Hi:
I'm Canadian - live/work in Canada - work some of the time under TN in US. Accountant filed my US taxes incorrectly for 2011 and 2012 under 1040 instead of 1040NR and claimed all business income for the year instead of just earnings while in the US. Discovered this when changed accountants for 2013.
Am planning on filing 1040X and 1040NR with correct (much smaller) US income for 2011 and 2012. I expect this should generate large refunds from the IRS.
This in turn will drastically change the Foreign Tax Credit claimed on my 2011 and 2012 T1 for Canadian taxes (federal and provincial).
In essence all the money I get back from the IRS will be owed to CRA as I understand it.
I assume I can amend this with T1-ADJ.
Will I be assessed penalties and interest by the CRA? The numbers are fairly large (> 20K per year).
How best to approach the CRA about this?
Changed from 1040 to 1040NR - CRA Foreign Tax Credit
Moderator: Mark T Serbinski CA CPA
Probably. Since you will not be getting any money back in this exchange, why bother.
A Cdn is always allowed to file a 1040 instead of 104NR.
But really, why would it change your foreign tax credit very much. The only foreign tax credit you were entitled to put on CRA return was the US tax paid on US income.
That amount would have been about the sane whether you filed 1040 or 1040NR, Sounds like you claimed too much US tax as a credit on CRA return in the first place.
Your previous 1040 should already have CDn tax as a credit (does it?). So, even then you should have only paid US tax on US income -- just as if you filed 1040NR.
I would leave it alone unless CANADA insists you make changes, then I would "correct" both returns.
A Cdn is always allowed to file a 1040 instead of 104NR.
But really, why would it change your foreign tax credit very much. The only foreign tax credit you were entitled to put on CRA return was the US tax paid on US income.
That amount would have been about the sane whether you filed 1040 or 1040NR, Sounds like you claimed too much US tax as a credit on CRA return in the first place.
Your previous 1040 should already have CDn tax as a credit (does it?). So, even then you should have only paid US tax on US income -- just as if you filed 1040NR.
I would leave it alone unless CANADA insists you make changes, then I would "correct" both returns.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
I changed accountants last year. When the new accountants reviewed my 2011/2012 tax returns they indicated I was filed with the US using the wrong form (1040). They did my 2013 return using 1040NR, and only claimed the income made while physically in the US.
On the 2011/2012 returns that accountant had claimed ALL my business income (but not any none-business income) on the 1040, so I paid a lot of US tax, which he then claimed as a credit on my T1.
The business income is all work done for a US company. Most of the time I worked from home in Canada, but I did do onsite work in the US - not enough for the substantial presence test.
I agree that for me this exercise would be tax neutral - any refund from IRS is owed to CRA, possibly plus interest and penalties.
However, my current accountant is saying I am not compliant.
On the 2011/2012 returns that accountant had claimed ALL my business income (but not any none-business income) on the 1040, so I paid a lot of US tax, which he then claimed as a credit on my T1.
The business income is all work done for a US company. Most of the time I worked from home in Canada, but I did do onsite work in the US - not enough for the substantial presence test.
I agree that for me this exercise would be tax neutral - any refund from IRS is owed to CRA, possibly plus interest and penalties.
However, my current accountant is saying I am not compliant.
If you paid US taxes on your Cdn income (that would only be the line 7 income, which was not put on correct line anywys, what about investments, etc) then you should have filed a form 1116 with that return to claim the Cdn tax that you paid on that income as a credit. If you excluded the business income, then what US tax did you pay on that income.
I won't disagree that your taxes weren't handled correctly all the way around, but if you are going to try to fix one thing hoping for a credit, then you need to fix everything.
Probably not worth it, since at best canada will demand all that tax back, and charge you interest.
Just leave it. If CRA accepted your previous returns (you did have to submit the US retunr with your CRA return), leave it until CRA complains. If they are the onbes who complian, they will give you a break on the penalties. If you voluntarily admit you underpaid, expect taxes interest an penalties.
I won't disagree that your taxes weren't handled correctly all the way around, but if you are going to try to fix one thing hoping for a credit, then you need to fix everything.
Probably not worth it, since at best canada will demand all that tax back, and charge you interest.
Just leave it. If CRA accepted your previous returns (you did have to submit the US retunr with your CRA return), leave it until CRA complains. If they are the onbes who complian, they will give you a break on the penalties. If you voluntarily admit you underpaid, expect taxes interest an penalties.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
I think I see where we are going on this. You are saying that your Cdn wages (from your Cdn job) were exempted (correctly), but thaty our business income was taxed in US, and you think it should not have been.
Were you an employee in US or were you being paid as a contractor through your business?
That is what makes the difference, not simply filing 1040 vs 1040NR.
