This seems like a chicken-and-egg problem for us... First, some tax history, as it's an interesting one.
We are Canadians working in the US. My husband and I have slowly become more committed to staying here and we have finally decided that Tax Year 2011 will be the year we officially depart from Canada.
Tax Year 2009:
- Spent 2/3 of the year working in the US (both on TN Visas)
- Didn't want to depart Canada as only intended to stay in US a short time
- Filed as Canadian Residents and US Non-resident Aliens (considered US residents via the Substantial Presence Test but tie-break to Canada because of Closer Connection to a Foreign Country)
Tax Year 2010:
- Spent almost 1/2 of the year working in the US (TN/L1 & L2 Visas)
- Again, intended to return to Canada, so filed as Canadian Residents and US Non-resident Aliens, just like in 2009
Tax Year 2011:
- Spent 100% of the year working in the US (L1 & L2/H1B Visas)
- Bought a house in the US in Aug (didn't ship the rest of our stuff from Canada until Jan 2012 though)
- Sold stocks from Canadian brokerage account in July (capital gains)
- Planning a departure date of Oct 7 in order to minimize our Canadian Deemed Disposition tax
Tax year 2011 will officially be a US Dual-Status Alien year for us as we will finally begin filing as US Residents. However, we will choose the special first-year election to file as US residents for the full year to take advantage of the lower married tax rate and the personal deduction.
An accountant advised us that we could file in the US as full-year residents, then file the Canadian taxes with a departure date of Oct 7, and claim a Foreign Tax Credit for US taxes paid up until Oct 7.
Generally, we would prepare the US taxes first, in order to know how much to claim as a Foreign Tax Credit on the Canadian taxes. But how should the captial gains from Aug 2011 be handled?
From the US side, should I claim a foreign tax credit via form 1116? How does this affect the foreign tax credit I'm claiming to Canada? Which do I calculate first? It's like a chicken-and-egg problem because I can't calculate one country's taxes first anymore...
Any advice for me?[/list][/list]
How are capital gains taxed in US Dual-Status Alien year?
Moderator: Mark T Serbinski CA CPA
-
skongalong
- Posts: 12
- Joined: Thu Feb 04, 2010 6:41 pm
You should have been filing 1040 from 2009 since you met SPT. Did you filr a treaty claim that you were Cdn residents? If not you have underreported in US for 2009 and 2010. What were you thinking?
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
-
skongalong
- Posts: 12
- Joined: Thu Feb 04, 2010 6:41 pm
We had KPGM file our taxes professionally in 2009 and 2010. Yes, they filed Form 8833 to indicate that the treaty tie-breaks us to Canada. See IRS link Conditions for a Closer Connection to a Foreign Country (http://www.irs.gov/businesses/small/int ... 77,00.html).
We maintained a permanent home in Canada the entire time (still do) and we only moved 60% of our stuff while renting in the US. We have only moved the rest of our stuff from Canada in Jan 2012! Technically, we can argue that our departure date is in 2012!
You may not agree, but an accountant we consulted with says that the departure date can be a very grey area, as severing ties with Canada is a grey area (depends on if you maintain a home, drivers license, health care, bank accounts, social ties, length and number of visits to Canada, etc). See CRA doc DETERMINATION OF RESIDENCY STATUS
(LEAVING CANADA) (http://www.cra-arc.gc.ca/E/pbg/tf/nr73/nr73-11e.pdf).
I'm curious on your opinion of the Dual-Status Alien year (regardless whether you agree with our situation or not).
Assume that we properly left Canada on a particular date (say Mar 7). Then we could file in the US as individuals as Dual-Status Aliens, but we could not file jointly and we could not claim the personal deduction. The IRS has an option that married couples can choose to file as Full-Year US Residents in the Dual-Status Alien year. See IRS link Choosing Resident Alien Status (http://www.irs.gov/publications/p519/ch ... 1000222177).
In this case, according to the accountant we consulted, we would file as US Residents for the full year and still file Canadian taxes with a departure date of Mar 7. Do you agree with this? How would you handle capital gains incurred in say Feb, when technically filing as residents in both countries?
We maintained a permanent home in Canada the entire time (still do) and we only moved 60% of our stuff while renting in the US. We have only moved the rest of our stuff from Canada in Jan 2012! Technically, we can argue that our departure date is in 2012!
