First-year choice and kids - tax year 2023

[Anna2024]

Hello,

After reading the IRS publications, forums and articles, I was pretty sure that Credits for Other Dependents were available for Canadian kids (if ITIN application is submitted during the tax filing process/period). While all the other conditions are satisfied, the instructions for filing 1040 seem to add another condition - a child must be a US resident at least. So, if Canadian parents make a first-year election and become US residents from the day of their arrival thanks to this choice, their kids are still Canadian only residents and are not eligible for Credits for Other Dependents during the first year - the year of election. Am I wrong?

When I read IRS publications concerning dependents, I usually meet this phrase "a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico". I can also see the following definition: "The term “dependent” does not include an individual who is not a citizen or national of the United States unless such individual is a resident of the United States or a country contiguous to the United States." which means once again Canada and Mexico. Is there any particular reason why IRS instructions contain only half of the usual definition " a U.S. citizen, U.S. national, or U.S. resident alien" and drop the most important part "a resident of Canada or Mexico"? Is it a typo? While the second part of the definition is dropped in IRS instructions, the reference to pub. 519 is present to see a full definition which contains once again the most important terms "a resident of Canada or Mexico".

I'm asking because TaxAct gives me this credit but only for one child and not for all my children. My understanding is that you are either eligible to get $500 for every child or you're not eligible at all.

Any suggestions and information in this matter will be greatly appreciated!

[nelsona]

Just a suggestion to not bother with the "first-year choice" and simply file a full year 1040. This will get you the standard deduction (part-year does not).
The child credit is really only open to US citizen children or those living in US. It is not the same as the dependent clause in the treaty. Your children are dependents if they live in Canada, but may or not be eligible for the CTC (these rules have changed so often over the years).

Trump got rid of the dependent exemption while president, in favor of increasing the standard deduction, making the CDn dependent clause kinda useless.

[Anna2024]

A very interesting suggestion about the first-year choice. Thank you! I think I'm planning to make it mostly for Canadian tax. I explain: Canadian internal laws are quite subjective about residency and take into account a multitude of factors while US laws are pretty straightforward. Instead of cutting any ties with Canada, I want to declare myself a real US resident according to US internal laws. Then, thanks to the treaty rules, when I'm a tax resident of both countries, I'll be considered a tax resident of the country of my permanent address, i.e. US. Thus, Canada will have no other choice than to treat me as a deemed non-resident for Canadian Tax purposes even if I leave Canada in August or September. This position (being a tax resident of another country) is clearly accepted by CRA but I'm not sure that a treaty election of filing taxes and being treated as a US resident saves you from Canadian taxes. I may be wrong as I'm just at the beginning of this process, discovering new things every day. If the first-year choice gives you a better protection from CRA, it's easier to file an extra statement with your US Taxes instead of filing objections with CRA if they consider you're still tied to Canada because your departure date is closer to the end of the tax year plus other ties...

As soon as I'm a real US resident (first year choice), I'm still planning to file, using a treaty position, a full-year 1040 or alternatively, according to US internal laws, to treat a non-resident spouse as a resident and to file a full-year 1040 MFJ without any treaty position but an additional statement/election from a non-resident spouse.

At this point, I don't know what is easier to use a treaty position or internal US laws to file a full-year 1040 MFJ?

[nelsona]

From experience, there is no need to apply the first-year rule. Canada accepts that once you physically move to US, and do not have a spouse living in canada, you are no longer Cdn tax resident, using your departure date. IN any event, The first-year rule doesn't MAKE you a US resident. It merely allows you to file a part-year 1040 (which really doesn't carry any advantage tax-wise).

File a departure return in Canada, and then decide if you wish to file a full-year 1040 (using all the deductions, credits etc) available to any other US taxapayer. OR, if you have not met SPT, file a 1040NR -- Canada won't question your departure.

[nelsona]

Btw, you would not be considered a "deemed non-resident" since you do not have sufficient primary residential ties in canada. You would be considered simply a non-resident (or more correctly, an emigrant) for this tax year.

