Nonresident alien - reporting cap gains dist/dividends

Celineb · Post by **Celineb** » Sat Apr 14, 2007 12:56 pm

I am a deemed resident of Canada (I work for the Canadian govt but live in the US and report my income to Canada). I have mutual funds from a US brokerage firm and am not sure how to report the investment income to the IRS. After doing much reading on this from the IRS website, I'm hoping that someone can confirm that I am reporting it the right way.

I received a 1099-DIV, and believe that I need to report my ordinary/qualified dividends on page 4 of the 1040-NR and will be taxed at a rate of 15%. For the capital gains distributions, I believe that I have to be taxed at a rate of 30% since they are taxed the same way as capital gains.

I thought that I might be able to not pay taxes on capital gains since I am a nonresident, but I read that since my tax home is in the US (correct?), i.e. I am physically present in the US, this income is taxable in the US. If this is correct, should I wait to move back to Canada to liquidate my investments? Also, can I claim any tax credits or do I just fill in page 4, calculate the taxes due for the dividends and cap gains dist. and pay that amount to the IRS? Seems like getting investments in the US was a bad idea or would I be taxed the same if I had gotten Canadian investments?

Thanks!

Celineb · Post by **Celineb** » Sat Apr 14, 2007 12:59 pm

Just to clarify, my last question about the tax credits is in regards to the investment income I need to report this year. I have not sold any of the mutual funds yet so no capital gains other than distributions.

Also, I believe I can get tax credits from Canada since I also have to report the investment income on my Cdn tax return. Any info on this is welcome, I haven't started to look at the Cdn side of it yet.

nelsona · Post by **nelsona** » Sun Apr 15, 2007 10:14 am

First off, the good news is that you are NOT a US non-resident, since you live in US.

I say that this is good news, because this allows you to file a regular 1040 AND allows you to NOT report your Govt income. Your standard deduction (you and your pouse should file jointly), plus your exemptions, should make any other income non-taxable in US.

For Canada, you return will be like any other Cdn resident , except that instead of provincial income tax, you will pay federal non-resident surtax.

Celineb · Post by **Celineb** » Mon Apr 16, 2007 12:15 pm

Nelson,

Thanks for replying, however I was looking for info on how to report my dividends/capital gains distributions, not my govt income. I would be grateful if you had any info on this.

I report my govt income to Canada, and am not sure why I would file a regular 1040 for my investment income?? Also, I should clarify that I am not married (single).

Thanks!

Norbert Schlenker · Post by **Norbert Schlenker** » Mon Apr 16, 2007 12:24 pm

nelsona: "First off, the good news is that you are NOT a US non-resident, since you live in US."

I believe that to be wrong. Employees of the Canadian or a provincial government who are in the US are deemed to be Canadian residents by the treaty. AFAIK there is no way of electing around that.

nelsona · Post by **nelsona** » Mon Apr 16, 2007 12:28 pm

I explained how you report your income: on a 1040, just like everyone else who lives in US!! 1040NR is not for you. As you ahve seen it is disadvantageous, thus you are allowed to file 1040.

If you need instructions on how to fill out 1040, then use software. Just remember to report all your income in both countries on all your returns, except your Govt income on 1040.

You are a US resident, and thus you need to report ALL your world income on 1040 EXCEPT your Gov't income (you would attach a form 8833 to your 1040 explaining that your govt wages are exempt by treaty article XiX). This is a great advantage you have. Use it. Unless you earned more than about $12,000 in other income, you won't pay US tax at all.

I thought that was pretty clear.

nelsona · Post by **nelsona** » Mon Apr 16, 2007 12:59 pm

The treaty does indeed class these workers as Cdn residents. (Art.IV(5))

However, the non-discrimination clause (especially para. 2 which deals with 3rd country nationals) would apply here, if she wanted.

In any event, if the poster does not wish to avail herself of that provision, she would report her dividends as she indicated.

Her cap gains however, unless they were as a result of a business, would not be taxable in US at all.

Any tax she does pay, would be used on her Cdn deemed resident return asa foreign tax credit.

My experience with Cdn govt workers has exclusivley been with those who ALREADY live in US, and who subsequently get Cdn Govt jobs. In this case, the method I outlined would be much preferred, especially if married, as the spouse would not want to subject their US income to Cdn tax (Art. IV(5)(b)). Canada permits this treatment for spouses of Deemed residents.

Celineb · Post by **Celineb** » Mon Apr 16, 2007 3:57 pm

Thanks again Nelson...I'm surprised that I would fill out a 1040 since I only saw 1040-NR mentioned in all of the documents I read on the IRS site.

I found this document which pertains to the Taxation of capital gains by employees of foreign governments: http://www.irs.gov/businesses/small/int ... 53,00.html

I guess this is what is leading me to believe that a 1040NR is the way to go. But your option sounds better....