You may not agree, but an accountant we consulted with says that the departure date can be a very grey area, as severing ties with Canada is a grey area (depends on if you maintain a home, drivers license, health care, bank accounts, social ties, length and number of visits to Canada, etc). See CRA doc DETERMINATION OF RESIDENCY STATUS
(LEAVING CANADA) (http://www.cra-arc.gc.ca/E/pbg/tf/nr73/nr73-11e.pdf).
I'm curious on your opinion of the Dual-Status Alien year (regardless whether you agree with our situation or not).
Assume that we properly left Canada on a particular date (say Mar 7). Then we could file in the US as individuals as Dual-Status Aliens, but we could not file jointly and we could not claim the personal deduction. The IRS has an option that married couples can choose to file as Full-Year US Residents in the Dual-Status Alien year. See IRS link Choosing Resident Alien Status (http://www.irs.gov/publications/p519/ch ... 1000222177).
In this case, according to the accountant we consulted, we would file as US Residents for the full year and still file Canadian taxes with a departure date of Mar 7. Do you agree with this? How would you handle capital gains incurred in say Feb, when technically filing as residents in both countries?
I'm glad you file 8833, as otherwise you would have no lefg to stand on with IRS.
The first condition of Closer connection:
* Are present in the United States for less than 183 days during the year.
Since you did not meet this, there is no point lookingany further at that option, so I'm not sure why you pinted this out to me.
Since you aren't interested in my opinion on resdidency (which is governed by the treaty, btw, not CRA or IRS regualtions), I'm curious as to why you would be intersted in my opinion on your question, but here goes...
You are, by treaty, alaways allowed to file full year 1040, regardless of the rules set out by IRS, outlined in Pub 519. So, forget any election or choice. merely file 1040 MFJ full year (which you could have been doing since 2009, anyways, regardless of residency).
This does not impact your Cdn departure return, which is filed as a normal return, except with (a) a departure date (b) deemed disposition tax, (c) only specifc Cdn-sourced income reported fromafter the departure date.
When preparing full returns in voth countries, one forst prepares the returns without any regard to foreign tax credit. So your 1040 will have all income including cap gains/losses incurred before and after departure date. Your Cdn return will have all income from before the departure, including any cap gains, plus deemed disposition. For the example, we'll assume there is no other post-departure income to report on your Cdn return.
So, in US, you will have reported true cap gains/loses that are all sourced. You will have reported your US-sourced wages. You will have reported various other Cdn-sourced and US-sourced income. Calculate your tax based on this. Determine an effective taxrate (tax/income)
On your Cdn return, you will have reported US-sourced income form before the move, your Cdn cap gains, and your deemed dispo. Do this for each spouse.
Determine what $ amount you are reporting is US-sourced. Use this figure multiplied by the effective rate you came up with on your initial 1040. use the US income and US tax to figure your credit (first federal, and then rest, if asny, provincial). That's it for canada. You can now come up with the effective rate for canada (income/tax)
Now go back to your US return, and calculate any foreign tax credit, which shoudl only be on your Cdn cap gains and any other cdn-sourced income you reported, be it "general" or "passive" on 1 or more 1116 forms. the tax you allocate is the cdn income times the effective rate you determined on your T1. and that is it,.
many folk think they need to 'iterate' severl times to figure out what their taxrate is before/after foreign tax credits. The treaty expalnatory notes explain taht this is avoided by detemining the taxrate without regard to FTC, and then apply FTC. and US/canada agree on the order it is done, As I described above.
The first condition of Closer connection:
* Are present in the United States for less than 183 days during the year.
Since you did not meet this, there is no point lookingany further at that option, so I'm not sure why you pinted this out to me.
Since you aren't interested in my opinion on resdidency (which is governed by the treaty, btw, not CRA or IRS regualtions), I'm curious as to why you would be intersted in my opinion on your question, but here goes...
You are, by treaty, alaways allowed to file full year 1040, regardless of the rules set out by IRS, outlined in Pub 519. So, forget any election or choice. merely file 1040 MFJ full year (which you could have been doing since 2009, anyways, regardless of residency).