What your acct essentailly told IRS (and CRA) was that all your business income was earned in US, when it was not. THAT is where your trouble is.
Now, you are going to tell IRS and CRA that this was really a Cdn business, IRS give me back my money and give it to CRA.
Were you an employee in US or were you being paid as a contractor through your business?
That is what makes the difference, not simply filing 1040 vs 1040NR.
What your acct essentailly told IRS (and CRA) was that all your business income was earned in US, when it was not. THAT is where your trouble is.
Now, you are going to tell IRS and CRA that this was really a Cdn business, IRS give me back my money and give it to CRA.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Just so you know, if you are on TN as a contractor, and live in canada, and don't stay in US more than 1/2 of your time, then NONE of the business income is taxable in US. Period.
I'll bet your new accountant isn't following that reasoning either.
I'll bet your new accountant isn't following that reasoning either.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Addressing the last line first:
Obviously neither of these accountants ever said I didn't have to pay US taxes on the business income.
I had income from a Canadian company in 2011/2012 (basically continuance - the plant closed and I took a package) and paid normal Canadian income tax on that income along with CPP, EI etc. - just like I was still working there.
The US entity of that company wanted to hire my services. I work from home, submit hourly rate invoices to another US company. They bill the actual client (the US entity), and send me a cheque. No 1099, no W2.
Sometimes I have to go to the actual client locations in the US. I had a TN as Management Consultant for those trips.
The 2011/2012 accountant assured me I had to pay US tax.
The 2013 accountant also said I had to pay US tax.
My TN expired in 2014 and I have not renewed as I will not be working in the US anymore, although I still work remotely (at much reduced amount). However, part of my 2013 1040NR refund was directed to anticipated tax for 2014 tax year, so I am thinking I will have to file for 2014 to recoup that.
Obviously neither of these accountants ever said I didn't have to pay US taxes on the business income.
I had income from a Canadian company in 2011/2012 (basically continuance - the plant closed and I took a package) and paid normal Canadian income tax on that income along with CPP, EI etc. - just like I was still working there.
The US entity of that company wanted to hire my services. I work from home, submit hourly rate invoices to another US company. They bill the actual client (the US entity), and send me a cheque. No 1099, no W2.
Sometimes I have to go to the actual client locations in the US. I had a TN as Management Consultant for those trips.
The 2011/2012 accountant assured me I had to pay US tax.
The 2013 accountant also said I had to pay US tax.
My TN expired in 2014 and I have not renewed as I will not be working in the US anymore, although I still work remotely (at much reduced amount). However, part of my 2013 1040NR refund was directed to anticipated tax for 2014 tax year, so I am thinking I will have to file for 2014 to recoup that.
By the manner you were working, you were not subject to US taxes.
People who collect business income from US while living in canada are exempt by treaty from US taxation as long as they don't have a fixed establishment (you didn't) AND they do not spend more than 183 days ion any 12-month rolling period in US.
You met thses conditions.
At workst you would have filed a 1040NR, showing what income you did earn while physically in US, and then exempt it by treaty (that is why the 1040NR has all those questions about resisdnce and days in US.
Since that was your only source of income in US, you would not have paid anything there. Period. For all three years.
But of course ALL your income is reportable in canada. So, if you wish to refile your Cdn taxaes with ZERO foreign tax credit, and refile your 1040NR with ZERO US tax, go ahead. I'm just saying it is proabably not worth it.
So, you've found 2 acct's who don't seem to know what they are doing. Please tell us how you go about finding these gems, so taht others can avoid them.
People who collect business income from US while living in canada are exempt by treaty from US taxation as long as they don't have a fixed establishment (you didn't) AND they do not spend more than 183 days ion any 12-month rolling period in US.
You met thses conditions.
At workst you would have filed a 1040NR, showing what income you did earn while physically in US, and then exempt it by treaty (that is why the 1040NR has all those questions about resisdnce and days in US.
Since that was your only source of income in US, you would not have paid anything there. Period. For all three years.
But of course ALL your income is reportable in canada. So, if you wish to refile your Cdn taxaes with ZERO foreign tax credit, and refile your 1040NR with ZERO US tax, go ahead. I'm just saying it is proabably not worth it.
So, you've found 2 acct's who don't seem to know what they are doing. Please tell us how you go about finding these gems, so taht others can avoid them.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
The first accountant was the only one in the smallish city I was living that would do US taxes, and of course he assured me he did them all the time.
Then I moved to a larger city, and the accounting firm I went to is quite large.
I'm just a stupid consultant, so what do I know?
In any case, your recommendation at this point would do nothing?
Then I moved to a larger city, and the accounting firm I went to is quite large.
I'm just a stupid consultant, so what do I know?