P.S: I was living in the US before being hired to work for the Cdn gov., I was married to a Canadian under H4B.

nelsona · Post by **nelsona** » Mon Apr 16, 2007 4:23 pm

See what I mean? You WERE a US resident, and continue to be so, if you wish.

The important phrse on that page is "unless a tax treaty provides for a lesser rate of taxation". In your case it does, and that rate is '0%', as a non-resident by treaty. (Art. XIII (4)). Only cap gains resulting from real estate, resources or a business run in US.

So, the choice is yours: File a 1040, excluding your wages only, and pay no tax on the rest, unless over ~$11,000

OR file a 1040NR, reporting your dividends only, excluding your cap gains, and paying no US tax. Your dividends will not yeild any tax, unless over a ~$2500

Your Cdn tax return will include all income, from all sources, with no foreign tax credits (since you pay no foreign tax).

Celineb · Post by **Celineb** » Mon Apr 16, 2007 5:05 pm

Nelson, I don't believe that I can keep the resident status since I am now divorced (as of June 2006), according to this (from the IRS website):

A legal separation under a decree of divorce or separate maintenance ends the choice (to Treat Nonresident Spouse as a Resident) as of the beginning of the tax year in which the legal separation occurs.

Since I am no longer married to a resident, I would be considered a nonresident alien, since I am an exempt individual from the substantial presence test. However, the link I attached earlier mentions that even though I am considered an exempt individual, I still have to pay 30% taxes on capital gains (and 15% on dividends according to the tax treaty lower rates for Canada) and to fill out page 4 of 1040-NR.

Celineb · Post by **Celineb** » Tue Apr 17, 2007 1:42 am

[quote="nelsona"]

OR file a 1040NR, reporting your dividends only, excluding your cap gains, and paying no US tax. Your dividends will not yeild any tax, unless over a ~$2500 [/quote]

I just filled out the 1040-NR, and essentially the only amount I enter is 15% of my dividends, which is $212. Bottom line is I owe that much since I have so exemptions...how did you conclude that I would owe nothing if my dividends are under $2500? Am I missing some sort of deduction/exemption?

Thanks!!!

nelsona · Post by **nelsona** » Tue Apr 17, 2007 4:32 am

You should have an exemption for yourself, no? You report your dividends on line 10. The 15% is the upper limit of the US tax you could pay. You still calculate the tax normally by including it on your return. Only if the calculated tax was greater than 15% would you invoke the 15% limit. Your tax is '0'. Your exemption is $3300.
----
My reference to being able to continue to treat yourself as resident has nothing to do with your ex. You WERE resident in 2005, you can always continue to be, at least in 2006, And, as i explained, you could even use the treaty to file a 1040 if you wished.

Celineb · Post by **Celineb** » Tue Apr 17, 2007 9:05 am

No, I don't report my dividends on line 10 since the income is not effectively connected to a US trade of business. That whole section stays empty because I don't have that type of income.

I report my dividends on page 4 and that amount gets copied to line 53 (other taxes).

The only reason I was a resident last year is due to being married to a resident. I am a Canadian, and so I would have been a nonresident alien normally. And the IRS site says that as soon as I can no longer choose to be treated as a resident (due to divorce in this case), I must file as a nonresident alient: http://www.irs.gov/businesses/small/int ... 65,00.html

Now I need to figure out how to file my California taxes! what a mess....:(

Thanks again for your help Nelson, but I think I prefer to file as a nonresident....

nelsona · Post by **nelsona** » Tue Apr 17, 2007 9:41 am

I have to admit, that 1040NR, since it ALWAYS results in over-taxation, is not my strong suit. I think you have the tax treatment of your dividends correct.

I do want to point out however, that all you are reading on IRS website is IRS regulations, which are ALWAYS superceded by treaty, if it is to your benefit.

It is your choice (since you do qualify as a US non-resident) to file a 1040NR, but please remember, in future years, that you can always, ALWAYS file a 1040. Canadians, by treaty have that right, even if they never set foot in the US. The substantial presence test, the first year choice, etc, are ALL superceded by a Cdns right to be taxed like any other US citizen in the same circumstances. It rarely is to one's benefit. But, say in future you wish to sell a house, or you get into other real estate and resource investments, wish to be treated as a US citizen, so as not to have to pay US tax. Particulaly if that tax were greater than your Cdn tax (unlikley, I know). As it is, your 15% dividend tax is quite high.

As a point of interest, how does California view the treaty with regards to foreign Govt workers/ Also, you should be aware that if you are considered a California resident, you will need to report RRSP internal income. If you need help with figuring that, THAT I AM expert in.

Thanks for an interesting case. I'm sorry I wa not on the nose in some of my responses. I tend to rush answers at this time of year.