Canadian TN commuting to US - how to file next year?

telly1 · Post by **telly1** » Tue Aug 22, 2006 3:54 pm

I have to say, I found this site rather late...but better late than never.
I've been working in the US for 6 years, contributing to 401k (for match), having extra taxes taken off and then wondering why I can't contribute to RRSP and get a deduction.

Anyway, my husband has also been working in th US (commuting) but he will begin work in Canada beginning next week. We have always filed separately using 1040-NR. For next year, I am assuming we should file separate again but in the future, would filing jointly (husband getting ITIN), 1040 make sense?

Also, to give me the benefit of requiring RRSPs (I would like to start using up some of my availbale limit) should I contact my HR rep and ask to have less deducted from my pay cheque? I think filing 1040 (non NR) might be a mistake given our situation this year (both having worked in the US)...

Believe it or not, I've read at least 1/2 the posts on this board...

nelsona · Post by **nelsona** » Tue Aug 22, 2006 4:19 pm

Geez, where to start...

I think your major problem has been filing a 1040NR. Even if neither of you have been living in the US, you should have been filing a joint 1040. You are allowed to by virtue of being cdn (and also by virtue of having spent enough actual days in US every year).

This would have lowered your US tax rate substantially, and this would have made RRSP worthwhile (and deductible) in canada.

If your husband has been working in US, why would he now need an ITIN? Does he not have an SSN right now? It is good forever as his tax ID.

There is no link between your HR and your withholding tax and your RRSP. the link is in the manner in which you have been filing your return. You have, in effect, made your US tax rate higher than your cdn tax rate, penalizing yourself by not using all the tax deductions available on a 1040.

1040NR was the absolute worst way for you to file

, even if your husband was always working in Canada, which he wasn't.

even with him now remaining in Canada a joint treturn, or at the very least a non-discrimination Article XXV return would make most sense.

Ordinarily, I would be going back as many years as legally allowed, and refiling as married joint 1040, but unfortunately for you, this would probably result in you taking all the money refunded to you and sending it to CRA, since you did not contribute to your RRSP when you should have.

But, ecertainly for this year, while you still both work in US, I would be filing a true blue 1040 and contributing just enough RRSP to reduce my Cdn tax to NIL.

telly1 · Post by **telly1** » Tue Aug 22, 2006 5:27 pm

Ugh...
Thanks so much nelsona. The worst part of all this is that we've paid to get our taxes done every year for the past 6 (4 different 'professionals') and no one has ever even brought up the true blue 1040 idea.

Thankfully, I found this site so at least I know better now. I should probably go ahead and start contributing to RRSPs knowing that we'll both be filing the 1040. This burns me because my RRSP fund is so tiny and if it's not put away it's spent (you know how it is

). Again, thanks for the info.

I didn't realize that his SSN is good forever.

Either way, previously, I contacted HR to increase my withholding tax (zero exemptions / filed single - another stupid move) so I have been overpaying beyond the 1040NR, in advance. I will at least change to married through HR so they take less now (and I can put it away in RRSP!).

This would have been an even bigger burn if my husband didn't have rental properties that we were able to split on our Canadian return (thus allowing us to both contribute some to RRSP to bring us to zero owing).

Looks like I need to learn how to prepare our taxes ourselves...

Thanks again, this has been a tough learning experience but better late than never.

BTW, one last thing, if one contributes 5% to 401k in order to get a company match, it seems that for CDN tax purposes, pension (or RRSP contribution limit) is reduced by 10% of earnings. Is this correct or should it only be the case if there is a company pension? I'm not sure I like the idea of contributing 5% to get a 50% match but have RRSP limit reduced by 10% especially since the 10% is taxable in Canada. I kow you're not a proponent of contributing to 401k but this pension adjustment makes it seem even worse...

nelsona · Post by **nelsona** » Wed Aug 23, 2006 6:39 am

Your notion that your husbands rebtal income, transferred to you, smehow greyed a tax break for you is false, of course.

On the matter of yout PA due to 401(k), they are handling it correctly, and is another reason to NOT contribute to 401(k) when living in canada. Its not merely your contributing that is impacting PA, it is your firm's match. I think you might be able to lower thePA if you provide CRA documention that firm is only matching 50% rather than dollar for dollar.

While, technicaly, you will not have to pay Cn tax on the portion you contrbute (you will be taxable on the match and the growth), when you withdraw it, you will pay Us tax on the whole thing, so there will not have been any tax relief on this money ever, and your RRSP limits have been hit too.

telly1 · Post by **telly1** » Wed Aug 23, 2006 7:41 am

Thanks again Nelsona.

