My situation in brief: I am a U.S. citizen and was employed by the University of Western Ontario for 1 year (Aug 2006 - July 2007). During this time, I resided in the United States, and most of the work was carried out there although I did travel to Canada five times for a total time of less 60 days. My income was classified as Other Income-Research Grant on the T4A and no withholdings were made.
Prior to Aug 2006, I had employment income in the United States and after July 2007, I earned income in Sweden (where I now reside).
Last year I filed a non-resident return (apparently incorrectly as I was sent an adjustment and small refund - as I understand it now, I am to file the Ontario package) and found myself unable to claim any portion of the personal amount because of my income in the U.S. prior to starting the Canadian job and the 90% rule. Now I am faced with the same situation again. Is there a way that I can claim a portion of the personal exemption amount for the period that I was only earning income from Canada making my situation similar to that of an emigrant? Or am I stuck with having to essentially pay $2000 more than if I had actually moved to Canada or if my term of employment coincided with the tax year? Did I get caught in a loophole? Thanks for any advice/info you can share.
Non-resident of Canada with Canadian employment income
Moderator: Mark T Serbinski CA CPA
If the income for the Calendar year was for less than $10,000 you could exempt it all, and not pay anything in canada. This is a treaty item.
Your other choice is to stand on the technicality that you should only be taxed in canada for work performed IN canada. So you could pro-rate your grant for the 60 days over the period you were employed (you would do this for each year). While you could not use the $10,000 rule, it would reduce your income.
But, in general, non-residents who earn wages in canada, pay the provincila taxrate (not the non-resident rate), and do not benefit from the full personal exemption, because they do not report a substantail portion of their income for the year (ie. their non-Cdn income). they can however claim any of the deduction items available on Scedule 1, whether they were incurred in canada or not, and then apply the exemption reductions.
Your other choice is to stand on the technicality that you should only be taxed in canada for work performed IN canada. So you could pro-rate your grant for the 60 days over the period you were employed (you would do this for each year). While you could not use the $10,000 rule, it would reduce your income.
But, in general, non-residents who earn wages in canada, pay the provincila taxrate (not the non-resident rate), and do not benefit from the full personal exemption, because they do not report a substantail portion of their income for the year (ie. their non-Cdn income). they can however claim any of the deduction items available on Scedule 1, whether they were incurred in canada or not, and then apply the exemption reductions.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Unfortunately, the income in both years exceeded $10,000. If only I would have known the details, I might have delayed the start for a couple of months.
From my reading of the tax treaty it seemed pretty clear that even though I was a resident of the U.S., I was obligated to pay tax to Canada, since my employer has a permanent establishment in Canada.
When you say that non-residents "do not benefit from the full personal exemption because they do not report...their non-Canadian income" do you mean they do not have a Canadian tax liability on that income - because it is reported in the Statement of World Income.
It's a bit frustrating that I have to pay more than I would have as a temporary resident and got none of the social benefits from paying those taxes. And I worked for 12 months with only Canadian income, just not the 12 mos. of the tax year. Seems like a surcharge for not spending that income in Canada.
From my reading of the tax treaty it seemed pretty clear that even though I was a resident of the U.S., I was obligated to pay tax to Canada, since my employer has a permanent establishment in Canada.
When you say that non-residents "do not benefit from the full personal exemption because they do not report...their non-Canadian income" do you mean they do not have a Canadian tax liability on that income - because it is reported in the Statement of World Income.
It's a bit frustrating that I have to pay more than I would have as a temporary resident and got none of the social benefits from paying those taxes. And I worked for 12 months with only Canadian income, just not the 12 mos. of the tax year. Seems like a surcharge for not spending that income in Canada.
[quote]"From my reading of the tax treaty it seemed pretty clear that even though I was a resident of the U.S., I was obligated to pay tax to Canada, since my employer has a permanent establishment in Canada."[/quote]
Your interpreation is a tad too conservative. Take for example a salesman working for a US manuafacturer, selling only in canada. His tax liability would be strictly in canada, regardless of the US manufacturer's establishemnt being only in the US.
As I said, your wages should only be taxed in Canada for the time that you were in canada. In these days of telecommuting, it is becoming more and more common for US residents to work for Cdn firms without setting foot in canada, and vice versa. There would be no need to pay Cdn taxes regardless of the employers establishment in canada.
[quote]"When you say that non-residents "do not benefit from the full personal exemption because they do not report...their non-Canadian income" do you mean they do not have a Canadian tax liability on that income - because it is reported in the Statement of World Income."[/quote]
That is correct. The statement of world income is only used to determine if you are reporting 90% or more of your income as taxable. Apparently you are not (and there really is no way arround this).
You are on pretty good grounds to apportion your income and report only the portion that was earned in canada, so long as you can show that you reported the rest in your country of residence (US in 2006, Sweden in 2007). this would mean NOT using any forerign earned income exclusion (if you were even eligible for this, which is unlikley since you were in US most tof the time).