In any case, your recommendation at this point would do nothing?
I should probably also mention:
In 2010 I was still with the Canadian Subsidiary doing some work for the US Entity in the US (still < 183 test). The US Entity got me an L1B, and had another Canadian accounting firm (large one) do my taxes for me. I paid US tax on 1040NR with them, claiming the US tax on the T1, so when the others told me I had to pay US tax it didn't sound wrong.
Much earlier in my career I also had an L1B and that same accounting firm did my taxes the same.
All seemed reasonable to me.
In 2010 I was still with the Canadian Subsidiary doing some work for the US Entity in the US (still < 183 test). The US Entity got me an L1B, and had another Canadian accounting firm (large one) do my taxes for me. I paid US tax on 1040NR with them, claiming the US tax on the T1, so when the others told me I had to pay US tax it didn't sound wrong.
Much earlier in my career I also had an L1B and that same accounting firm did my taxes the same.
All seemed reasonable to me.
There has always been a differnce being paid as an employee rather than a contractor. Wages earned in US by a Cdn worker have a different set of exemption limits (generally 10K if paid directly by the US firm).
Some will report the income based on whether taxes were withheld or not, just because it makes things easier. The US really doesn't care if you don't use thetreaty and pay them more tna you should (obvioulsy).
the problem comes when CRA decides that the US tax you claim shouldn't have been paid (by treaty) and thus the FTC is denied. That is whay they want your US tax return and W-2 when you file.
So I would do nothing unless and until CRA denied your foreign tax credit.
Some will report the income based on whether taxes were withheld or not, just because it makes things easier. The US really doesn't care if you don't use thetreaty and pay them more tna you should (obvioulsy).
the problem comes when CRA decides that the US tax you claim shouldn't have been paid (by treaty) and thus the FTC is denied. That is whay they want your US tax return and W-2 when you file.
So I would do nothing unless and until CRA denied your foreign tax credit.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Well, in every year (2010 - 2013) I received a request for more information from the CRA. In each year they requested my US tax return and my professional dues receipts. In each year I sent them the information, and in each year they accepted the information and allowed the Foreign tax exemption, although it was sometimes adjusted slightly (for exchange rate I think - I would have to look).
Hence until this new accounting firm said something I had no inkling of a problem of any kind. I did pay the US tax, and did claim it on my Canadian return, the CRA questioned it and appeared satisfied.
Everything you read says to consult a tax professional when dealing with cross-border anything. You're saying out of 3 firms none are correct. Not disputing that, just wondering where the heck to find a good firm to do my taxes.
Hence until this new accounting firm said something I had no inkling of a problem of any kind. I did pay the US tax, and did claim it on my Canadian return, the CRA questioned it and appeared satisfied.
Everything you read says to consult a tax professional when dealing with cross-border anything. You're saying out of 3 firms none are correct. Not disputing that, just wondering where the heck to find a good firm to do my taxes.
The information request was simply for things that should have been submitted with a per return, not to make a determination of income source.
As I said earlier, your accountants have all determined (incorrectly) that the payments you recieved, be it wages or contractor income) were US-sourced. That is strictly true ONLY of US wages paid by a US fimr tfor work performed on US-soil. Anything else is subject to the treaty and residence. even those wages are subject.
that said, CRA and IRS rely on the pros to make the correct determination of source is al lthese other cases, like self-employment and contractor income.
IRS is rarely that intersted in source, because US taxpayers pay tax on world income regardless of residence. they have very liberal FTC regulations.
CRA does care, and has very stringent ftc rules. That is where one can get tripped up. You haven't, so I wouldn't worry. CRA was happy as long as al your income was being reported in US anyways. But once you use 1040NR (or nothing at all) for IRS, they will pay more close attention to the arithemtic, making sure that they give you credit ONLY for US tax on income you reported to IRS and paid tax on -- legally, by treaty.
As I said earlier, your accountants have all determined (incorrectly) that the payments you recieved, be it wages or contractor income) were US-sourced. That is strictly true ONLY of US wages paid by a US fimr tfor work performed on US-soil. Anything else is subject to the treaty and residence. even those wages are subject.
that said, CRA and IRS rely on the pros to make the correct determination of source is al lthese other cases, like self-employment and contractor income.
IRS is rarely that intersted in source, because US taxpayers pay tax on world income regardless of residence. they have very liberal FTC regulations.
CRA does care, and has very stringent ftc rules. That is where one can get tripped up. You haven't, so I wouldn't worry. CRA was happy as long as al your income was being reported in US anyways. But once you use 1040NR (or nothing at all) for IRS, they will pay more close attention to the arithemtic, making sure that they give you credit ONLY for US tax on income you reported to IRS and paid tax on -- legally, by treaty.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing