Article XXV application to single Canadian resident

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mackayr
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Article XXV application to single Canadian resident

Post by mackayr » Tue Mar 26, 2019 9:48 pm

I'm trying to understand the application of Article XXV for an individual who is resident in Canada. Here's the scenerio:

Canadian citizen
Canadian resident
US pension (effectively connected) = $1.4k
US SS = $10k
Canadian OAS = $6k

In prior years, she paid no US tax since her exemption of $4k was higher than the US pension income.

With the "tax cuts" of 2018, she's now losing 10% of her pension (ie. $140) in taxes.

Article XXV paragraph 1 would suggest that she should not be taxed higher than if she had been a US citizen. In that instance, she would have been entitled to the $12k standard deduction, and her US SS and Canadian OAS wouldn't have been taxed in the US (under treaty). This would have resulted in Nil income tax.

Based on my research, it appears that she can file a 1040NR with Nil tax payable on line 11, attaching a 1040 Pro Forma indicating application of Article XXV(1).

Any thoughts on that approach?

nelsona
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Re: Article XXV application to single Canadian resident

Post by nelsona » Wed Mar 27, 2019 4:59 am

The non-discrimination clause allows her to file as a US citizen would in similar circumstances, ie. living in Canada.
So she can file a 1040 if she wishes INSTEAD of a 1040NR, but not, in my opinion, with a pro forma (the way XXV(3) is typically applied).
I would indicate on the 1040 that this is a XXV(1) filing (and perhaps include an 8833), thus not forcing her to meet any other USC reporting requirements.
I assume she pays no CDn income tax.
Does she not receive any CPP?
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mackayr
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Re: Article XXV application to single Canadian resident

Post by mackayr » Wed Mar 27, 2019 9:24 am

Thanks for the response, @nelsona.

That sounds like a fair approach (ie. to file the 1040 that it's a XXV(1) filing). We had been filing 1040NRs for years, until the IRS contacted her to indicate that she had never properly given up her Green Card (she just let it expire instead of filing the appropriate tax forms). In the end, we had to revise several years of her returns to change her status to resident and file 1040s, reporting her worldwide income. She ended up getting more tax back, which was inevitably not their intention. Now that we got her back on track filing the 1040NR forms, I was worried about stirring the pot again by filing a 1040.

If we take that approach, should we also file the non-effectively connected income and the OI page of the 1040NR, or does the XXV(1) disclosure negate that requirement as well?

"USC reporting requirements" refers to FBAR, etc..?

No, she doesn't receive CPP. She worked / lived most of her life in the US (thus effectively connected pension income), and only returned to Canada to retire. She pretty well lives off her US SS and a prorated amount of her OAS.

<vent> So much for the Trump "Tax Cut". Poor single non-resident retirees with US income pay additional tax or additional accounting fees. </vent>

nelsona
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Re: Article XXV application to single Canadian resident

Post by nelsona » Wed Mar 27, 2019 10:19 am

Just for future reference, GCs are indeed allowed to file 1040NR if they by treaty, are resident of a treaty country that has a residency clause, and they meet that clause.
Your client's problem, which would have been the reason to file actual 1040's might have been in order to properly expatriate.

But a GC, especially if they don't really care about maintaining status, can indeed file a 1040NR.

What OI income would she possibly have?
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nelsona
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Re: Article XXV application to single Canadian resident

Post by nelsona » Wed Mar 27, 2019 10:20 am

And by filing 1040 reporting world income, she doesn't file 1040NR.
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mackayr
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Re: Article XXV application to single Canadian resident

Post by mackayr » Wed Mar 27, 2019 1:18 pm

[quote=nelsona post_id=51628 time=1553696452 user_id=30]
And by filing 1040 reporting world income, she doesn't file 1040NR.
[/quote]

... but by referencing the filing under XXV(1), this prevents her from getting caught up in FBARs and the likes, right?

[quote=nelsona post_id=51627 time=1553696376 user_id=30]
What OI income would she possibly have?
[/quote]

... I mean page 5 of the 1040NR where she answers questions about immigration status, citizenship, etc... We've also been reporting the US SS and interest as not effectively connected income on page 4 under 0% column. May not be correct, but certainly discloses the rest of her US source income to avoid the risk of having them reassess her return to include it, believing they were just missed (had that happen before). Once upon at time, she had income tax withheld from US SS, so this also provided a means to report it and claim the refund for the tax withheld since it's exempt under treaty. Now that there's no US tax withheld from those, I suppose we don't even have to report on page 4 any more.

nelsona
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Re: Article XXV application to single Canadian resident

Post by nelsona » Wed Mar 27, 2019 2:30 pm

Neither would be reported as NEC. the SS would be included on page 1 and taxable = 0, if reported at all.
Any how on 1040, all income would be reported, and a series of 1116s, and SS as zero taxable would take care of it, if the Std deduction was insufficient.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

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