Wife and I are Canadian Citizens (non USC), Canadian residents. Our 2 children are U.S citizens. We filed dual status in 2012 without issue.
For 2013, we intend to file 2 very simple 1040-NRs to report activity from a rental property in U.S. We have no other U.S income and the property operates at a small loss so no tax is owing.
At various times on this board, I have read about filing strategies that open access to the refundable U.S child tax credit for which our children are elgible. I'm a little unclear on the details.
Q1) Is there a U.S filing method we can use to receive the "refundable" child tax credit AND escape the onerous 1040 reporting requirements.
Q2) If said method exists, how are CDN wages handled?
Filing 1040-NR / Child Tax Credit
Moderator: Mark T Serbinski CA CPA
I forgot one more detail. I am aware that one can simply claim the child tax credit on 1040-NR. We did this in 2012 to reduce tax owned on a roth conversion made before leaving U.S and it worked just fine.
For 2013, we have no U.S tax owing on the 1040-NR so the "credit" is not helpful. I'm wondering if we can access the "refundable" credit somehow. I believe this is called the "additional child tax credit".
Likely, this requires reporting CDN wages somehow but that's where I get confused. Can we do that without increasing our U.S tax burden and getting hit by all the reporting requirements (we have TFSA, RESP at this point).
For 2013, we have no U.S tax owing on the 1040-NR so the "credit" is not helpful. I'm wondering if we can access the "refundable" credit somehow. I believe this is called the "additional child tax credit".
Likely, this requires reporting CDN wages somehow but that's where I get confused. Can we do that without increasing our U.S tax burden and getting hit by all the reporting requirements (we have TFSA, RESP at this point).
Before dealing with your Q, I have one about something you wrote: You claimed CTC on 1040NR "to reduce tax owned on a roth conversion made before leaving U.S"
I trust that you reported the actual conversion income on your 1040 (ie. the statement you filed covering the part of the year that you were resident) and not directly on your 1040NR.
To your CTC question:
You are corrct that, since you have no tax liability, the only possible way top access the credit is thru the Additional Child Tax Credit (ACTC).
This requires that you have some US taxable income reported on your 1040NR. You do not. Alternatively, it requires that you have paid either social security payments, or self-employemnt tax during the year. You did not. So I don't know of any way that you can get ACTC with 1040NR unless you have US taxable income. You cannot report non-US income on your 1040NR.
The method Cdn residents use to claim the ACTC is by filing a 1040 and not using 2555 to exclude wages, using 1116 instead. But this does not apply to 1040.
The only thing that might work, is if you (as a Cdn employee) were to go down to US on business from time to time. US considers this income US-sourced (various treaty positions make it non-taxable, but one is not required to apply the treaty), so if you were to earn, say, 5 to $6000 while in US (you can crunch the numbers for your case), you could have ) tax liability, but sufficient income reported to collect ACTC.
Don't know anyone who has tried this however, I'm just spit-balling. I do know that I have reported wages earned while a Cdn employee on my 1040NR because it was earned while physically in US (below treaty limits), and I have reported money earned from my US employer while in Canada as foreign income on my 1040 without problems.
Just so its out there, other US-source income such as IRA withdrawla etrc won't work for the ACTC. It will work for the regular CTC, as long as it creates a tax liability of $100 per child. But that will then also come witha Cdn tax bill that will outweigh the credit (and you won't be able to claim the full tax credit on your Cdn return, since you reduced your US tax with the CTC.
I trust that you reported the actual conversion income on your 1040 (ie. the statement you filed covering the part of the year that you were resident) and not directly on your 1040NR.
To your CTC question:
You are corrct that, since you have no tax liability, the only possible way top access the credit is thru the Additional Child Tax Credit (ACTC).
This requires that you have some US taxable income reported on your 1040NR. You do not. Alternatively, it requires that you have paid either social security payments, or self-employemnt tax during the year. You did not. So I don't know of any way that you can get ACTC with 1040NR unless you have US taxable income. You cannot report non-US income on your 1040NR.
The method Cdn residents use to claim the ACTC is by filing a 1040 and not using 2555 to exclude wages, using 1116 instead. But this does not apply to 1040.
