foreign income and are not subject to reporting your foreign accounts for the year (and all the nasty tax forms that come with it).The 1040NR can really save you if you’ve forgotten to do items in the Pre-Move checklist.
Okay ready up your Ws, 1042-S, 1099-INT, 1099-DIV, 1099-R here we go (PS Read the instructions on those forms to find out which box they go if this is your first time doing taxes)
In a place of great complexity the rules for 1040NR aren’t too bad but on the other hand there is no automation through software. Fortunately the bulk of the return is on the first two pages. Get the trusty 1040NR Guide and you can essentially go line by line and there will be descriptions what goes in each line. All the relevant schedules for income come with 1040 NR which saves you from needing to find forms.
To start, you get the exemptions for yourself and dependants if applicable, this is like the basic amount in Canada except it’s less due to not having the standard deduction. This is effectively income that does not get taxed for those who don’t know.
Non-business related interest income is excluded income for Canadian residents as per Pub901 via the US – Canada tax treaty. If you had tax withheld while you were still in Canada you can put your 1042-S or 1099-INT numbers in schedule NEC to claim it back and exempt the income in schedule OI. Exempt your dividends if you have 1099-DIV income by the following rules.
If you have a High Deductible Health Savings Plan you can deduct personal contributions to a Health Savings Plan. Contributions can be made up to April 15 of the year following the tax year so you may still have time to get a deduction. Fill out form 8889 for the deduction.
If you moved to the US you can deduct moving and travel costs with form 3503.
If you reported any income that you had to pay tax in Canada on you can file form 1116
If you have itemized deductions you can claim put them on Schedule A. Filling out the rest is pretty straight forward and that’s actually it unless you pull out IRA money or need to pay penalties.
1040 is supported by Turbotax and other tax software you just need to plug in your numbers. However be aware of Canadian account reporting requirements.
Foreign Income Exemption: 2555
Foreign Tax Credit: 1116
Foreign Mutual Funds: PFIC (8621)
RRSP: 8891 (Note RRSP is a foreign trust exempt from reporting 3520/3520A)
Foreign Bank/Investment Accounts: FBAR/3938
US Canada Tax Treaty Exemptions: 8833
There isn’t any more need to go into detail, since the rest can be handled by tax software and this type of return is the most common. You can easily search the web if you want to handle certain items yourself.
Make sure you have your T4 (employment), T4A, T4RSP, T2202, T3, T5, etc (Put numbers from these forms the right box if doing manually, that’s doing your taxes )
Canadian returns can be done in Turbotax, Ufile or manually with a few small tweaks. The CRA is pretty good about putting all the information out and organizing it in a very accessible way. Pretty much all under the sun that you need to know is in the Emigrant’s Guide, here are a few things that stood out:
- You need to pay capital gains as if you sold everything on the day you left
See: T1243 and T1161 and see if they apply to you. Real property is exempt though you can file T2061 for a capital loss
- Certain Federal and Provincial deductions such as the basic amount are prorated by the number of days you were in Canada. ie 330 days in Canada / 365 days a year multiplied by your amount
- You do not need to report non-Canadian income after the day you are non-resident, but you can via section 217 but the only advantage is being able to claim your deductions without them prorated but that’s if you report at least 90% of your world income
- You use the tax package of the province you resided in before you left
- You put the date you Left Canada date on the first page of your return
T4056 can give you a full blown explanation on all the details but it’s mostly the same stuff.
Ufile works lovely with emigrant returns but if you use Turbotax you have to do a few adjustments.
- Even though you were a non-resident at the end of the year, you were a tax resident of Canada for the year (See Canadian residence above) you are filing so put in the province you resided in before leaving Canada.
- You will have trouble plugging in your non-Canadian address because of 1 (You might have to manually adjust)
- Answer yes to “Did your Canadian Residency Change In 2013? ” or if you’re in forms mode go to INFOWS and fill in the leave date, Part XIII Income and foreign income
Without going into a turbotax tutorial that’s it. The hardest part is waiting for all the forms to come in, they’re mailed in Feb if that wasn’t late enough and you have to wait even longer for them to trickle down to the US, all the while you are waiting anxiously.
After-Move Canadian Considerations
- Income: Remember all Canadian income after moving is subject to Part XIII withholding tax at a flat rate of 25%. That includes rent on property at gross income, though you can file NR6 and reduce it to net and file a 216 return at the end of every year you have income. Even if they don’t withhold you have to pay it and you’ll need to open a non-resident account to pay taxes.
- Selling Real Estate: DO NOT sell real estate in Canada without first getting a certificate of approval from the CRA or you will be subject to a 30% tax on the gross proceeds.
- TFSA Contributions: after moving your eligible TFSA limit is 0. Do not contribute or you will get the 1% / month penalty (for US tax considerations you shouldn’t even have one by now)
- RRSP Withholding Tax rate is 25% flat for non-resident without making it an annuity (if you hate filing 8891 to defer tax on gains take the hit and close it). The withholding tax is it, no need to add to income like a regular RRSP withdrawal.
- Home Buyer’s Plan: If you haven’t withdrawn, cancel any plans to. If you have pay it back, you’re not eligible to be in the plan as a non-resident
- Federal / Provincial Rebates: All the GST/HST, OSTC, UCCB are goodies for residents only, if you got any after you were non-resident you have to return it.
Remember to submit the taxes by mail. First year and final year returns cannot be done by electronic filing. If you attempted the tax returns yourself and are in a serious level of doubt on some definitions, find a tax consultant familiar with both US and Canada taxes (yes it will cost you an arm and a leg because they’ve got you). For me I chugged through all the paper forms manually and cross-checked with Turbotax where I could. If you don’t hunt for every possible deduction under the sun or need to mess with RRSPs and capital gains the returns should take you an hour or two each.
Also there’s an amazing resource where I get most of my cross border tax questions:
Happy Tax Filing… Okay it almost sounded fun but the real fun is when you get a return.
PS I’m not a tax accountant, this is just a compilation of my research and you need to do your own so this does not constitute as any formal tax document and cannot be held liable for an issues caused..