Confusion on making a Section 217 election

[optism]

First off, great thread. This is by far the most useful tax information I can find for Canadian non-residents living in the U.S.

Here's our situation: my wife and I moved to the U.S in May 2015 for a job I accepted, and therefore we qualify as non-residents for 2015. We had a baby in October 2015 and my wife collected maternity benefits from Canada from August onwards which were taxed at the non-resident withholding rate of 25%. She also cashed in her pension from her old job in Canada while we were living in the U.S. This pension withdrawal was taxed at 10%. As I understand it, both of these incomes are taxable in the U.S.

From reading your threads, it seems to make more sense to make a section 217 election for this income rather than claim a foreign tax credit on the U.S. 1040 form. This way, we'll get most of the Canada tax back (since my wife barely worked in Canada in 2015) and we're then taxed by the U.S. on this income at a lower rate of around 15%. Does this seem logical?

If so, I'm a bit confused on how to elect under Section 217. Do I only include the maternity and pension income in Section 217, or do I also need to include these amounts elsewhere in the T1 Canadian tax form (e.g. T4E for the maternity benefits)? It's unclear with my TurboTax software whether there would be double counting going on if I report the same income in a Section 217 form as well as a T1 form.

Thanks for the help!

[nelsona]

Anytime you do 217, you include Cdn income on the return, and then world income on a separate schedule, which becomes the total income used to detyermine your taxrate, as well as if you are eligible for all credits.

In the year of a move, you can't simply use 217 without a manually created statement (remember, you are not filing non-resident return in your moving year. Besides, in the moving year, you already have Cdn income, which usually pushes up your CDn taxrate anyways. 217 is best done in a year when you are fully non-resident. You will probably find, in the end, that the 25% tax withheld is you best result.

I trust, of course, that you told service Canada and your RRSP that you were non-resident BEFORE taking the money, so that the withholding would be 25% flat and not graduauted rates, ither wise you have a whole other issue to deal with.

CRA has a section on 217, and an emigrant section for departure issues.

[optism]

Thanks for the useful information, Nelson.

If I choose not to do a 217, would I simply not report on the Canadian return my wife's EI benefits and pension income received while we were in the U.S.? And could I claim a foreign tax credit on the 1040 for the 25% and 10% withheld on the EI benefits and pension income?

It would appear that the pension plan was not aware we were non-residents as only 10% (the standard tax for withdrawals under $5k) was withheld. Any advice on correcting this? If I'm claiming on the 1040 a foreign tax credit anyways, does it matter how much tax the CRA withheld?

[nelsona]

You would need to fill out form 1116.

And, you need to report ALL world income for the entire year on your 1040 for both of you.

Your RRSP should have been taxed 25%. How you remit this will depend on whether your 217 election turns out to be useful or not.
If it isn't, you will need to send, in a separate letter, a check for the missing 15%.

Yes, it matters, since your RRSP is Cdn-sourced, CRA determines what tax you pay, and IRS gives any credit.

[optism]

Wow, I thought I had a handle on this. Clearly I don't.

Are my wife and I not dual status aliens according to the IRS for 2015? Their instructions suggest that we don't report income outside the U.S. for the time we were non-residents (i.e. Jan-April):

-----------------------------

(copied from IRS website)

For The Part of the Year You are a U.S. Resident Alien

For the part of the year you are a U.S. resident alien, you are taxed on income from all sources. Income from sources outside the United States is taxable if you receive it while you are a resident alien.

For The Part of The Year You are a Nonresident Alien

For the part of the year you are a nonresident alien, you are taxed on income from U.S. sources only.

----------------------------------------

[nelsona]

You can choose dual-status, but that is generally penalizing to couples, since you cannot file jointly.

Better to do full-year 1040, and then whittel down the US tax like any other US taxpayer would do.

You are allowed this by treaty as a Cdn.

[optism]

This is very illuminating. I see two possible approaches for filing, both of which don't include a 217 for simplicity. Hopefully one of these is correct.

1. I report everything in 2015 on the 1040 married filing jointly. We also file as non-residents on our respective T1's and report income earned in Canada prior to moving to the U.S. For the income being reported on both the T1's and 1040, we make a 1116 claim for any taxes paid in Canada. Is that the general idea?

I'm a bit confused by the 15% tax correction for the RRSP. Wouldn't filing a T1 account for this (i.e. tax software sees we are NR and adjusts the tax to 25% accordingly)?

OR

2. I DO NOT File T1's at all, pay the 15% owed to CRA by cheque, and then claim the 25% tax on 1116 along with all other taxes taken by CRA?

[nelsona]

You cannot get away without filing a Cdn return. it is NOT a non-resident return, it is a departure return, and you must report -- at the very least -- all income earned before you left Canada, plus any departure tax. it would not, under normal circumstances, include your EI and RRSP income from after the move -- thus the need for a separate payment to CRA by letter.

NR's don't normally report income on which flat tax is taken (or supposed to be taken). Your 25% tax is the final amount.
Its only if you make a 217 election that you include it.For simplicity, even if you eventually elect to file a 217, I would be sending a letter and cheque now for the missing RRSP tax. this will make your decision for 217 election much easier to make, since you will have paid the 25% withholding tax.


for US, you will use 1116 for the EI and RRSP and any investment income, but for wages it is usually preferable to exclude using 2555.

[optism]

Thanks Nelson. You've convinced me that I don't know what I'm doing and that I should book a consultation with Serbinski. Had I not found this forum I would have filed taxes dreadfully wrong.

[nelsona]

Sure. But send that 15% in before you do anything else.

[garya505]

Old thread so I don't think I'm hijacking. Would this Section 217 apply in this case?:
viewtopic.php?f=2&t=472969&p=530115#p530115

[nelsona]

No, becuase she lives in canada and repoets all income.

[garya505]

nelsona wrote:
> No, becuase she lives in canada and repoets all income.

No my sister is a US citizen and has never lived in Canada.

[nelsona]

So NOWHERE in your thread (how about we just go back to that thread).