If recent media attention, a job offer, travel plans to the U.S., or a new investment opportunity has you concerned about your U.S. personal tax filing requirements, you are not alone. Our U.S. tax team frequently gets asked this question.

Here are some questions you should ask yourself to determine whether you may be required to file a U.S. tax return. Please note the list below includes some of the most common reasons a resident of Canada may be required to file a U.S. personal income tax return. There may be other reasons not listed which require an individual to file or reasons an individual may choose to voluntarily file a U.S. personal tax return (contact our US Tax Team to answer any other questions).

 

1. Are you a U.S. citizen or green card holder?

This question is significant as both U.S. citizens and green card holders are classified as residents of the U.S. for tax purposes. The U.S. is one of the only countries in the world which requires individuals to file a tax return based on residency status, regardless of where they live. Residents must annually report their worldwide income to the Internal Revenue Service (“IRS”) by filing a U.S. tax return.

 

2. Do you meet the substantial presence test?

What is the substantial presence test?

The Internal Revenue Service (“IRS”) applies a test known as the “substantial presence test” to determine whether an individual will be considered a U.S. resident for income tax purposes under U.S. tax rules. An individual may be considered a U.S. resident for tax purposes under the substantial presence test if they are physically present in the U.S. for at least:

  • 31 days in the current year; and
  • 183 days of a three-year period that consists of the current year and the two preceding years, based on the sum of the following:
    • All the days in the current year (i.e. 2017)
    • One-third of the days in the preceding year (i.e. 2016)
    • One-sixth of the days in the second preceding year (i.e. 2015)

For example, an individual that spends 180 days (approximately 6 months) in the U.S. in any given year will meet the substantial presence test. In addition, an individual will also meet the substantial presence test if they regularly spend more than 122 days a year in the U.S.

 

3. Are you a non-U.S. citizen receiving Form W-2, Form 1099-MISC, or Form 1042-S?

Yes! Then let’s look at why you are receiving Form W-2, Form 1099-MISC, or Form 1042-S.

The IRS requires all employers (including employers of independent contractors) to file Form W-2, Form 1099-MISC, or Form 1042-S to report an employee’s/independent contractor’s annual U.S. wages/income and the amount of taxes withheld relating to services performed in the U.S. for the specified calendar year.

 

4. Are you a non-U.S. citizen that owns U.S. real property and rented it out during the current year?

By default, foreign persons receiving rental income from property located in the U.S. are subject to 30% withholding tax on the gross rent. This is because rental income is considered Fixed, Determinable, Annual, or, Periodical (FDAP) income.

As an alternative, individuals can elect to treat this income as being effectively connected with U.S. trade or business to report income and pay tax on a net basis. In order to do so, a U.S. tax return must be filed to report the income and expenses for the year.

 

5. Are you a non-U.S. citizen that has sold U.S. real property during the current year?

The sale of U.S. real property by a foreign person is generally subject to 15% withholding tax on the gross proceeds of the sale. One exception to this rule is that when the property is sold for less than $300,000, the withholding tax will not apply.

Regardless of the amount of withholding tax, the sale of U.S. real property is subject to U.S. tax and a U.S. tax return should be filed. Any taxes withheld may be applied against the calculated balance owing to the IRS.

 

Did you answer yes to any of the above questions? Do you require clarification and have more questions? Contact me at blake.deluca@rlb.ca or call 519-822-9933 and ask to speak to a member of our U.S. tax team!