Non-Resident Tax Filings
Learn more about Our Non-Resident Tax Filing Services
1. What is a Non-Resident Tax Filing
2. Implications for Canadians living in America
3. Canadian Non-Resident Tax Filings
4. Implications for Americans living in Canada
5. US Non-Resident Tax Filings / US Taxes for Canadians
6. US Dual Status Tax Returns
1. What is a Non-Resident Tax Filing
The requirement to file non-resident tax returns exists in both the US and Canada. This is a brief outline of some of the situations that may exist and we recommend you reach out to our team of specialists if you have a non-resident tax filing requirement.
The primary reason for a non resident filing is that you have earned income in a country where you are not a resident, and the non-resident country has the right to tax those earnings. In these instances, you may need to file a non-resident tax return in that country, as well as in the foreign state/ province where that income was sourced. These filing requirements are, in addition to your regular resident tax return obligations in the country and province / state where you reside.
2. Implications for Canadians living in America
Canadians who move to the US on a permanent basis may not have an ongoing Canadian tax filing obligation. Canada primarily taxes individuals based on residency, as well as the source of their income. As a result, you will have a Canadian filing obligation up until and including the year you become a non-resident of Canada. After that your specific situation will dictates whether you still have Canadian source income and future Canadian non-resident tax filing obligations. Determining residency is a complex and detailed topic. If you are in this situation please contact us to discuss your situation and the reporting implications further.
3. Canadian Non-Resident Tax Filings
Canadian non-resident tax filings exist for those that are not considered residents of Canada but have Canadian source income. The taxation of Canadian non-resident source income falls into different categories – including what’s referred to as Part 1 and Part X111 tax.
Part 1 tax relates to a number of different income types including business income, employment income and taxable capital gains from the disposition of certain Canadian properties. These income sources may have income tax withheld by the payor, but you usually are required to file an annual Canadian non- resident income tax return to calculate your final income tax obligation from this income.
Part X111 tax relates to tax on income sources such as dividend income, rental income and retirement / pension income. Canadian payors of this income must deduct Part X111 tax from the amount paid to you and this is usually your final tax obligation to Canada (usually at a rate of 25% unless a tax treaty reduces these rates). Part X111 tax is a non-refundable tax and where the correct amount of withholdings have been paid to the Canada Revenue Agency, you do not need to file a Canadian tax return. You do however have the option to elect to file what’s referred to as a Section 216 tax return for Canadian rental income, or a Section 217 return related to Canadian pension income which are further explained in the paragraphs below.
The purpose of making a Section 216 election is to revise and reduce how you are taxed on rental income. The default method of taxing you as a non-resident is 25% of your gross rental income (when no tax filing is submitted). The Section 216 election requires the filing of an annual Section 216 non-resident tax return which requires you to report all rental income and expenses. The result is that you are then taxed on your net rental income (vs gross as outlined above). There are a number of compliance and ongoing steps that are required in order to make and maintain this election status and we recommend connecting with us if you need help with filings in this area.
The purpose in making a Section 217 election is to reduce the non-resident taxes you need to pay on pension type income (including Old Age Security Pension, Canada Pension Plan income, most RRSP and RRIF payments, Employment Insurance benefits). This election requires the filing of an annual Section 217 non-resident tax return. There are a number of complexities and nuances with these tax filings and we recommend you contact us for help with these filings.
Provincial income tax considerations also need to be considered and reported based on the type of non-resident income you earn. If your income is earned while working in Canada, you pay the provincial tax in the province you worked plus your federal tax that’s owed. In most other instances you are taxed on the federal tax amount that is determined plus a non-resident surtax which is calculated at a rate of 48% of your federal tax.
For additional guidance on Canadian non-resident tax filings please refer to this CRA Link
4. Implications for Americans living in Canada
US Citizens and US green card holders are taxed in the US based on their citizenship / permanent resident status. For these individuals, residency does not play a role in determining whether they need to file US taxes. They are taxed on all worldwide income in the US regardless of where they reside. This means that even though you may be a full-time citizen and/or resident of Canada you are also deemed a US resident (based on citizenship) and you are required to complete and submit a full resident US income tax return & FBAR filing annually (refer to the foreign information reporting link for more details on your FBAR / FinCEN Form 114 filing obligations).
5. US Non-Resident Tax Filings / US Taxes for Canadians
US non-resident federal tax filings apply to non-resident aliens of the US where they have certain types of US source income. This section does not apply to US citizens and US green card holders who are also Canadian residents (refer to the section above).
US source income fits into a number of defined categories including employment and business income, rental income, lump sum pension payments and FDAP income. These are expanded on in the paragraphs below.
US FDAP INCOME – US income types also include a category that is defined and referred to as FDAP income (fixed or determinable, annual, or periodic income). FDAP income includes income types such as interest, dividends, rents and royalties and this income is taxed at a flat rate of 30% unless a tax treaty specifies a lower rate (which is the case for certain US-Canada income types). Where FDAP income is the only type of US income earned and the required withholdings have been paid, a US federal income tax return does not need to be filed.
US RENTAL PROPERTY – for US rental income you have the option to make an election to lower your taxes and you can be taxed on your net rental income (vs gross rental income per the defined FDAP category above). In these situations a US non-resident tax return will need to be prepared and filed annually to determine and pay the net rental income taxes that are owed.
STATE INCOME TAXES – in addition to US federal income tax, most US states have their own state income tax that they charge. Non-resident or part year resident state income tax filings apply to those that are not a resident in a state for the full year, and / or to those who may have non-resident state source income. Non-resident and part year resident state filings may need to be filed by both Canadians and Americans who live and work across state lines / international borders.
For additional guidance on US non-resident tax filings please refer to this IRS Link.
6. US Dual Status Tax Returns
A dual status tax return may be required in the year a US non-resident leaves or arrives in the US. Conceptually you are not a resident of the US for the full year and so you may have 2 sets of tax filings in the year you arrive or leave. The one filing would be for the period where you are a resident alien and the other filing would be for your non-resident period where you would be considered a non-resident alien. The residency return filing would report worldwide income for the period you lived and were a resident of the US, and the non-resident return would only report US source income for the period you were a non-resident. The US-Canada tax treaty can have an impact on your US tax filing in the year of a move. This area is technical and complex and we recommend connecting with us to discuss our services if this situation applies to you.
How Can US Taxes Toronto Help?
We can assist with the preparation of your non resident income tax returns (at both a federal and provincial / state level). Our team provides hands on ongoing support throughout this process, so that preparing and completing your tax filing is convenient and easy. If you would like to get more information on how we can help please reach out to us via our contact page.
Disclaimer
All information provided on this Non-Resident Tax Filing page is for educational purposes only. This information should not be relied upon in making decisions and we make no representation that the information providedis current/ up to date or accurate.