No need to overthink this: No house/no spouse in canada = US tax resident. Cdn national = allowed to file full 1040 at any time. Pub 917, while making for interesting reading, as little value for someone coming from a treaty country.

[Anna2024]

Thank you very much for clarifications! And I'm happy to know that Canada doesn't really question your departure return concerning your residency. So, as I understand, the real utility of the first-year choice appears if you're from a non-treaty country. I just noticed while reading that this first-year option was presented by some cross-border advisers as beneficial in the context of breaking free from CRA: once you're a tax resident of US and Canada, residing in US, you're considered only a US tax resident according to the US-Canada treaty rules.

Will it be seen as a contradiction to mail a first-year statement along with a full-year 1040 for the first year? On one hand, you're asking IRS to treat you as a part-year resident (first-year choice) and on the other, you're submitting your full-year 1040 (treaty position)? I don't know that this filing is even possible, and probably IRS, knowing that the treaty position supersedes their internal laws, will just put aside your first-year choice statement and will accept your full year 1040... Or probably one should either stick to the treaty rules, by just sending a full-year 1040, or follow the internal US rules, by submitting a cascade of statements (first-year choice statement + a statement to treat your non-resident spouse as a resident and thus filing a full-year 1040)? I'm just trying to name my thoughts... and to discover what will be the consequences of my filing choices.

For example, a FMV of your principal Canadian residence, according to the treaty, is frozen on the day you become a US resident.

Does any of the filing choices really change this date?

1. If you make a first year-choice only, the date of your arrival, if all the other conditions are satisfied, is the day of the beginning of your residency, easy, as written in IRS publications.

2. If you arrive closer to the end of the year and choose to file as a non-resident for the first year, the date of your US residency, if all the conditions are satisfied, is the first day of the presence in the US of the next filing year (it can be 8 January if you spend your winter vacations outside of the US) according to my understanding of IRS publications.

3. If you file a full-year 1040, taking a treaty position, your US residency probably begins on the day of your arrival?

4. If you follow the IRS internal rules/domestic laws only - a bunch of statements - does your residency begin on January 1, 2023 or still on the day of your arrival despite all your filing choices?

5. And finally a hybrid thingy for those with anxiety (a first-year choice + a treaty position to file a full-year 1040), and the day of the beginning of your residence is probably the day of your arrival according to the first-year statement?

All this said, your suggestion to take only a treaty position and to file a full-year 1040 does seem more elegant and the beginning of your US residency for FMV of your Canadian residence will be the day of your arrival or the first day of the year? I'm looking for this date to order an appraisal for my Canadian residence, just in case I have to sell it while in the US.

Thank you very much for your help,

[nelsona]

Not reading all this because you are de-simplifying what I'm telling you ---- but you cannot make the first year choice and file a full 1040, because the 1040 associated with the first year choice is a part year 1040. You can only file ONE 1040. You pick one, and I've already told you which one you should pick.

Put down the Pub 519.

[nelsona]

... and how you file in US is NOT lock-tied to how you file in Canada.

[Anna2024]

I put down pub 519 and returned to the US-Canada treaty to the definition of "resident of a Contracting State" and was happy to discover that I mistakenly took the words " under the laws of that State, is liable to tax therein by reason of his domicile" for being a tax resident under the laws of the State. So, anyone who, under the laws of the US, is liable to tax because he lives in the US, is a resident of the US. Under these circumstances, effectively, you don't have to become a US resident under US domestic laws to stay free from Canadian taxation of your US income.

And if I use a treaty position and file a full-year 1040, the day of my arrival in the US is the day I become a US resident for FMV of my Canadian residence, right?

[nelsona]

Your departure date from Canada, as indicated on your Cdn return, is the day for ALL your assets to be valued, both for deemed disposition purposes, as well as any Cdn property you may own, for future US tax considerations. For your RRSP, it becomes the 1 Jan of the tax year in question.

[Anna2024]

Thank you very much, it's good to know that the starting date of your US residency doesn't change whatever you filing strategy is.

