Serbinski Accounting Firms

We have already debated the issue of whether an individual who is not a U.S. citizen or U.S. resident can choose to file a Form 1040 (as opposed to a Form 1040NR) under the nondiscrimination article (Article XXV) of the Canadian-U.S. Income Tax Treaty. (viewtopic.php?t=11273&highlight=)

We continue to disagree. I don’t think the nondiscrimination article allows for this. You do. As stewartho points out, the IRS also seems to agree that "Article XXV, paragraph 1, does not provide a basis for Canadian national who is a U.S. nonresident alien to claim a standard deduction or extra personal exemptions on the hypothetical Form 1040." If a nonresident alien cannot claim a standard deduction on a hypothetical Form 1040, I don’t see why the nonresident alien would be able to claim the standard deduction on an actual Form 1040. The statute is clear that nonresident aliens cannot claim the standard deduction. Code §63(c)(6)(B).

In any case, stewartho wanted to know whether he should file Form 8833 and what Article of the treaty would apply to him. You did not answer which article of the treaty would apply. I assume that you are applying Article XXV (nondiscrimination).

The regulations provide that “every nonresident alien individual * * * who is engaged in trade or business in the United States at any time during the taxable year or who has income which is subject to taxation under Subtitle A of the Code shall make a return on Form 1040NR.â€￾ Treas. Reg. §1.6012(b)(1)(i).

Since stewartho will be a dual status alien and he will be a U.S. resident at the end of 2016, he “must make a return on Form 1040â€￾ and “a separate schedule is required to be attached to this return to show the income tax computation for the part of the taxable year during which the alien was neither a citizen nor resident of the United States * * *.â€￾ Treas. Reg. §1.6012(b)(2)(ii)(a).

If stewartho wants to not attach the “requiredâ€￾ separate schedule because he is claiming that the treaty overrides this requirement, and if he wants to claim the standard deduction, the question is whether Form 8833 must be filed. The instructions to Form 8833 state “See Regulations sections 301.6114-1(a) and (b) for more details and for examples of treaty-based return positions taken by taxpayers for which they must make disclosure.â€￾

Treas. Reg. §301.6114-1(b) states “[r]eporting is required under this section except as expressly waived under paragraph (c) of this section. The following * * * is a list of particular positions for which reporting is specifically required. These positions are as follows: (1) That a nondiscrimination provision of a treaty precludes the application of any otherwise applicable Code provision * * *.â€￾

The FIRST ITEM listed as requiring a Form 8833 is a position relying on the nondiscrimination provision in a treaty. Unless paragraph (c) waives the requirement to file, a Form 8833 would be required.

Paragraph (c)(2) of the regulation provides that "[r]eporting is waived for an individual if payments or income items otherwise reportable under this section * * *, received by the individual during the course of the taxable year do not exceed $10,000 in the aggregate * * *.â€￾

While this exception is not crystal clear, it appears to only apply to amounts received by an individual not exceeding $10,000. It does not appear to apply to which form to file or to which deductions may be claimed. Consequently, it would appear that the exception would not apply to stewartho, and a Form 8833 would be required by him. Further, it would appear that Form 8833 is required for any nonresident alien who is claiming nondiscrimination under a treaty as a reason for filing a Form 1040 and claiming the standard deduction.

The treaty does not refer to claiming a nondiscrimination position as an “election.â€￾ Further, the only exception to disclosing a treaty position for an election is with respect to a Code §897(i) election. A Code §897(i) election is not relevant here.

Yes, if you want to rely on a treaty position that overrides US domestic tax law you generally must file Form 8833. There is a $1,000 penalty for not filing the form when required to file. Also, some advisors would disagree with nelsona's advice that a joint return can be filed for nonresidents unde...

The IRS clearly did not accept the "non-dual-status 1040, and all that goes along with it." The IRS argued, and the court held, that the individual was a nonresident alien for a portion of the year. The education credits with non-dual-status 1040 were not allowed. NRAs are not subject to U...

"the taxpayer WAS taxable on world income" I did not see anything in the case suggesting that the taxpayer was taxable on worldwide income prior to February 22nd, while he was a nonresident alien. "your argument would mean that the taxpayer should not have been allowed to file a "...