This does not impact your Cdn departure return, which is filed as a normal return, except with (a) a departure date (b) deemed disposition tax, (c) only specifc Cdn-sourced income reported fromafter the departure date.
When preparing full returns in voth countries, one forst prepares the returns without any regard to foreign tax credit. So your 1040 will have all income including cap gains/losses incurred before and after departure date. Your Cdn return will have all income from before the departure, including any cap gains, plus deemed disposition. For the example, we'll assume there is no other post-departure income to report on your Cdn return.
So, in US, you will have reported true cap gains/loses that are all sourced. You will have reported your US-sourced wages. You will have reported various other Cdn-sourced and US-sourced income. Calculate your tax based on this. Determine an effective taxrate (tax/income)
On your Cdn return, you will have reported US-sourced income form before the move, your Cdn cap gains, and your deemed dispo. Do this for each spouse.
Determine what $ amount you are reporting is US-sourced. Use this figure multiplied by the effective rate you came up with on your initial 1040. use the US income and US tax to figure your credit (first federal, and then rest, if asny, provincial). That's it for canada. You can now come up with the effective rate for canada (income/tax)
Now go back to your US return, and calculate any foreign tax credit, which shoudl only be on your Cdn cap gains and any other cdn-sourced income you reported, be it "general" or "passive" on 1 or more 1116 forms. the tax you allocate is the cdn income times the effective rate you determined on your T1. and that is it,.
many folk think they need to 'iterate' severl times to figure out what their taxrate is before/after foreign tax credits. The treaty expalnatory notes explain taht this is avoided by detemining the taxrate without regard to FTC, and then apply FTC. and US/canada agree on the order it is done, As I described above.
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
-
skongalong
- Posts: 12
- Joined: Thu Feb 04, 2010 6:41 pm
Thanks for your clear answer! I really appreciate it! Thank you for answering my questions.
You make a good point about the Closer Connection I sited. Perhaps I was wrong. I am trying to retro-understand how KPMG filed our taxes for 2009 and 2010. They did not point me to those links, that was from my own (incorrect) research.
I don't think KPMG filed incorrectly though, as it was eventually accepted by the IRS and CRA. What they quoted in Form 8833 was "Paragraph 2 of Article IV" of the 1980 US-Canada tax treaty. I just looked it up (see snippet below) and it seems to make sense to me...
Canada considers us residents because we are citizens, maintain a permanent home, visit often, etc. US considers us residents because we passed the Substantial Presence Test. Tie-break goes to Canada because of Article IV, Paragraph 2(a), "personal and economic relations are closer (centre of vital interests)" to Canada. Even though my husband and I were working in the US, we were both working for Canadian companies, but performing the work on US soil (hence the TN and L1/L2 visas). Our situation has certainly changed in 2011 though!
I think my understanding is coming together! Thanks again!
1980 US-Canada tax treaty:
http://www.irs.gov/pub/irs-trty/canada.pdf
ARTICLE IV
Residence
1. For the purposes of this Convention, the term "resident of a Contracting State" means any person
who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of
management, place of incorporation or any other criterion of a similar nature, but in the case of an estate
or trust, only to the extent that income derived by such estate or trust is liable to tax in that State, either
in its hands or in the hands of its beneficiaries.
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting
States, then his status shall be determined as follows:
(a) He shall be deemed to be a resident of the Contracting State in which he has a
permanent home available to him; if he has a permanent home available to him in both States or
in neither State, he shall be deemed to be a resident of the Contracting State with which his
personal and economic relations are closer (centre of vital interests);
(b) If the Contracting State in which he has his centre of vital interests cannot be
determined, he shall be deemed to be a resident of the Contracting State in which he has an
habitual abode;
(c) If he has an habitual abode in both States or in neither State, he shall be deemed to
be a resident of the Contracting State of which he is a citizen; and(d) If he is a citizen of both States or of neither of them, the competent authorities of the
Contracting States shall settle the question by mutual agreement.
3. Where by reason of the provisions of paragraph 1 a company is a resident of both Contracting
States, then if it was created under the laws in force in a Contracting State, it shall be deemed to be a
resident of that State.
You make a good point about the Closer Connection I sited. Perhaps I was wrong. I am trying to retro-understand how KPMG filed our taxes for 2009 and 2010. They did not point me to those links, that was from my own (incorrect) research.