[nelsona]

As I said your residency starting date does not have to match your Cdn departure date. If you choose to file full year, your residency starting date is Jan 1 of that year. But "residency starting date" is meaningless once you've chosen to file full-year.

[Anna2024]

Hello,
I have to say that my first reading of the treaty was correct. To be liable under domestic tax laws because of the residence… means to be a tax resident. There’s no other way out, unfortunately. I would prefer not to be a tax resident of Canada and pay taxes to Canada on my Canadian income only and, the same with the US, not to be a US tax resident and pay taxes to the US on my US income only even if this way I don’t have a benefit of different personal deductions offered by both countries to its tax residents.
And these thoughts return me to the conclusion that if I want to break free from Canadian taxation the year of departure, if the departure occurs after July, I just have to make a first-year election in the US regardless of my intention to use a treaty position to declare my whole year income to get a standard deduction on the US side.
Yes, I agree with Nelson that if Canadian tax authority doesn’t question your departure return and you are still eligible to file as a non-resident in the US, you may choose this way. But if Canada questions your residency status and if the first-year election is no more available at the time these questions arise, this may be annoying.

[nelsona]

For the US by the non-discrimination article of the treaty, you can file in US as any US citizen would, even if you never lived in US, so you can certainly do so when living there some of the year. No election needed.

As for residency, Canada has LONG accepted that once you depart, you are no longer tax resident of Canada if going to a treaty country with a residency clause.

[Anna2024]

Hello Nelson,

I absolutely agree with your statement that any Canadian can file as a US resident regardless of whether he is a US tax resident or a Canadian tax resident for the year. I'd like to precise that one will use different references to the same non-discrimination article of the treaty and this will depend on his status in the US.

Canadian residents and part-year US residents (actual physical presence test, first-year election) will put Article XXV (1)
Canadian residents and nonresident aliens (physical presence test is not met during the year, no first-year election is made, never lived in the US) will put Article XXV (2) + a reference to a third country (once, you gave an example of US-Germany treaty and I'll cite your post here for others)

------------------- The beginning of the citation
So that, in effect, says that if you can find another US treaty that allows a right to the citizens of another country that this treaty doesn't, you can use that treaty right.

Well, the US-Germany treaty has such a clause:

Article 24.1:


Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement therewith that is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. Notwithstanding the Provision of Article 1, <i>this provision shall also apply to persons who are not residents of one or both of the Contracting States</i>."

The italics part is the key to applying this, since it takes away the need to be a resident of a particular state at the time of applying the treaty.

So a German -- living in Canada -- can by 24.1 of the US-German treaty, file a 1040, since he cannot be subjected to a 'requirement' (i.e. SPT) to which a US citizen -- living in Canada -- is not subjected (US citizens don't need to satisfy SPT to file a 1040).

Since a German citizen living in Canada Can file a 1040, then by XXV.2, so can a Cdn living in Canada.

It is the removal of the SPT requirement, and the fact that German living in Canada still falls under the US-German treaty, that allows this.
---------------------- The end

The second scenario (about a Canadian citizen who has not spent a single day in the US but still can file a 1040) gives me an idea to use this treaty position and to file a regular 1040 for all the kids - Canadian citizens and nonresident aliens in the US. While they are counted as dependents, they don't receive any benefits attached to this status as they spent 0 days in the US. The main reason for filing their returns is to get ITIN before 2024 filing season to simplify at least 2024 tax year. The process of getting ITIN is so long that I don't want to wait for their eligibility to get dependent benefits for 2024 to get their ITIN. I'm now looking for the way to get their ITIN beforehand.

A mechanical question: is it better to file a real 1040 with 0 income or to file a pro forma "protective" 1040 with an attached statement that the return is being filed to preserve the taxpayer’s right.

I understand that they don't need to file any tax return but it seems to be the only way to get ITIN now without waiting for the next tax season. I read somewhere and the information looks consistent with the IRS eligibility tool for ITIN (If you don't expect to get any benefit, you're not eligible to apply for ITIN)

Thank you for your attention,