Thanks for the reply. I think we have discussed this in the past, and I have tentatively disagreed.

Today I took a closer look at this issue, and I continue to respectfully disagree that the taxpayer in Li’s circumstances would be successful in claiming to be a U.S. resident for the entire year under Article XXV (Nondiscrimination) of the Canada-U.S. Income Tax Treaty.

I think that the “same circumstancesâ€￾ in the Li case would be where a nonresident alien became a U.S. citizen on February 22, 2012. In this circumstance, the taxpayer would be a nonresident alien up through February 21, 2012. Since the taxpayer would be treated as a nonresident alien for a part of the year, he/she would not be able to claim the education credit. Therefore, I see no discrimination, and I do not see how the nondiscrimination clause of the treaty would apply.

I recognize that it would be unusual for an individual to be a nonresident alien before becoming a U.S. citizen. However, it can (and does) occur.

I respect your broad knowledge and experience in this area. It is just this one small item that you and I disagree on.

In Li v. Commr., T.C. Summary Opinion 2016-49, the Tax Court held that a Canadian citizen who filed a Form 1040 for 2012 could not claim an education credit for that year because his residency starting date was February 22, 2012. The education credit could not be claimed if he was a nonresident alie...

Schedule I, Line 1 would be zero. I have never used the worksheet to calculate Subpart F Income. I do not find it useful.

Negative Subpart F Income means no Subpart F Income. This means that you have no amount to report on your Form 1040.

Sorry, thought you were asking a different question. Please disregard my prior post.

Rev. Proc. 2014-55, the Revenue Procedure that eliminates the 8891, in section 5.01 says that no 3520 or 3520-A is required for an RRSP.

Yes. I believe that you “mayâ€￾ be engaged in a trade or business in the United States. I disagree with Nelsona’s statement that this is “incorrectâ€￾ and his apparent assertion that you are definitively not engaged in the conduct of a trade or business in the United States. The fact that the server in the U.S. is a dedicated server, I believe, increases the risk that you are engaged in the conduct of a trade or business in the United States.

If you were engaged in the conduct of a trade or business in the United States, then you would need to annually file a U.S. tax return. Treas. Reg. §1.6012-1(b)(1)(i) (“* * * every nonresident alien individual * * * who is engaged in trade or business in the United States at any time during the taxable year * * * shall make a return on Form 1040NR.â€￾).

Many foreign persons are unsure if they are engaged in the conduct of a trade or business in the United States. Consequently, the regulations allow those persons to file “protectiveâ€￾ tax returns where they are not conceding that they are engaged in the conduct of a trade or business in the United States. Treas. Reg. §1.874-1(b)(6). On the contrary, the foreign persons explicitly assert that they are not engaged in the conduct of a trade or business in the United States. The procedure for this is specified in the cited regulation.

The benefit of filing this protective tax return is that it starts the statute of limitations running and it prevents the I.R.S. from disallowing deductions (the penalty for failing to file a U.S. tax return when required) if it turns out that you are engaged in the conduct of a trade or business in the United States. On the tax return, you may even want to include Form 8833, claiming that if you were to be considered engaged in the conduct of a trade or business in the United States, that you do not have a permanent establishment in the U.S. Therefore [you would argue], you should not be subject to U.S. tax.

Of course, filing the protective tax return is a red flag to the I.R.S., but that is exactly what it is intended to be. Whether you decide to file the protective tax return or not is up to you. However, you should seriously consider it.

If the Canadian person has agents in the U.S. running the dedicated server on his behalf, the U.S. agents activities and the dedicated server may be attributed to the Canadian person, creating a presence in the U.S.

And agents.

I agree that no PE, no presence = not engaged in a U.S. Trade or business. However, no PE, some presence (such as a server) might be engaged in a U.S. Trade or business.

Not sure that I agree. The OECD Commentary to the Model treaty states that a web site does not itself involve any tangible property, and thus cannot constitute a permanent establishment. Paragraph 42.2. In contrast, the server on which a web site is stored and through which it is accessible is a pie...