TN worker and student with fellowship

notoriouspg · Post by **notoriouspg** » Tue Mar 08, 2011 3:15 pm

Hello,

I'm working in US on a TN visa, and my wife is with me on TD status. We moved here together in early 2010, and got married in July. Before the wedding my fiancee was here as a visitor. We both meet substantial presence test for 2010. She is a full-time PhD student at a Cdn university (and was for all of 2010), but is carrying on her research here. She has a Cdn gov't fellowship (CGS) which is completely tax-free in Canada.

My main question is how we should file taxes for 2010 in both countries in terms of determining residency, and whether to file jointly in US. We would like to avoid paying taxes in US on my wife's scholarship income. We also don't want to pay Canadian taxes on my US income (which would happen if Canada views me as a resident). Can we be considered non-residents of Canada by CRA, in spite of my fiancee's enrollment in a Cdn university? We have no residence in Canada, and I am in the process of severing other ties, like driver's licence, banking stuff... but I'd like to keep a basic bank account in Canada, and my fiancee would like to keep hers for the purpose of receiving her scholarship funding.

Also: even if Canada considers us non-residents, will her scholarship $ be taxable by IRS & state of California? (although how could they find out about it?...)

Thanks for any advice!

nelsona · Post by **nelsona** » Tue Mar 08, 2011 4:17 pm

bad news I'm afraid. Because she is a TD (and not an F1 or J1 student in US), she is a US tax resident, and therefore subject to tax on worldwide income.

Moreover, because she is not a student in US, he grant money does not fall under the treaty expemption for grants from outside US. So, unless you can find some definition that would make her grant non-taxable in US, you will need to report it on her 1040.

The good news in this is that neitehr of you are Cdn residents (you from your departure date, and she from hers), so you should not have any Cdn tax on your US income. You should both file departure returns for canada.

Just so we're clear, if she had gotten the grant to go study in US, it would not be taxablre in canada, she would remain Cdn resident (but not you) and her grant money would be completely tax-free. But because she is not a US student, but does live in US on TD, she loses such exemption.

nelsona · Post by **nelsona** » Tue Mar 08, 2011 4:20 pm

http://www.irs.gov/taxtopics/tc421.html

might help you determine if the grant is tax-free in US, by IRS rules rather than treaty

notoriouspg · Post by **notoriouspg** » Tue Mar 08, 2011 4:53 pm

Thank you very much for the quick reply, even though it wasn't the answer I was hoping for :)).

Looking over the link you posted, it seems that the amount that covered her tuition may be tax free. However it's unclear whether she'd be eligible since the institution is outside the US.

Chapter 1 of Publication 970:
"This chapter discusses the tax treatment of various types of educational assistance you may receive if you are studying, teaching, or researching in the United States. The educational assistance can be for a primary or secondary school, a college or university, or a vocational school."

Thoughts?

nelsona · Post by **nelsona** » Tue Mar 08, 2011 5:55 pm

Most Cdn schools are eligible for FAFSA, and thus fall under these rules as well.

"Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs. "

notoriouspg · Post by **notoriouspg** » Tue Mar 08, 2011 6:20 pm

Thanks again!

I also found this in the Glossary, which has a list of definitions for "Eligible
Educational Institution" depending on the context (there's a specific one for Scholarships and Fellowships). This also seems to imply that it doesn't have to be in the US.

"Scholarships and fellowships. An institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities."

nelsona · Post by **nelsona** » Tue Mar 08, 2011 8:13 pm

So, as you suspected, only her school expenses would be tax-free, all other amounts would be taxable.