A U.S. non-resident alien is any individual who:

  • Is not a U.S. citizen or U.S. national
  • Has not passed the green card test: residing permanently in the United States as an immigrant
  • Has not passed the substantial presence test: physically present for 31 days during the current year, and for 183 days in total during the current year and the preceding 2 years

Situations Requiring Canadians to File a U.S. Tax Return

If any of the following situations apply to you, you are required to file Form 1040-NR, U.S. Nonresident Alien Income Tax Return.

1 Taxable trade or business income in the U.S.

Business income includes, but is not limited to:

  • Payments for any personal services performed in the U.S. However, if you were in the U.S. for less than 90 days of the year, and earned less than $3,000, you may be eligible for an exemption.
  • Net income from your U.S. incorporated business or partnership.
  • Gains from the sale of any capital assets of a U.S. business.
  • The sale of real property.
  • Rental income from U.S. real property.

You are also considered to be engaged in a trade or business if you are a student, teacher, or trainee who was temporarily present in the U.S. You are required to file a U.S. tax return if you have earned income such as wages, tips, scholarship grants, or dividends.

2 Taxable rental income from U.S. real estate

This applies to rental income from personal ownership of a U.S. property that you rent for all or part of the year, with the exception of vacation property that was rented for less than 15 days.

There are two options for dealing with rental income:

Option 1:  Pay a 30% withholding tax on gross rent received.

Under this option, there is no need to file a U.S. tax return. However, you are not allowed to claim any expenses incurred to earn the rental income. The annual rental income is reported to the IRS by the tenant or property manager.

For your Canadian tax return, you will report the net rental income (revenue less expenses) and claim a foreign tax credit if the amount of your Canadian tax is lower than the 30% withholding. The maximum foreign tax credit cannot exceed the Canadian tax on U.S. income.

Option 2:  Pay tax on your net rental income.

Under this option, you must file a U.S. tax return, treat the rental income as though it is effectively connected with a U.S. trade or business, and pay tax on net rental income.

As with option 1, you will be entitled to claim a foreign tax credit on your Canadian tax return for the U.S. tax paid.

3Royalties received from U.S. sources

There are a number of ways you may have earned royalty income. If you are a musician or author, you may receive musical performance royalties or book royalties. Other examples include mineral and franchising royalties.

In some cases, royalty income may be exempt from U.S. tax, and in other situations the tax may be at a reduced rate.

4Winnings from gambling, lotteries, or prizes

Although these types of winnings are not taxable in Canada, you will have to pay U.S. tax if the winnings are from U.S. sources. You will be subject to a tax withholding of 30% of your winnings. However, under the Canada-U.S. Income tax treaty, losses are deductible up to the amount of your winnings.

The business from which you won will issue you a Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding) that discloses your winnings.

For your losses to qualify as deductions, you must be able to provide the IRS proof of your losses through a list of all amounts won or lost, and include dates, times, and locations. You should also keep any related documents as proof of your winnings or losses.

5 The Sale of U.S. property

The Foreign Investment in Real Property Tax Act (FIRPTA) is the U.S. federal law that applies withholding tax on foreign persons for dispositions of U.S. property (real estate). The term disposition includes, but is not limited to, a sale or exchange, liquidation, gift, transfer, or redemption.

This applies to U.S. real estate, such as vacation property, or real property that you, as a non-U.S. citizen or resident, are selling. There are specific rules dealing with these situations. See our FIRPTA Guide for more information.

The IRS enforces FIRPTA to ensure the U.S. government is able to collect any tax obligations on foreign persons.

Selling your U.S. property often involves a capital gain on the sale. See Capital Gains Tax for Canadians Selling U.S. Property for further explanation.

Claiming a Refund or Benefit

You may be entitled to a tax refund if you have:

  • overpaid your taxes, or
  • have had excess taxes withheld, such as the tax withholdings on the sale of your U.S. property.

A benefit may include claiming deductions against U.S. income even if you have no U.S. business activities. For example, you are required to file a U.S. tax return to claim deductions from income earned from real property.

Obtaining an ITIN Number

In order to file a U.S. tax return, you must have an ITIN number.

An ITIN (Individual Taxpayer Identification Number) is a tax processing number issued by the IRS to Canadians or other non-U.S. citizens who are required to file a U.S. tax return and do not have an IRS social security number, or are not eligible to obtain one.

U.S. Tax Return Filing Dates

If you are an employee or have a place of business in the U.S., the general deadline to file your return is the 15th day of the 4th month after your tax year end. Otherwise, the deadline is the 15th day of the 6th month after your tax year end.

When you’re unable to file your return by the due date, you can request an extension by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

Failure to file your return by the statutory due date could result in the denial by the IRS of any deductions or credits claimed.

Filing Your U.S. Tax Return is Complicated

That’s why we’re here. We’ve helped many Canadian clients through this process, and we can do the same for you, virtually or in person. We can help you obtain your ITIN and prepare your U.S. federal and state tax returns, and your Canadian tax return.

Our tax services are virtual so you don’t have to take the time for a personal visit. We have intake forms for different situations that allow us to learn everything we need to know to prepare your tax returns accurately and ensure your taxes are minimized.

You can fill and submit the appropriate form, along with all your other documents, in our secure client portal. It’s important that we understand your situation and any changes in your situation from the past year.

If you have a complex tax situation and would like to discuss it, we can meet in person, or virtually over Zoom or Teams.

Contact us today and let us handle the dirty work, so you can breathe easy.