Flying as a Non-Resident Alien Through Tax Planning
The snow is flying, and the snowbirds are heading to the sun. The migration is filled with anticipation of warmer days ahead but a lack of planning before departure can leave a sunny destination filled with anxiety and uncertainty about more than the weather.
If you are planning an extended absence from Canada in the U.S., checking your dates is important to be prepared for tax planning purposes. Regardless of where you are at the time of tax filing, steps should be taken to avoid double taxation with Canada and the United States.
Immigration officers are not the only ones asking, “How long have you been away?”
Canadians can stay in the U.S. for up to 182 days a year before being considered a U.S. resident. There are three ways to be treated as a ‘non-resident alien’ by the IRS:
Regardless of U.S. residency status, as a Canadian citizen or Permanent Resident the CRA requires a T1 filed every year that includes income earned in Canada, the U.S., and abroad.
Why should I report income earned outside of Canada to the CRA?
Canadian residents are required to report all income earned worldwide on their T1 tax return. Where income was earned in the U.S. by a Canadian with ‘non-resident alien’ status, tax credits may be applied. Different types of income are treated differently, e.g. U.S. real estate, but all foreign income should be reported.
What is considered taxable income from outside Canada?
Types of taxable income earned outside of Canada, or foreign income, include earnings from non-Canadian employers for personal services, rental property income, dividend income, interest, royalties, business profits, gains and more. The Canada-U.S. Tax Treaty outlines these in more detail.
How do I report U.S. and Canadian income to tax authorities?
In the U.S., there are several forms you may be required to complete for the IRS.
- For personal services, a W-8BEN may be submitted to a U.S. employer to prevent the IRS from withholding taxes at the source.
- Form 1040NR and Form 8833 demonstrate why an exemption from U.S. taxes applies to your situation.
- In addition to Form 1040NR, under the SPT you may also be required to complete Form 8840 to further prove a closer connection to Canada than the U.S.
In Canada you will file:
- T1 General
- Include W2 form from any U.S. employers
- A T2209 Federal Tax Credit, Foreign Income form
- Provincial tax credit forms
Depending on the type(s) of foreign income earned there may be more detailed forms required. A CPA tax professional can help you determine which ones are most relevant to your circumstances.
Penalties
Whether it was an oversight or omission, there are penalties for not reporting foreign income. Failure to report foreign income range from $25 a day up to $500 a month for up to 24 months. The fines increase after 24 months and/or if the failure to file is done “knowingly or under circumstances amounting to gross negligence.”
Navigating compliance with the CRA and IRS can be tricky. To qualify for credits and avoid fines take inventory of your U.S. foreign income sources and time spent in the U.S. While non-payment of taxes is not a crime, failure to file complete returns is. While scheduling flights, transfers, and travel plans, remember to schedule a call with our qualified U.S.-Canada tax professionals to ensure you have all your bases covered.