The only thing that might work, is if you (as a Cdn employee) were to go down to US on business from time to time. US considers this income US-sourced (various treaty positions make it non-taxable, but one is not required to apply the treaty), so if you were to earn, say, 5 to $6000 while in US (you can crunch the numbers for your case), you could have ) tax liability, but sufficient income reported to collect ACTC.
Don't know anyone who has tried this however, I'm just spit-balling. I do know that I have reported wages earned while a Cdn employee on my 1040NR because it was earned while physically in US (below treaty limits), and I have reported money earned from my US employer while in Canada as foreign income on my 1040 without problems.
Just so its out there, other US-source income such as IRA withdrawla etrc won't work for the ACTC. It will work for the regular CTC, as long as it creates a tax liability of $100 per child. But that will then also come witha Cdn tax bill that will outweigh the credit (and you won't be able to claim the full tax credit on your Cdn return, since you reduced your US tax with the CTC.
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Oh, and just so we are clear, I'm of the opinion, that if you ONE or BOTH of you elect to file as a resident (filing 1040 by treaty, since neither of you ) to get the ACTC , at least one person will be subjec to all the foreign reporting headaches.
There have been a few threads that have outlined how a USC married to a non-USC who elects to file jointly, the non_US filer is excused from some (but by no means all) of the reporting issues. This is because they are using a a specific IRS (not treaty) provision for the non-US spouse. I don't think this applies to someone just deciding to file.
It does leave the possibility of one spouse loading up on all these problematic accounts ,while the otherone submits a 1040, and elects to have the spouse join them on the return.
There have been a few threads that have outlined how a USC married to a non-USC who elects to file jointly, the non_US filer is excused from some (but by no means all) of the reporting issues. This is because they are using a a specific IRS (not treaty) provision for the non-US spouse. I don't think this applies to someone just deciding to file.
It does leave the possibility of one spouse loading up on all these problematic accounts ,while the otherone submits a 1040, and elects to have the spouse join them on the return.
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Fantastically detailed response. Thank you for your time.
On your question re: roth conversion, the answer is yes. My wife reported it on her 1040 "statement", transferred it to the 1040-NR and then claimed the child tax credit. It was fully utilized to reduce U.S tax liability.
I do in fact travel every couple months to the U.S to meet with my employer who pays me on a Canadian payroll. Less then 30 days in 2013.
The question of whether or not I had to report this income actually came up last year . I ultimately didn't report it at all because I just couldn't believe that a CDN employee would have to file a 1040-NR in the U.S to report income earned on a couple of business trips. I hope that was in error.
Your suggestion of claiming income earned during these trips as taxable in the U.S did occur to me. It sounds like a good idea, particularly if I'm required to do it. How would the taxes on the income work? Do I pay CRA first and claim FTC on 1040-NR or the other way around?
On your question re: roth conversion, the answer is yes. My wife reported it on her 1040 "statement", transferred it to the 1040-NR and then claimed the child tax credit. It was fully utilized to reduce U.S tax liability.
I do in fact travel every couple months to the U.S to meet with my employer who pays me on a Canadian payroll. Less then 30 days in 2013.
The question of whether or not I had to report this income actually came up last year . I ultimately didn't report it at all because I just couldn't believe that a CDN employee would have to file a 1040-NR in the U.S to report income earned on a couple of business trips. I hope that was in error.
Your suggestion of claiming income earned during these trips as taxable in the U.S did occur to me. It sounds like a good idea, particularly if I'm required to do it. How would the taxes on the income work? Do I pay CRA first and claim FTC on 1040-NR or the other way around?
Technically, one is supposed to report the income. However both the IRAS and the treaty have opt outs if the incoem is lesss than $5000 (IRS reg) and $10K (treaty).
None of the states have these opt outs, so occasionally one has state tax to pay while none fedearlly.
For taxes, you would need to get the credit on your Cdn return for the US tax. HOwever, CRA is well aware of the treaty exemptions, so would deny your credit if you were under the 10K, so you don't want that.
What you want is to be in the range of low enough to pay no US tax on your 1040NR, but high enough to get the ACTC.
Run the numbers to see what that would be, and see if your prorated work in US falls in that. If it does, I would be going for it.
None of the states have these opt outs, so occasionally one has state tax to pay while none fedearlly.
For taxes, you would need to get the credit on your Cdn return for the US tax. HOwever, CRA is well aware of the treaty exemptions, so would deny your credit if you were under the 10K, so you don't want that.
