Tax treaty and forms - DUAL STATUS RETURN - box 35b on page 2 of 1040 -

QUESTION:

Hello:

I was hoping to get some clarification about using the tax treaty.  Here is my situation... I am a permanent resident in BC and filed my income taxes from regular employment in 2006.  I moved along with my wife to the US on H1B in March 07.  We still maintain a bank account in Canada.  So for the year 2007, I have salary income in Canada from a Canadian company for 75 days, and in US from a US company for the rest of the year.

I have already filed my taxes here in the US as a (tax) resident.  My questions are regarding the taxes to be filed in Canada:

 a) Do I file as a factual resident or a deemed resident?
 b) Which forms and schedules do I have to submit?
 c) Can I claim the income from my US job exempt as a deduction (line 256)?

Will appreciate any advice.  Thanks.

---------------------------------------------------------------------
david ingram replies:

If you filed as a tax resident, the US return will be wrong because it has to  include your world income which includes the Canadian income before you moved there.  Then you would claim a foreign tax credit on form 1116 or file exemptions on form 2555.


Your US return should either have been a DUAL Status return (line 35b on page 2 OR a joint return with your wife and reported the Canadian Income on it. the chances of your US return being correct are about 2% in my experience.

On the US return I also hope you paid attention to questions 7 and 8 on the bottom of the US schedule B - If you have any foreign accounts you have to pay attention to these questions because the minimum penalty for failure to report Canadian accounts is $10,000.

You should be filing the Canadian return as a DEPARTING Canada return including Forms T1161, 1243 and 1244 if you left any assets behind.

The following will likely help you .


David, ---------
Question

I'm a 27 year old Canadian currently living in the United States on an H1B. Before leaving Canada I closed all major credit cards, bank accounts (except for one which still has an outstanding balance which will be paid off this year), and brought all personal belongings with me. The only thing I've left in Canada which is giving me a tough time is ~60K  in RRSP's. I've determined as per IRS publication 519 I am a resident alien for tax purposes as per the substantial presence test. I've been considering doing the filing myself, but I'm confused as to whether or not I should be declaring my RRSP's and if so, what are the implications? Especially this year since I've lost over 10%+ of their value.

I would like to use your services, but I would like some degree of confidence that by paying over 1K (moving year) that I will be really saving that much. I can understand someone who has complex tax situations with properties, receiving retirement funds, capital gains/losses, etc. My tax situation is pretty straight forward (I think) and aside from filing forms 1040, 8891 (maybe) in the US with some Canadian tax credits and in Canada file a T1 tax return (departing), I'm having a tough time seeing the value of your services. I'm hoping you can convince me otherwise.

Any other year, I would only except to file in the US, but this one I don't want to take a chance on.

Thanks for your help!


-------------------------------------------
david ingram replies;

I went to see my dentist Ed Clark the other day and $160 dollars later was told 'no cavities'.  I was very happy.  Last time I saw him because a cap had split off the enamel - this is the truth - I ended up with a $16,000+  dental bill because he discovered a very hidden abscess and then pointed out all my ground down teeth.

Although I like the appearance of my $16,000+ teeth and appreciate the fact that the abscess was fixed, etc. I was happier hearing 'nothing wrong but floss more' than I was with the litany of stuff wrong after not being there for a few years.

I have no idea if our service would be worth it to you.

It is an interesting question.  You have mentioned the form 8891 which is a new form.  Not filling it out can result in a penalty of 35% of the value of your RRSP PLUS 5% for each year you do not report it.  Being in the US on an H1B requires the filing of form 8891 to report (and exempt) the internal earnings of your RRSP.  However, if you are in California, the 8891 does NOT exempt the internal earnings on your RRSP and the California Franchise Board taxes them requiring an adjustment on form CA or CA(NR) with the 540 or 540NR.

You do not mention form TDF 90-22.1.  I was told by a representative from Treasury on June 20, 2007,  that their intention is to levy a minimum $10,000 fine for failure to file this form.  I had a 105 year old client pay a $10,000 fine for failure to file it and over 1,000 clients of a Vancouver financial consultant 'Jerome Schneider' were fined because he told them not to file the forms.  Jerome Schneider was sent to jail himself and fined $100,000 for telling them not to file the forms.  That was a plea bargain where he agreed to testify against all his clients and a couple of lawyers and accountants he had worked with.  Without the plea bargain, his penalties were astronomical because there were over 1,000 charges possible. 

If you want more info on Schneider, you can read the story at 
http://www.quatloos.com/schneider_witmeyer_guilty.htm Just remember that this first year, your US 1040 either needs to include your Canadian income (before you moved to the US)  and a '2350 and 2555' (to exempt the Canadian Income) or an 1116 (to claim a foreign tax credit)  OR be filed as a Dual Status preparer - see line 35b top of page 2 of the 1040 and mark the top of Page One of the return as a DUAL STATUS RETURN.  In this situation, you also have to file a 1040NR with DUAL STATUS STATEMENT on the top of Page one of the 1040NR.  This 1040NR would be reporting any US source money you received BEFORE moving to the USA.

one more thing for you or anyone else reading this.  If you have 'ANY' foreign accounts (Canadian, French, Spanish, Japanese, Australian or any other of the 265 or so countries in the world) you MUST fill in US schedule B and answer the two questions at the bottom.  Your RRSP is a foreign trust and form 8891 replaces form 3520 for an RRSP.

Good Luck
-----------------

QUESTION: Hi David,

I am Canadian citizen, worked in Canada for the first 5 months of 2006. then moved to US and worked then for the rest of 2006. I have income from Canada employer, canadian bank and US employer. I filed tax return on my US income to IRS already. I haven't done canadian tax return yet. I had thought I only need to file canadian tax return on my canadian income. But it seems both CRA and IRS requested to report my world income to both. I am confused. What should I do to file the tax return to both? 

More specially, I received NR4 slip from CIBC bank. I could not find where to enter this form when I used Ufile.ca. 
How can I enter US W2 form into any Canadian tax form?
How can I enter T4 slip into US tax return form? 

thanks a lot!

_______________________________________________________________
david ingram replies:

An NR4 does not go on the Canadian return.  It goes on Schedules B and 1116 of the US return

The T4 does not go on the US return unless you are filing as a year round resident as in 2 below.

I am too busy to come up with a new answer but this older one will give you an idea.

QUESTION: Hi David,

I really need your help in filling U.S tax and I am getting mixed messages which forms to file. 

I am a Canadian Citizen in U.S on TN visa for more than a year. 

I have RRSP in canada over 10,000 put in fixed bond and saving account in a bank. 

What do I need to file here and what forms do I need to fill. 

Do I still have to file tax in Canada for canadian earning? Please help.

____________________________________________________
david ingram replies;

You need to file a departing Canada tax return and file T1161 if you left more things than your RRSP behind.  The Canadian return will only include Canadian earnings although if you had a Home Buyers Plan, it is all due and taxable on the departing Canada return unless you have paid it back.

For the US, you have two choices:

1.   File a 1040NR dual status statement and a Dual Status 1040 Income Tax return with no standard deduction

or

2.   File a full 1040 which includes your Canadian income and gives you a full standard deduction and the right to file a joint return if married.  This is usually the best if you left Canada early in the year as you did.

If you can't figure it out, file an extension  form 4868 (find it at http://www.irs.gov/pub/irs-pdf/f4868.pdf )

and then send the information to us at the address in blue below to complete for you.
_____________________________