People who earn income in the United States but are not U.S. citizens might be defined as a resident or nonresident alien and will need to file the appropriate tax return.
Once residency status has been determined, there are additional tax issues.
A Statement of Closer Connections may be filed to be considered nonresident, even though the applicant meets all the tests of being a resident within the U.S.
The Internal Revenue Service will consider factors such as the location of:
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- Permanent home and family.
- Personal belongings.
- Social ties, such as clubs and memberships.
- Business activities.
- Driver’s licence.
- Where the applicant votes.
The only way the applicant will not be able to claim a closer connection to another country is if he took action or applied for Lawful Permanent Resident status.
Form 8840 will have to be filed to claim a closer connection. Applicants who successfully claim a closer connection to Canada will be considered a nonresident and will be taxable in the U.S. only on income earned in the U.S. rather than on worldwide income.
U.S. citizens living outside of the U.S. are required to report all investments and accounts outside of the U.S. on which they have signing authority, such as Registered Retirement Savings Plans, investment accounts and bank accounts.
The form TD F 90-22.1 must be filed before June 30 of each year to avoid interest and penalties being assessed by the Internal Revenue Service.
If you are a Canadian with U.S. tax obligations, you may also be subject to U.S. gift taxes if you give someone money or property during the year. You would not be subject to the gift tax if:
- The gift is less than the annual exclusion of $12,000 for each person.
- It is the payment of tuition or medical expenses directly to an institution for someone.
- It is to your spouse.
- It is to a political organization.
- It is to a charity.
You may also be subject to U.S. estate taxes on property in the U.S. at the time of your death. The U.S. estate would include life insurance proceeds payable to the estate, the value of other annuities payable to the estate and the value of certain properties transferred within three years of their death.
There are allowable deductions to reduce the amount of income upon which the estate tax will be calculated: funeral expenses; debts owed upon death; the value of property that passes to a surviving spouse and the value of property transferred to a qualifying charity.
You will also be entitled to a unified credit of $345,800 for gift taxes and $780,800 for estate taxes, which will reduce the taxes owing. This credit is a lifetime amount, which means the balance will decrease for the amount that can be used in future years once part of it is used.
These are only a few of the many tax issues that will be faced with income and investments in the U.S.
Those in this position should talk to a tax professional regarding their possible U.S. filing requirements so as to meet all filing deadlines and reduce possible filing penalties that may apply. Tax experts will also be able to help with U.S. tax planning to reduce the amount of taxes owing, if any.
Marianne Gray is a tax specialist in KPMG’s agri-business industry practice in Lethbridge. Her opinions do not necessarily reflect the views of The Western Producer. She can be reached at 403-380-5742 or by e-mail at mariannegray@kpmg.ca.
