Individuals
If you are an individual working in Canada, remotely, but your employer is a U.S. company, what would be the correct tax slip to be issued for your employment income?
T4
Employers have to deduct income tax from the remuneration they pay to non-resident employees who are in regular and continuous employment in Canada in the same way they do for employees who are residents of Canada. This applies whether or not the employer is a resident of Canada.
What is the U.S. federal corporate income tax rate?
21% flat rate
State income taxes may also apply and vary from state to state - each state is different!
U.S. Form 114, Report of Foreign Bank and Financial Accounts, is required to be filed by U.S. persons if they have financial interest or signature authority over foreign financial accounts if the aggregate value exceeds US$______ at any time during the calendar year.
US$10,000
How will IRS know if you don't do it? - FATCA
Canadian financial institutions are required to submit information to the US government on US citizens with Canadian bank accounts exceeding US$50,000
When an individual taxpayer considered to be a resident of both the U.S. and Canada, the taxpayer can use the treaty “tie-breaker” rules to break in one country or the other.
This is found in Article IV (Residence) of the Canada-U.S. Income Tax Convention. In what order are the following factors considered – order first through last:
A - citizenship
B - centre of vital interests (personal and economic relations)
C - where permanent home available
D - habitual abode
C -> B -> D -> A
When you travel into the U.S., your travel history is recorded based on your travel document (i.e. passport) and you can request for the information online on Form I-94. Which government authority has this information?
A) U.S. Border Protection
B) U.S. Customs and Border Protection
C) U.S. Border Patrol
Answer is......B
Tip: Don't lie about how many days you were in the U.S. because they keep records!
Partial days are counted as a full day on your income tax return for non-residents.
A U.S. branch is subject to branch profits tax (BPT), what is the exclusion amount per the Canada-U.S. income tax treaty? And what is the treaty BPT rate?
Hint: Treaty article X
CAD$500,000 (US equivalent)
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5%
If a non-U.S. person owns vacation property in the U.S., do they need to file a U.S. tax return?
Not if it is purely personal use.
Yes if there is rental activity, or in the tax year the property is sold.
Note: 15% withholding tax on the gross sales price applies to nonresidents unless it is not more than $300,000 AND buyer uses it as their personal residence.
For an individual who receives social security taxes (i.e. U.S. social security benefits, CPP, OAS), how is this taxed in Canada, and how is this taxed in the U.S.?
A) 100% in Canada, none taxed in the U.S.
B) 85% in Canada, none taxed in the U.S.
C) 85% in Canada, 15% in the U.S.
Hint: treaty Article XVIII
B) 85% in Canada, none taxed in the U.S.
The 85% is taxed by 100% inclusion with a 15% deduction.
State income taxes apply separately from U.S. federal taxes, and not all states impose income taxes. Name three (3) states that do not have personal income tax.
Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming
State income taxes apply separately from U.S. federal taxes, and not all states impose income taxes. Name three (3) states that do not impose corporate income tax (but may still have a business gross receipts tax).
Nevada, Ohio, Texas, Washington
Name an expense item related to personally-used real estate property (i.e. non income generating) that can be deducted for U.S. tax but not Canadian tax?
Bonus: elaborate on how this expense is deducted, any rules, or any limitations on deduction.
Mortgage Interest Expense.
- Can be claimed as an itemized deduction (i.e. Canadian T1 schedule 1 equivalent) on personal tax return.
- Limitations: Mortgage interest can only be claimed on principal and one additional real estate property, on a maximum of US$375,000 principal loan, and the loan has to be obtained within 90 days of purchasing the property, among other restrictions.
To claim a treaty benefit when filing an income tax return, Form 8833 - Treaty-Based Return Position Disclosure must be attached to the return.
Failure to disclose a treaty-based return position may result in a penalty. How much is this penalty for individuals? and for C corporations?
$1,000 in the case of an individual
$10,000 in the case of a C corporation
As a U.S. citizen or U.S. resident, you are subject to “gift tax” when you gift amounts to someone. There is an anuual exclusion amount whereby you would a U.S. person would not be subject to gift tax. What is this amount for the 2022 tax year?
A) US$25,000 in aggregate
B) US$25,000 per gift
C) US$16,000 per gift
Answer is.... C!
Anything above that, Form 709 - Gift Tax Return would be required. There is however a lifetime unified credit (exclusion amount) of US$12.06m for 2022. Grinds down over your lifetime - cannot be applied against estate tax.
An S Corporation is a U.S. domestic corporation that has made the election to be taxed as a partnership, to avoid the two-tiers of taxation (corporation and then shareholder). Give an example in which this election would be terminated?
By terminating its eligibility:
1) non-eligible persons (i.e. a corporation shareholder)
2) more than the maximum number of shareholders - 100 (attribution rules apply)
Voluntarily revoking the election
In Canada, the use of the principal residence exemption would eliminate any capital gain on the sale of your home. In the U.S., the “home sale exclusion” may not fully exclude your capital gain, what is the amount that’s excludible?
US$250,000 for single or MFS or $500,000 MFJ
To be eligible, must satisfy both (24 months in the previous 5 years - does not need to be continuous 24 months):
1) ownership test;
2) use test.
Gambling income for a nonresident is subject to U.S. withholding tax of 30%. For example, you win at roulette in Vegas. Can you get any of this back and how? (Hint: treaty Article XXII:3)
A) You can offset any winnings with losses, the net is taxable
B) It is not subject to U.S. tax for a Canadian resident
C) The treaty reduced rate is 5%
A) You can offset any winnings with losses, the net is taxable
Treaty allows for Canadians to have the same benefits as a U.S. citizen/resident. Because U.S. citizens/residents can offset losses with winnings, Canadians can also do so. The net winnings are still subject to 30% U.S. tax but any amounts overwithheld would be a refund by filing a U.S. nonresident income tax return.
Yes, you will need to apply for a U.S. tax number to file a U.S. tax return to claim a refund.
For individuals who decide to give up their U.S. citizenship:
1) What tax will apply?
2) In what situation would it apply?
Expatriation tax - capital gain tax based on the Taxpayer's net worth
It applies if:
1) the Taxpayer's net worth exceeds US$2m
2) they have not been tax compliant for at least the 5 preceding years; or
3) average net income tax liability for the 5 preceding years was more than US$172,500 (2021 figure).
A U.S. domestic (incorporated in the U.S.) corporation is required to annually file a U.S. corporate income tax return, even if it has no activity. When can it stop filing a tax return?
Must be legally dissolved
Files a final return, with Form 966 – notifying IRS of such dissolution
Any applicable state applications of withdrawal
A U.S. person who dies is subject to the U.S. estate tax rules. In what circumstances would a Canadian (non-U.S. person) also be subject to U.S. estate tax?
U.S. situs assets:
1) real property situated in the U.S.
2) shares of U.S. corporations.
Exempt from filing a U.S. estate tax return if under US$60,000
What are the requirements for a public company to be eligible for treaty benefits (i.e. under the Canada-U.S. Income Tax Treaty)?
Hint: Treaty article XXIX-A:2(c)
1) traded on a "recognized stock exchange" - NASDAQ and any stock exchanged registered with SEC, "prescribed stock exchanges" or "designated stock exchanges" under the ITA.
2) "principal class of shares" are primarily and regularly traded - not defined in the Treaty, defined by reference to the domestic tax laws (refers to stock exchange, and volume)