I don't think KPMG filed incorrectly though, as it was eventually accepted by the IRS and CRA. What they quoted in Form 8833 was "Paragraph 2 of Article IV" of the 1980 US-Canada tax treaty. I just looked it up (see snippet below) and it seems to make sense to me...
Canada considers us residents because we are citizens, maintain a permanent home, visit often, etc. US considers us residents because we passed the Substantial Presence Test. Tie-break goes to Canada because of Article IV, Paragraph 2(a), "personal and economic relations are closer (centre of vital interests)" to Canada. Even though my husband and I were working in the US, we were both working for Canadian companies, but performing the work on US soil (hence the TN and L1/L2 visas). Our situation has certainly changed in 2011 though!
I think my understanding is coming together! Thanks again!
1980 US-Canada tax treaty:
http://www.irs.gov/pub/irs-trty/canada.pdf
ARTICLE IV
Residence
1. For the purposes of this Convention, the term "resident of a Contracting State" means any person
who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of
management, place of incorporation or any other criterion of a similar nature, but in the case of an estate
or trust, only to the extent that income derived by such estate or trust is liable to tax in that State, either
in its hands or in the hands of its beneficiaries.
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting
States, then his status shall be determined as follows:
(a) He shall be deemed to be a resident of the Contracting State in which he has a
permanent home available to him; if he has a permanent home available to him in both States or
in neither State, he shall be deemed to be a resident of the Contracting State with which his
personal and economic relations are closer (centre of vital interests);
(b) If the Contracting State in which he has his centre of vital interests cannot be
determined, he shall be deemed to be a resident of the Contracting State in which he has an
habitual abode;
(c) If he has an habitual abode in both States or in neither State, he shall be deemed to
be a resident of the Contracting State of which he is a citizen; and(d) If he is a citizen of both States or of neither of them, the competent authorities of the
Contracting States shall settle the question by mutual agreement.
3. Where by reason of the provisions of paragraph 1 a company is a resident of both Contracting
States, then if it was created under the laws in force in a Contracting State, it shall be deemed to be a
resident of that State.
I would have made the argument that your "personal and economic ties" were overwhelmingly in US, since by your own admission, you lived and worked there. Visiting canada doesn't make you resident; It just means you had a cottage in canada.
Only living in temp housing in US would have kept you a Cdn resident by treaty.
Besides, if you paid one penny to canada during this time, you were overtaxed, since you were already overpaying your US tax by filing 1040NR.
I'd be curious to know how KPMG answered the 1040NR questions in a way that made you non-resident, as this specifically asks for days in US for all these years.
I will give him this. Doing this and getting away with it, did get you 2 more years of growth on your cottage tax free. You'll have to see if the extra tax you paid was worth it ot not when you sell up.
Btw, for others, Selling your assets before moving to minimize deemed dispo doesn't make much sense either.
And can I ask what is happened Oct 7, that makes this your departure date?
Only living in temp housing in US would have kept you a Cdn resident by treaty.
Besides, if you paid one penny to canada during this time, you were overtaxed, since you were already overpaying your US tax by filing 1040NR.
I'd be curious to know how KPMG answered the 1040NR questions in a way that made you non-resident, as this specifically asks for days in US for all these years.
I will give him this. Doing this and getting away with it, did get you 2 more years of growth on your cottage tax free. You'll have to see if the extra tax you paid was worth it ot not when you sell up.
Btw, for others, Selling your assets before moving to minimize deemed dispo doesn't make much sense either.
And can I ask what is happened Oct 7, that makes this your departure date?
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
-
skongalong
- Posts: 12
- Joined: Thu Feb 04, 2010 6:41 pm
Some quick answers to your questions...
We rented in the US in 2009 and 2010 because we didn't expect to stay in the US long-term. We didn't close any Canadian accounts, didn't rent out our home, and I was working remotely for my Canadian office, doing my exact same Canadian job, being paid in Canadian, to my same Canadian bank account. It was amazing that I was able to get a TN visa and accompany my husband on his temp work assignment in the US for his Canadian company. I think it is easy to argue our residency either way really. Pub 519 that you pointed out to me clearly states that a Tax Treaty can override the Substantial Presence Test, and that's exactly what KPMG did.
