Which Status Saves the Most Tax

rogerme · Post by **rogerme** » Tue Mar 22, 2011 8:32 am

Hello,

I am a Canadian citizen studying in the US. I will graduate this May and work for a company in the US. I have been given a few options by the company lawyer:

- OPT while the company applies H1B for me, and then switch to H1B
- TN while the company applies H1B for me, and then switch to H1B
- TN

I will be working in New York City, so I will be subject to the city tax. I was wondering - would it be worth it for me to declare non-resident status (Canada)? With NYC City Tax (5%), my overall taxation will be around 40%, which is not much different than how much I will pay in Canada. So I wouldn't pay much extra taxes by keeping my Canadian resident status, correct?

I am also curious about the tax implications of the above options. Which one will save the most tax? I know that OPT will allow me to be exempt from Medicare and Social Security for a while, which is great...

Do you guys have any other suggestions for saving on taxes?

Thank you!

nelsona · Post by **nelsona** » Tue Mar 22, 2011 5:36 pm

Asa long as you are OPT, you are not subject to FICA (SS and medicare), so I would stay OPT as long as possible.

rogerme · Post by **rogerme** » Tue Mar 22, 2011 8:31 pm

Thanks! What about resident vs. nonresident issue? Since my tax rate in the US is so high (including the 5% NYC tax), should I remain as resident of Canada and file taxes over there? (I'd benefit somewhat from CPP and EI right?)

nelsona · Post by **nelsona** » Wed Mar 23, 2011 12:10 am

No. You will always be taxed in US for work done in US, so having to pay tax in canada as well cannot be better.

rogerme · Post by **rogerme** » Wed Mar 23, 2011 3:33 pm

Yes, but my point is since I will be in NYC, my US tax rate will be 40%, which is about the same as my Canadian tax rate.
So staying as a resident of Canada will not result in me paying much more taxes when I file with Canada.
My question is, would staying as a resident of Canada allow me to "save" the SS and Medicare I pay in the US? Would CRA recognize it as CPP equivalent and give me the credit? (Does that make sense?)

nelsona · Post by **nelsona** » Wed Mar 23, 2011 4:43 pm

I do see what you are asking, but, as I said, work done in NYC , will be taxed (AND FICA'd) in NYC regardless of where you live. You have no option to pay CPP instead or as equivalent.

While canada will give you credit for these things towrds your taxes, it will not reduce Cdn tax below zero, and you will be subject to other taxes (Ontario medical contribution, etc). Also, your non-wages in US don't get hit with FICA, so that portion will be taxed more in canada.

I would also question you presumed taxrate. Your marginal rate on wages *may* be 40%, but if it is, then that is pretty high wage, so your marginal rate in Ontarion will be higher. your effective rate will be no where near that, escpecially with some of the tax breaks that are available only in US.

Finally, by treaty, Canada will push you out once you become H1 or TN, so why create or fake unnecessary Cdn ties just for the privilege of filing a Cdn tax return.

Unless you have some strange set of circumstances that a departure from canada (either voluntary or forced by CRA) would trigger some huge tax consequence (which some folks do -- but I doubt given your a student just starting out), I don't see any need to remain Cdn tax resident.

So, I would stay OPT and Cdn tax resident (since you can't be considered US resident on OPT) as long as you can, and then offically depart Canada for tax purposes the moment you switch to TN/H1 (since you will then meet treaty requirement for US tax residnecy).

rogerme · Post by **rogerme** » Thu Mar 24, 2011 10:30 pm

Thank you very much for the detailed response!

Between the Roth IRA, IRA and 401K, which is better from a tax standpoint if I want to ultimately go back to Canada?

Also, for the social security and medicare I pay in the US, is there a way for me to benefit from them? (Under tax treaty do I benefit from it even when I'm in Canada?)

Thanks again for your help!

nelsona · Post by **nelsona** » Fri Mar 25, 2011 6:11 am

Roth is best, but if you are going short-term, avaoid starting one of these, rather just invest and sell after leaving, and you will pay no tax on gains incurred in US.

nelsona · Post by **nelsona** » Fri Mar 25, 2011 6:12 am

Once you work 2 years, you will get some SS when you retire.

rogerme · Post by **rogerme** » Sat Mar 26, 2011 6:47 pm

[quote="nelsona"]Roth is best, but if you are going short-term, avaoid starting one of these, rather just invest and sell after leaving, and you will pay no tax on gains incurred in US.[/quote]

Thank you!
So if I sell the stocks after leaving the US, I will pay no capital gain taxes to the US govt? Will I need to pay Cdn tax?

nelsona · Post by **nelsona** » Sun Mar 27, 2011 6:21 am

no us tax. cdn tax only on gains made after you arrive in canada

rogerme · Post by **rogerme** » Sun Mar 27, 2011 8:54 pm

WOW!!!
So basically all the cap gain I made in the US will be tax free?
Awesome!

rogerme · Post by **rogerme** » Sun Mar 27, 2011 9:04 pm

I was told that if I'm a nonresident of Canada, and keep my investment account in Canada - my capital gains from sell of canadian securities while I'm a nonresident will not be taxed, but my dividends will. Is this true as well?

nelsona · Post by **nelsona** » Mon Mar 28, 2011 7:37 am

Cap gains regardless of where the account is held are not taxable in canada once you live in US, that is why the yare asubject to departure tax in canada. They are taxable in US, if triggered.

Dividends are taxable in both countries. This is not the same issue as what we were discussing. If you do not trigger cap gains while in US, again, ragardless of whre the account is held, you will not be taxed on the gains when you leave.

rogerme · Post by **rogerme** » Mon Mar 28, 2011 8:29 am

That clarifies a lot of things.
Thank you very much!