Now, another possibility is that you could use the anti-discrimination' clause of the treaty (XXV), and report ALL your world income 'as if' you lived in Canada for the entire year. This is completely permissable. You would then use foreign tax credits (this would be the US/state and fica you paid on your non-Cdn income) to reduce the Cdn tax on your US income. This might* result in a slight tax savings. My take on this though is that you probably paid very little US tax, and thus would actually raise your Cdn tax liability.
As for the effective tax-rate being higher for non-residents than for residents, this is not unusual. The same situation exists in US. After all, non-residents are rarely voters.
Your interpreation is a tad too conservative. Take for example a salesman working for a US manuafacturer, selling only in canada. His tax liability would be strictly in canada, regardless of the US manufacturer's establishemnt being only in the US.
As I said, your wages should only be taxed in Canada for the time that you were in canada. In these days of telecommuting, it is becoming more and more common for US residents to work for Cdn firms without setting foot in canada, and vice versa. There would be no need to pay Cdn taxes regardless of the employers establishment in canada.
[quote]"When you say that non-residents "do not benefit from the full personal exemption because they do not report...their non-Canadian income" do you mean they do not have a Canadian tax liability on that income - because it is reported in the Statement of World Income."[/quote]
That is correct. The statement of world income is only used to determine if you are reporting 90% or more of your income as taxable. Apparently you are not (and there really is no way arround this).
You are on pretty good grounds to apportion your income and report only the portion that was earned in canada, so long as you can show that you reported the rest in your country of residence (US in 2006, Sweden in 2007). this would mean NOT using any forerign earned income exclusion (if you were even eligible for this, which is unlikley since you were in US most tof the time).
Now, another possibility is that you could use the anti-discrimination' clause of the treaty (XXV), and report ALL your world income 'as if' you lived in Canada for the entire year. This is completely permissable. You would then use foreign tax credits (this would be the US/state and fica you paid on your non-Cdn income) to reduce the Cdn tax on your US income. This might* result in a slight tax savings. My take on this though is that you probably paid very little US tax, and thus would actually raise your Cdn tax liability.
As for the effective tax-rate being higher for non-residents than for residents, this is not unusual. The same situation exists in US. After all, non-residents are rarely voters.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
You raise some interesting questions, although I have resigned myself to paying the full amount.
My interpretation of the tax treaty comes in part from the IRS informational guide, although I did wade through the actual thing last April.
How would one go about doing this: "Now, another possibility is that you could use the anti-discrimination' clause of the treaty (XXV), and report ALL your world income 'as if' you lived in Canada for the entire year. This is completely permissable. You would then use foreign tax credits (this would be the US/state and fica you paid on your non-Cdn income) to reduce the Cdn tax on your US income. This might* result in a slight tax savings. My take on this though is that you probably paid very little US tax, and thus would actually raise your Cdn tax liability."
I am mainly thinking ahead to 2007 taxes, where my only non-Canadian income is from Sweden, and where tax rates are actually higher than Canada. So taking credits for tax paid to Sweden on the Swedish-source income would eliminate the Canadian liability on that portion and potentially save me $1000 (not insignificant to me) by allowing me a portion of the personal exemption. I will check out the relevant portions of the US/Canada Treaty (or do I now have to consider the Canada/Sweden Treaty?)
Thanks for your replies.
My interpretation of the tax treaty comes in part from the IRS informational guide, although I did wade through the actual thing last April.
How would one go about doing this: "Now, another possibility is that you could use the anti-discrimination' clause of the treaty (XXV), and report ALL your world income 'as if' you lived in Canada for the entire year. This is completely permissable. You would then use foreign tax credits (this would be the US/state and fica you paid on your non-Cdn income) to reduce the Cdn tax on your US income. This might* result in a slight tax savings. My take on this though is that you probably paid very little US tax, and thus would actually raise your Cdn tax liability."
I am mainly thinking ahead to 2007 taxes, where my only non-Canadian income is from Sweden, and where tax rates are actually higher than Canada. So taking credits for tax paid to Sweden on the Swedish-source income would eliminate the Canadian liability on that portion and potentially save me $1000 (not insignificant to me) by allowing me a portion of the personal exemption. I will check out the relevant portions of the US/Canada Treaty (or do I now have to consider the Canada/Sweden Treaty?)
Thanks for your replies.
I just looked at the Non-discrimination clause of the treaty and it doesn't seem to help with my situation since all non-residents are treated the same, though perhaps differently from residents. No relief for non-residents being treated differently from residents.
[quote] 2. Citizens of a Contracting State, who are not residents of the other Contracting State, shall not be subjected in that other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which citizens of any third State in the same circumstances (including State of residence) are or may be subjected to.[/quote]
[quote] 2. Citizens of a Contracting State, who are not residents of the other Contracting State, shall not be subjected in that other State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which citizens of any third State in the same circumstances (including State of residence) are or may be subjected to.[/quote]
Clauses 1 and 2 have the effect of forcing CRA to treat americans no worse than Cdns, but you may have a point that if neither were resident, then it doesn't help you.
That is why the taxed only while in canada is your better option.
That is why the taxed only while in canada is your better option.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best