In 2009, it was tax-beneficial for us to file as Canadian Residents because of tax-free living per-diem and a hefty Overseas Employment Tax Credit (OETC). In 2010, we didn't qualify for the OETC because we didn't work 6 consecutive months in the US, so maybe filing as Canadian residents wasn't so tax-beneficial for 2010. We just didn't want to bother to go Canadian non-residents (departure tax, closing of investment accounts, etc) because we thought we'd move back to Canada in 2011.
2011 is a totally different story now. I work for a US company on an H1B visa. We bought a house here and are committed to staying 5 years or so (still have our home and 40% of our stuff in Canada though). Is it tax beneficial to choose such a late Canadian departure date? Not sure. We have that date in mind because it's a low point for all our stocks (not in registered accounts), so that date would minimize our departure tax. This year my husband does qualify for OETC, so that's good! No per-diem for this year though.
I know you disagree with the arbitrary departure date (be it a tax preferential date or not). The treaty tie-breaker "personal and economic relations are closer (centre of vital interests)" is very grey. We fly back-and-forth btw our US and Canadian homes often -- should we have arbitrarily chosen one of those dates? We bought a house in the US in Aug. I got my H1B visa on Oct1. Should we have chosen one of those dates? We finally moved the rest of our stuff from Canada in Jan 2012. Should we wait until 2012? It's been a very gradual process for us, and the treaty tie-breaker is a grey definition, so I figure why not chose an arbitrary date.
We haven't decided what accountants to go with for 2011 yet. Just wanted to try to forward-understand our situation instead of retro-understand it this time.
Thanks for all the discussion!
We rented in the US in 2009 and 2010 because we didn't expect to stay in the US long-term. We didn't close any Canadian accounts, didn't rent out our home, and I was working remotely for my Canadian office, doing my exact same Canadian job, being paid in Canadian, to my same Canadian bank account. It was amazing that I was able to get a TN visa and accompany my husband on his temp work assignment in the US for his Canadian company. I think it is easy to argue our residency either way really. Pub 519 that you pointed out to me clearly states that a Tax Treaty can override the Substantial Presence Test, and that's exactly what KPMG did.
In 2009, it was tax-beneficial for us to file as Canadian Residents because of tax-free living per-diem and a hefty Overseas Employment Tax Credit (OETC). In 2010, we didn't qualify for the OETC because we didn't work 6 consecutive months in the US, so maybe filing as Canadian residents wasn't so tax-beneficial for 2010. We just didn't want to bother to go Canadian non-residents (departure tax, closing of investment accounts, etc) because we thought we'd move back to Canada in 2011.
2011 is a totally different story now. I work for a US company on an H1B visa. We bought a house here and are committed to staying 5 years or so (still have our home and 40% of our stuff in Canada though). Is it tax beneficial to choose such a late Canadian departure date? Not sure. We have that date in mind because it's a low point for all our stocks (not in registered accounts), so that date would minimize our departure tax. This year my husband does qualify for OETC, so that's good! No per-diem for this year though.
I know you disagree with the arbitrary departure date (be it a tax preferential date or not). The treaty tie-breaker "personal and economic relations are closer (centre of vital interests)" is very grey. We fly back-and-forth btw our US and Canadian homes often -- should we have arbitrarily chosen one of those dates? We bought a house in the US in Aug. I got my H1B visa on Oct1. Should we have chosen one of those dates? We finally moved the rest of our stuff from Canada in Jan 2012. Should we wait until 2012? It's been a very gradual process for us, and the treaty tie-breaker is a grey definition, so I figure why not chose an arbitrary date.
We haven't decided what accountants to go with for 2011 yet. Just wanted to try to forward-understand our situation instead of retro-understand it this time.
Thanks for all the discussion!
Except that the tax treaty says you were US resident, pretty clearly. You lived in US, worked in US, and were with your husband.
In any event, your moving date is impossible to determine othr than the day you rented your appartment in US and never returned to live in canada.
Any other is fictitious, so I'll let you make up one.
In any event, your moving date is impossible to determine othr than the day you rented your appartment in US and never returned to live in canada.
Any other is fictitious, so I'll let you make up one.
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