As for transferring the rental income, I'm not sure I understand. Are you saing there was no advantage to splitting that net income? It did allow me to make (and use) an RRSP contribution this year (that I had carried over)...

Thanks for the info on PA as well. I have lots of contribution room left but I don't think it would hurt to have my PA adjusted if possible. I inquired with HR as to whether they could pay a bonus of the match if I show proof of contributing to an RRSP (as you have suggested to others) but they said no.

It seems in this case I am probably better off not contributing to 401k at all then.

telly1 · Post by **telly1** » Wed Aug 30, 2006 4:10 pm

If I'm able to lower the PA by providing the CRA documentation that my company is only matching 50% (as you mentioned), then contributing the 5% to get the 2.5% match would likely be worth it wouldn't it? My yearly PA should then only be 2.5% of my annual income (multiplied by the exchange rate of course)...is this correct?

nelsona · Post by **nelsona** » Mon Sep 04, 2006 5:55 pm

Whatever you can do to lower your PA is advisable. The match is a wash, in my opinion, butr since you already have set up this 401(k), you will have to dela with the complexity anyways, you might as well get some money from the firm.

telly1 · Post by **telly1** » Fri Jan 26, 2007 10:18 am

[quote="nelsona"]Geez, where to start...

I think your major problem has been filing a 1040NR. Even if neither of you have been living in the US, you should have been filing a joint 1040. You are allowed to by virtue of being cdn (and also by virtue of having spent enough actual days in US every year).

This would have lowered your US tax rate substantially, and this would have made RRSP worthwhile (and deductible) in canada.

[/quote]

nelsona,
Where do the tax savings come from when filing a 1040 as opposed to 1040NR? Are there any deductions I can / should take when filing 1040 as instead of 1040NR?

I just ran our numbers through U.S. tax software and there didn't seem to be a significant difference from last years 1040NR return but maybe I'm missing something.

It appears I have contributed RRSP more than I needed to bring me to zero owing (I know I can carry forward) so any feedback would be greatly appreciated.

Thanks!

nelsona · Post by **nelsona** » Fri Jan 26, 2007 11:52 am

The tax savings come from being able to claim the standard deduction, which is something like $11,000, or allows you to itemize and thus claim mortgage interst, state tax, prpoerty tax etc, many of which you cannot claim on a 1040NR.

If you are married it allows you to file jointly, giving an even better tax rate, and if you have kids, they will get you a $1000 credit each.

The goal, for any Cdn working in US, is to reduce their US tax (which includes FICA, btw) to sufficiently below their combined Cdn/Prov rate to make their full RRSP contribution tax deductible. Your 1040 may be a tad more complicated, since you have to report any Cdn income, and then take credit for the Cdn tax, but it usually pays off.

For those not living in ON,AB, or BC, this does not require being to aggressive -- in fact whats available thru 1040NR may be sufficient.. But for those provinces, you'll find that the Cdn taxrate is so low that you really benefit from lowering your US tax as much as possible, which is uus

telly1 · Post by **telly1** » Fri Jan 26, 2007 1:20 pm

Thanks nelsona!

Can I claim my home mortgage & property interest even though I live in Canada (home is in Canada)? All my income is US but my husband is split (mostly US income as he just started working in Canada in Sept.). So we will have to claim his Canadian income on the 1040?

We do not have any children but plan to file MFJ.

Your advice to reduce US tax to make full RRSP tax deductible is great advice and something I'd really like to do of course. FICA is SS tax right?

We live in Ontario btw.

nelsona · Post by **nelsona** » Fri Jan 26, 2007 2:36 pm

Yes, FICA is SS and medicare tax.

If you file joint 1040, then all world income for both of you is reported.

His US income will of course be reported in canada too, unless you are saying he has just recently moved to canada.

telly1 · Post by **telly1** » Fri Jan 26, 2007 2:42 pm

Thanks nelsona.

We both lived in Canada for all of 2006. He was commuting to US for work for most of last year until he became employed in Canada.

Can we claim home interest and property tax paid to Canada on our 1040?

telly1 · Post by **telly1** » Fri Jan 26, 2007 2:44 pm

Sorry, mortgage interest and property taxes on our Canadian home...

Also, we have rental properties in Canada so I assume we must declare these on 1040 as well.

Sorry for all the questions. I do appreciate the help!

nelsona · Post by **nelsona** » Fri Jan 26, 2007 4:19 pm

The mortgage interst and property taxes on your home are deductible regardless of where it is.