What you want is to be in the range of low enough to pay no US tax on your 1040NR, but high enough to get the ACTC.
Run the numbers to see what that would be, and see if your prorated work in US falls in that. If it does, I would be going for it.
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My case would be ~10 K income. I can claim 3 exemptions so I would have zero tax liability and the ACTC would kick in. I think I would only get 15% of the income over $3000 though ($1050) ?
You need to have ~ 16.5 K in U.S income with a path to zero tax liability to get the maximum credit.
I'm not sure it really works for me but others with more income and additional deductions/credits could make it work.
You need to have ~ 16.5 K in U.S income with a path to zero tax liability to get the maximum credit.
I'm not sure it really works for me but others with more income and additional deductions/credits could make it work.
One more question on your comment :
Technically, one is supposed to report the income. However both the IRAS and the treaty have opt outs if the incoem is lesss than $5000 (IRS reg) and $10K (treaty).
Does "opt out" mean "not report", or does it mean "formally report and apply treaty provision to be exempt from tax" ?
I am under the 10 K threshold so leaving this income completely off my 1040-NR is ok?
Technically, one is supposed to report the income. However both the IRAS and the treaty have opt outs if the incoem is lesss than $5000 (IRS reg) and $10K (treaty).
Does "opt out" mean "not report", or does it mean "formally report and apply treaty provision to be exempt from tax" ?
I am under the 10 K threshold so leaving this income completely off my 1040-NR is ok?
The opt out for not reporting is $3900 for wages, but ypu have normal limits as well for single filer under which you do not need to report. Any treaty limit would need to be reported and then exempted, but would not count for calculating ACTC.
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Personally, I wouldn't bother. I would only do it in a migration year, if filing dual-status, or if I was spending MANY months in US.
By the way, the $10K limit is techniically if you are working for a US employer. Otherwise the real factor is time spent in US (by either you or a series of your colleagues) , so I wouldn't bother. But if it were to collect ACTC I certainly would.
By the way, the $10K limit is techniically if you are working for a US employer. Otherwise the real factor is time spent in US (by either you or a series of your colleagues) , so I wouldn't bother. But if it were to collect ACTC I certainly would.
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Thanks. Let me just restate my options for handling the CDN wages earned while physically present in U.S (27 days) to verify I understand.
Option #1
-Report the income as taxable wages on 1040-NR Line 8
-Claim ACTC.
-If any tax liability remains and income > 10 K, claim FTC on CRA return
Option #2
-Do not report the income on 1040-NR Line 8
-Report the income on 1040-NR / Schedule OI and 1040-NR Line 22
-Do not claim ACTC
Option #3
-Do not report the income on 1040-NR Line 8
-Do not report the income 1040-NR / Schedule OI or 1040-NR Line 22
-Do not claim ACTC
Do I have it now?
Option #1
-Report the income as taxable wages on 1040-NR Line 8
-Claim ACTC.
-If any tax liability remains and income > 10 K, claim FTC on CRA return
Option #2
-Do not report the income on 1040-NR Line 8
-Report the income on 1040-NR / Schedule OI and 1040-NR Line 22
-Do not claim ACTC
Option #3
-Do not report the income on 1040-NR Line 8
-Do not report the income 1040-NR / Schedule OI or 1040-NR Line 22
-Do not claim ACTC
Do I have it now?
I guess I should be more clear on exactly what the treaty says: Since you work for a Cdn employer (and not a US one), unless you were in US more than 183 days OR you are part of an ongiong project whereby your employer is continually sending employees down, NONE of your wages are taxable in US, by treaty.
This means you will NOT get any Cdn tax credit, so really you are looking for a sweet spot that will get you some ACTC but not tax.
Since you have to file anyways because of your rental your othions are as above, except that in option 1, you won't be asking for any cdn credit.
I would not choose option 3, because you are already filing a 1040NR for your rent.
So it is between 1 and 2.
This means you will NOT get any Cdn tax credit, so really you are looking for a sweet spot that will get you some ACTC but not tax.
Since you have to file anyways because of your rental your othions are as above, except that in option 1, you won't be asking for any cdn credit.
I would not choose option 3, because you are already filing a 1040NR for your rent.
So it is between 1 and 2.
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