Canadian filing 1040NR: getting refund for U.S. unemployment

[Krakus]

My question relates to getting a refund on the U.S. tax I paid on U.S. unemployment insurance income while a resident of Canada.

As a Canadian, I returned to Canada in 2015 after working temporarily in the U.S.

I collected U.S. unemployment insurance in 2016 while a resident of Canada. The total amount received was less than $10,000 US. I ended up paying federal and state tax on it.

I'm currently filing my 1040NR-EZ, and filling out schedule OI. I only spent a week in the U.S. in 2016, and in the last three years was not sufficiently physically present in the U.S. according to the substantial presence test, to be considered a resident.

I plan to declare the unemployment insurance as employment income in Canada and pay tax in Canada on it. (In fact, I have sufficient exemptions and credits to not have to pay any). So I would like to obtain a full refund on the U.S. tax that I paid on this income, rather than get credit in Canada for the U.S. tax paid (which is credit that I don't need).

On the 1040NR, I've listed the income as income exempt by a treaty. On schedule OI, what US-Canada tax treaty article can I reference?

There is an article XV 2 (a) which suggests that this income is not taxable in the U.S. because it does not exceed $10,000. This seems like a possible candidate.

The other article I found is XXIV 1, which seems to suggest that I can obtain credit on U.S. tax based on my tax paid to Canada, but I'm not sure if it's indeed applicable.

This unemployment insurance income relates to my finding employment in Canada as a resident of Canada, so it's not connected to any business conducted in the U.S. but I can't find an article that addresses this directly.

Any suggestions would be welcome. Thanks.

Also, I would like to obtain a refund on the state tax too, by filing a IL-1040 and schedule NR with Illinois, the state in question. Can I use the same tax treaty article to get this refund? Or will they not recognize the treaty?

Thanks again.

[nelsona]

First, the UI you received from US should be reported as as if was EI benefits in Canada, not employment income. It is NOT employment income in US either.

It is absolutely NOT exempt by treaty, since it is NOT employment income. It is US sourced income, and as such, the US and the state get first cut at it. Nothing in the treaty for that.

File your 1040NR reporting the UI on line 20, and then determining whatever tax you owed on that money. Same for the state, using their NR return.

Then, use the UI and the tax you owed on the 2 US forms to come up with your foreign tax credit on your CDn return. if any.

[Krakus]

Thank you for your reply. That alll makes sense. I followed your approach with respect to paying the tax owing on my federal and state returns and not claiming treaty benefits.

However, when looking at my Canadian return, I noticed that because I also had other Canadian income last year, and various tax credits, the foreign tax credit that was calculated (based on the U.S. taxes paid) is minimal on my T2209. I'm wondering whether I can, instead, use all of the U.S. tax paid to get a 20(12) deduction on line 232? Since the unemployment insurance isn't considered employment income, perhaps it qualifies for 20(12)?

[nelsona]

No it doesn't, and no you can't.
The best you can do is try to push some of the Cdn credits for which you might have an option to claim later, to a future year.

But if you don't owe much Cdn tax on the UI, you can't very well get much FTC for it either.