1040-NR or 1040 for 2008, 2009?

[jugador]

I am a Canadian citizen on an L1B Visa, with a house, business, common-law partner (she's still there) and many other connections with Canada. I claimed a Treaty Position and filed 1040-NR with the IRS for 2007. Last year, I applied and got my I-140 under the EB-1 category on December 2008. I am filing my I-485 this January, 2009.
Should I still file 1040-NR for 2008 as I did in 2009? My concern is question Q (Other Information page)
What about my future 2009 cross border tax return?

[nelsona]

Since you are using the treaty to claim non-residncy in US (assuming your Cdn ties do not lessen), you can continue to do so until the day you get your Green Card . At that point however you will have no choice and will file a dual-status return for that year (or a full 1040), and then a full 1040 after that. The fact that you have taken steps to immigrate doesn't affect your residency yet. It would if you had used the "Closer connection" clause, but you are using the treaty (that is why 'Q' question doesn't matter, simply stste the treaty).

At that point, you might wish to declare yourself a deemed non-resident of Canada.

Is there an advantage to you to file 1040NR rather than 1040 -- other than simplicity? There isn't if your 1040NR taxrate is more than you can use on your Cdn return.


You may find, once you are required to file 1040, that being married is more advantageous than your current arrangement, but that is another topic.

[jugador]

Thanks a lot, this really helps

Yes, not having to declare my Canadian corporation, bank accounts, and also been able to manage my RRSP were a few of the advantages of filling 1040-NR.

My Canadian return had an excess of non-business foreign credits that I believe I cannot carry forward. This happen because my US FICA contributions where deducted from my income (Based on the assumption that I will not be eligible for any financial benefit as stated on T2209). This is a point I wanted to discuss further. Should I keep deducting these contributions now that I am on a permanent resident status course? Also, I believe that for 2008, I can deduct my 401(k) contributions from my foreign income

[nelsona]

You were incorrect to remove Fica contributions from your total wage income . You are entitled to Social security and have been all along, regardless of whether or not you were going to pursue GC or not. This is clear by the Canad-US totalization agreement.

Fica then becomes a tax credit on your Cdn return.

So, as you can see, filing a 1040NR has cost you, since you clearly overpaid your US tax. There are always sufficnet measures to take to reduce your US tax (including Fica and state) to below your Cdn taxrate, thuis allowing you to use all your US tax as credit in the same year (you are correct that you cannot carry forward).

The provision to deduct 401(K) contributions begins in 2009.

[nelsona]

... and just so you don't miss my point, having Fica as a credit is better than as a deduction -- IF you are paying your US tax correctly at a low rate.

[jugador]

On reviewing my return, I found out that FICA was correctly claimed as a foreign tax credit. (I got confused with the notes on T2209 :D)

Clarifying what you are pointing out about 1040 NR costing me, what kind of sufficient measures are you reffering to?

What is your advice about my RRSP? Cashing it this year before having to file 1040 because of green card?

[nelsona]

If you filed a 1040, I'm sure that you would have enough foreign tax credits etc to reduce your US taxrate to below your Cdn rate.

You would have the foreign tax credits on all your Cdn income, and would be able to use standard deduction, or at least itemize such that your US tax would be lower.

[nelsona]

Put it this way: Most commuters living in Windsor pretty much use up all their US, Michigan and Fica tax on their Cdn return, by either filing a 1040 or a non-discrim 1040NR (if married). They get the mortgage deduction, etc.

Your problem may be because you aren't married (I would look into how IRS treats foreign couples who are considered married for tax purposes in the foreign country). the married rates on 1040 are much better than the single or 1040NR rates.

[jugador]

I am filling married filling separately (double exception). Still, the itemized deductions get limited by my income. Not sure how much this can be improve with 1040.

Also, kepping my current situation, what happens whenever I decide to switch to filing 1040? I still need to file resident in Canada, claiming foreign credits in both returns. Is there a way of puting myself in a position to switch the Treaty to be able to file non-resident in Canada? Or I am already doomed by having taking a position with the IRS?

[nelsona]

You might not be married in IRS terms.

As i said above, once you have GC, you may be able to argue that you are a deemed non-resident, by virtue of MORE ties in US than canada -- but this would require spending more time in US and less in canada.

Besides, if you get a GC and continue to live in Canada, your GC is in peril each time you cross into US.

[nelsona]

You seem to have been under the impression that your toes in canada were insurmountable, and therefore insisted on being treated as a Cdn resident. I would argue that even now, since you seem to indicate that you meet SPT (otherwise why need to file treaty position on residence) you could have been declared deemed non-resident when you forst went down...

[jugador]

We applied and got an ITIN for her. It seems to be yet another discrepancy between the IRS and US Immigration interpretations.

Yes, SPT (not more than a month during the year in Canada) together with the strong ties with Canada were some of the reasons for filing the treaty position with the US for 1040-NR. Certainly, twisting the balance in favor of the US and filing the treaty position with Canada would be a solution.

Have you run into this scenario before? Due to the fact that the IRS and Revenue Canada communicate more nowadays, what do you think are the chances of them trying to dismiss the original and new treaty positions. Would Revenue Canada consider GC reason to be of greater weight that other ties?

[nelsona]

Do you understand the definition of deemed non-resident (DNR). It is someone who indeed has all the requisite ties in Canada, except that he lives and works in US. Yours is a classic case.

You should have declared yourself DNR the day you left Canada for the new job. Canada accepts DNR status without question usually. Yjey benefit by getting your deemed dsposition tax, and you benefit by no longer having to report your foreign income on your Cdn return.

Your treaty stance is a year-by-year thing, so for US purposes, you can file 1040 for 2008 (you need to look at the rules for joint filing for common law - the ITIN is in your favor for joint) and forward. Then you need to decide what you want to do for Canada. Iy is hard to point to a date other than when you started wrking as a departure date. so you may just have to wait until you get GC, to declare yourself deemed non-resident.
It would look suspicious to change status on a date when nothing significant happened.

[jugador]

Thanks, this has been a very informative discussion!!!

OK, then 2009 will be 1040 for sure due to GC for US since I can only take the Treaty position for the whole year. This locks up my RRSP, and will have US tax consquences if I sell my house in Canada. I also will have ot fill the corresponding forms with the Treasury for accounts and owner of foreign company.

For Canada, I can start planning to do a dual status return around the GC time.

[nelsona]

What do you mean "locks up" your RRSP? Your RRSP continues as it has in the past, tax defferred until selling so long as you file 8891. And your home will not be taxable in US unless it has appreciated $500,000 since you bought it.