1040NR - exemption for spouse

[Whiskers Merryweather]

Hi,

Sorry if this is a duplicate question -- I've searched the forum and couldn't find an answer to this specific question.

Canadian citizen, filing exit return with CRA for exit date of late August. Moved to US in August on TN along with spouse on TD. Spouse has no US income. Don't meet substantial presence test.

Question is: Can I file married filing separately with a 1040NR, and take exemption for spouse (line 3/box 7b)?

Reason I wonder is because line 3 says "Married resident of Canada" and I don't know if I'm counted as a "resident of Canada". 1040NR Instructions and Pub 519 don't seem to define what a "resident of Canada" is. Is it just assumed that if you are a non-resident of the US (not meeting both green card and substantial presence tests) that for the purpose of this question you are a resident of whatever other country you were resident in for part of the year, even if you've cut ties to that country? Or is line 3 only intended for dual-status filers & those who were cdn residents the whole year?

I realize that this question may seem kind of silly, but it seems odd to me to be claiming Canadian residence when we had no address in Canada for the latter part of the year. I also understand that we may be able to file jointly under the treaty, but I think filing as NR works out better for us in our circumstance (large RRSP contribution wiped out most of the CDN tax liability, so not much of a tax credit against US tax payable on world income), though I'll have to work it out.

Thanks very much.

[nelsona]

You can take the exemption. The part of the year she wasn't resident in canada, she was resident in US.

Just a warning about using 1040NR. If you have any serious ties in canada left after you moved in August, you should file 1040 (or at least dual-status), just in case CRA tries to rope you in for the remainder of 2006.

But if you broke all ties except a few accounts, then 1040NR does not pose a problem.

[Whiskers Merryweather]

Thank you Nelson.

I hope that we won't have a problem with the CRA -- our lease on the home we were renting was up at the end of August, moved all of our possessions to the US in Aug, we closed non-RRSP brokerage accounts, didn't earn any income in Canada after August, and didn't spend much time in Canada for the rest of the year... but I guess if I really want to play it safe and make sure I make the right choice, I could file a 4868 and make the first-year choice in 6 months, giving the CRA some time to go after us? Down side is that I'd lose out on the time value of a $2k refund or so.. might be worth it.

[nelsona]

You don't appear to be in jeopardy, so I would not be filing dual.

In any event, you would likely be better off filing full-year 1040 rather than dual status, as this would get you the standard deduction, and allow you to exclude your Cdn wages by 2555. You don'y have to wait to meet SPT either.

Dual-status rarely gets you anything, especially if you have the choice of filing 1040NR (which you would not if you had arrived in, say, June). It is only a measure to ensure that you get 'kicked-out' of the cdn tax system by claiming US tax residency.

[Whiskers Merryweather]

Spent hours today reading old threads, and working through a full-year with the 2555 (would do german treaty/bona fide test because don't meet PPT in any 12 month period that works). Got kinda of stuck when it came to capital gains.

I think I might be a case where dual status makes sense. I knew there would be a large deemed disposition when leaving Canada, so the same week we moved (~ 2 days after) disposed of mutual funds and made RRSP contribution (had a lot of contribution room) to avoid having to pay all that tax on the deemed disposition. Filing as full year would seem bad because I won't get to use the deemed disposition amount as ACB as per Sept 18 2000 agreement? Am I right about that?

If I filed *only* 1040NR (because don't meet SPT) could I avoid reporting the capital gain to the IRS altogether since it isn't US-source income, and not connected with US trade/business? I think I read one thread where you implied that you couldn't, but I may have misunderstood.

One last question -- it so happens that the number I get for the SPT is 182 5/6 days. I've made my best effort to verify that number and am pretty confident that it's accurate -- found all the red-eye flights with morning stopovers, etc. Do you think the IRS would audit me for sure on that, or would they see that all the time and not blink an eye (since presumably some people plan it so it works out that way)?

Thanks very much for your help.. I would be totally lost without this forum, and your answers to everyone's questions.

[nelsona]

I filed dual status for the very issue you mentionned 7 years ago. However, at the time I did not know about the 2555 exclusion being allowed for our situation. I would have filed full-year. I could not risk 1040NR because my wife still had a job in Canada. And I arrived before the sept rules, so could not use them.

I do not see a problem using the sept 2000 rules if you file 1040 full-year or dual. you would report the gain made over the 2 days-. If you file 1040NR, you do not report the cap gains, as you said.


Either you meet spt or you don't. Ifyou don't you don't have to file a 1040 (dual or full year). As a Cdn you can, but unless you meet SPT or GC test, you are fine with 1040NR. I don't see how they could contradict your numbers.