US taxation for US citizen in Canada with no US income -

A question I am hoping you will be able to help us with.

 

My son's fiancee who has been living common law with him for over a year and living in Canada is trying to file her US taxes.  She is in the process of applying for her residence status here, which should come through any time now.  They have "filed" common law status with the Canadian authorities as of March of the past year and the paperwork was filed in May for her Canadian residency.  She has no US income so how does she file her return for 2006 with the US?

 

If you can help us, it certainly would be appreciated.

 

Thank you,

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david ingram replies:

Well, she could send it all to us and we would do it for her and likely charge $800.00 plus GST.

OR,

If she just has one or two T4 slips from Canada, she can goto www.centa.com and read the 'US/Canada Taxation' section in the second box down on the right hand side.  She should also read the October 1995 Newsletter which explains the responsibilities of a US citizen living in Canada.  She can find that newsletter in the top left hand box on the same page.

I have reproduced part of it here

 

The U.S. taxes on citizenship first and residency or physical presence second. If you have another tax home, and are just an extensive visitor in the States, you can escape U.S. tax on your income from other countries. However, if you renounce your other tax home or become a "green card" holder or are in the U.S. for more than 183 days in one year, you are subject to U.S. income tax on your world income.

The U.S. taxes its citizens and green card holders wherever they are and no matter what they are doing. The U.S. taxes its citizens in Canada and they will tax them in the North Sea. The U.S. will add on the benefit of housing allowances, car allowances, servants, and education allowances for people who have not been in the U.S. for twenty years but who are still U.S. citizens.  If you want the benefit of U.S. Citizenship, you pays your taxes.) The first $82,400 U.S. of income earned from personal  services (as opposed to capital) is exempt if you have been out of the country for a full calendar year in one test or for 330 out of 365 days in another test using a fiscal year (form 2555).

However, being "exempt" does NOT mean that you do not have to file a tax return. You must still file your U.S. 1040, report the Canadian Earnings in U.S. dollars and claim the "up to $82,400 U.S." by filing a form 2555 with the 1040. If you have investment, [INCLUDING AMOUNTS EARNED WITHIN YOUR CANADIAN RRSP], rental, royalty, or any income other than from services, you must also report the income in U.S. dollars.  Since you will have paid tax to Canada first, you will file a Form 1116 with the 1040 to claim your foreign tax credit. A separate Form 1116 must be filed for each kind of income, i.e. rental, pension, dividends, etc.

The RRSP earnings may be exempted under ARTICLE XXIX.5 of the U.S. / CANADA Income Tax Treaty 1980 - file form 8891.

Social security (FICA) taxes usually do not have to be paid to the U.S. under Article XXIX.4 of the U.S./CANADA Income Tax treaty or Article V of the CANADA / U.S. Social Security Agreement.  (I sure hope all this is impressing you).

Therefore, a U.S. citizen living in Canada who had a rental house, a job, an RRSP, some dividends and some capital gains from the sale of stock would file his or her Canadian return first and then file a U.S. return with these forms:

* 1040 - is the basic return for a citizen or resident of the U.S. or landed immigrant of the U.S. (commonly called a "green card" holder).

* Schedule A - to claim itemized deductions if needed

* Schedule B - to report the dividend income

* Schedule D - to report the capital gains

* Schedule E - to report the rental income

* 4562 - to report depreciation on the rental house

* 1116 - (maybe two foreign tax credit forms) - one for any income from services over $82,400 - one for the rental, capital gains, and dividend income and another for the wages.

* 1116(AMT) - two more forms to calculate the foreign tax credit for Alternative Minimum Tax purposes (AMT)

* 2555 - to exempt up to $82,400 (2006) U.S. of earnings from services - Note that htis ran from $70,000 to $80,000 before.

* 6251 - Alternative Minimum tax form

* 1161 AMT - AMT foreign tax credit

* FICA (Social Security) exemption - to exempt income from U.S. FICA

* 8891 - RRSP election forms to exempt income earned within the RRSP from current U.S. income tax until withdrawal

* TDF 90-22.1 form(s) - to report foreign bank accounts including Canadian RRSP accounts which are considered "foreign trusts" - failure to file this form can result in up  to a $500,000 fine PLUS up to five years in jail

He or she might also have to file either of the following two specialty forms when he or she owns shares in corporations.

* 5471 form - If you are a U.S. citizen and 5% or more owner of a Canadian corporation. Failure to file this form can create fines of $10,000 every 30 days up to $50,000