1040NR vs 1040 and effective tax rate

[tvinar]

I am J-1 (2nd year), Canadian (married, with some income outside US like interest and some small amount of wages from a third country; wife also Canadian on J-1) and I have to file 1040NR according to IRC. Now I have followed the discussion on proforma 1040 and effective tax rate.

What I am not clear on is what do I do on 1040NR, after I get effective tax rate from 1040. Do I report WORLD INCOME on 1040NR, or do I just report US source? (Reporting the world income would follow the spirit of the treaty, right? But what is the correct solution?)

Thank you.

[nelsona]

As XXV points out, you would report only the US-source income, and pay the 1040 taxrate on the US wages.

[nelsona]

... 1040NR is ALWAYS for reporting US-source income only.

[tvinar]

Thank you. That clarifies it a bit.

So, as I understand, I actually have three options? (Which I did not realize until last night)

a) Simply filing 1040NR as any other J-1 present in US for the whole year but only in his 2nd year would have to do (separately for me and my wife)

b) Using XXV(1) or XXV(2) (not sure which one) and filing 1040 MFJ in place of 1040NR because we are Canadian citizens

c) Using XXV(4) and compute effective tax rate using 1040 MFJ and applying it to US wages on 1040NR as described elsewhere in this forum

Is that correct?

[nelsona]

I didn't really understand most of your post, so I'll just recap

Since you are a student, you and spouse have the choice of being treated as a US non-resident, but to do so you must file Cdn taxes as a resident.

So, you both have the option of
(a) filing normal 1040NR and Cdn tax return, (no treaty issue)

(b) filing a normal joint 1040, reporting world income, AND ALSO filing full Cdn tax return. XXV(1) position

(C) filing a XXV(4) 1040NR on which you have recalculated that tax AND ALSO filing a Cdn return.

Your Cdn return would always include all world income, and would use the final US tax as a credit.

As you can see you only goal is to lower your US tax sufficiently to bring it under your Cdn rate. Being any more creative than that is pointless.

[nelsona]

... and yes Ido seem to recall that there is a point after which a J student can't use 1040NR and must use 1040. At that point only could you decide to stop filing in canada (ie. become Cdn tax non-resident, assuming no residentail ties).

[tvinar]

I am not a student, but a research scholar (but I don't think my situation would be much different if I was a student).

That is interesting. I was about NOT to file a Canadian return, because I have terminated all substantial residential ties in 2006, and according to the tax treaty, I am a US resident (for treaty purposes):
- I don't maintain any place to live in Canada, but I do that in US (so that's the permanent home criteria);
- practically all of my income comes from US sources from my work contract here, and my spouse is here (center of vital interest);
- I am not even present in Canada for more than a few day a year (habitual abode)

... so all of these three go in favor of my being a US resident (for the treaty purposes), even though I am non-resident for IRS. I have this confirmed from CRA (residency status determination form). Am I correct here?

In such case, can I use XXV(i) to simply file in US using 1040?

Tomas

[nelsona]

Your J1 status makes youa non-resident onf US, and thus you cannot be a treaty resident of US, siunce you don't meat the first criteria, which is residency by their rules. student/teacher same thing.: you don't meet any of the criteria.

Did you indicate on your NR73 that you would NOT be a US resident? If you did not, then the determination by CRA is of little value. There exists an almost universla tax principal that you MUST have a tax residence, and Canada ALWAYS takes the position that, unless you establish one elsewhere, you haven't left canada. So it is your choiuce at this point,but , if indeed you are non-resident of canada, then none of the treaty provisions apply anymore, you simply file a 1040 like every other US resident.

[nelsona]

All NR73 determinations have a clause attached that, if your situation changes, or if your situation was incorrectly portrayed on the NR73, all bets are off.

This would apply in your case.

That is why they have a box for study/reasearch on NR73 and why there is a "statement of residency" box, to which -- according to what you have stated above -- you probably could not answer YES to any of the questions.

[nelsona]

My advice, since we aren't talking big bucks here, is simply file 1040 MFJ for the year, and go along with what Canada determined, and the departure date you indicated on your 2006 final Cdn tax return.

You didn't say how you filed in 2006.

[tvinar]

Thank you very much so far. Sorry to ask more questions, I must have misunderstood something. Most of all, I just simply want to make this correctly.

For the purpose of the treaty, the "residence" is defined as follows:

1. For the purposes of this Convention, the term "resident" of a Contracting State means any person that, under the laws of that State, is liable to tax therein by reason of that person's domicile, residence, citizenship, place of management, place of incorporation or any other criterion of a similar nature, but in the case of an estate or trust, only to the extent that income derived by the estate or trust is liable to tax in that State, either in its hands or in the hands of its beneficiaries. For the purposes of this paragraph, an individual who is not a resident of Canada under this paragraph and who is a United States citizen or an alien admitted to the United States for permanent residence (a "green card" holder) is a resident of the United States only if the individual has a substantial presence, permanent home or habitual abode in the United States, and that individual's personal and economic relations are closer to the United States than to any third State.

----

2006 was complicated (and I still may need to fix some things, but any errors that I potentially made are in favor of CRA, and I have no deemed disposition property), since my situation was not completely clear at the time of filing; that's why I actually did NR73 after my work contract was extended.

[nelsona]

It is genrally interpreted that "Under the laws of the state" refers, in US, to SPT or Green card test, neither of which you meet, because your days are exempted due to J status. Thus this provision does not apply to you and you don't get to use the tie-breaker.

If your spouse is working on another status, her situation might be different.

But since you have that CDn determination in hand, I wouldn't sweat it.

Besides, if you want to go back and fix 2006 cdn return, it might involve sending a copy of your 1040NR for that year which may make them revisit the entire issue.

[tvinar]

OK, so the correct thing would be to:

a) Ignore NR73. If CRA does not want my money for 2007, great, they can simply send it back. Not sure whether should attach an explanation letter, or just send the return.

b) File 1040MFJ using XXV(ii) (or simply 1040NRs - depending on how the numbers work out)

c) File Canadian taxes as well for 2007 with expatriation date on 31.12.2007, since as of 1.1.2008 we will be considered US residents according to J-1 legislature

d) Somehow fix the incorrect non-resident witholding on my Canadian interest (How do I do that?)

(My 2006 return would support this course...)

---

I want to do this correctly now, since sometimes this year, I will be likely moving to a third country... ouch.

Thanks for all your help,

Tomas

[nelsona]

If 1040MJF turns out to be the lowest US tax (i'm almost 100% sure it will be), then why bother with canadian tax return, since you have no income from there, and they have told you you were non-resident. and you will have filed as a US resident, by election rather than by force (but who cares) so will be covered as to having had at least one tax home.

Correct the interest withholding by sendinga letter and a check for 10% to CRA expalining that you are non-resident, and get this fixed at the bank for future.

By the way, the 10% NR tax for US residents has been abolished, so you don;'t have to worry about that for 2008.

Leave 2006 Cdn return alone. Just make sure your 2006 US return is correct: they are your masters now.

[tvinar]

Yep, you are right. Thank you so much for assistance, this helped to clear up my mind of this. I will be back next year ;-)