My wife, kids and I visited my sister in Boston this past summer. One day, the kids set up a lemonade stand and made about $10.50 (U.S.) in the process. I saw that the kids were selling one type of lemonade for 50 cents a glass and another for 75 cents. I ordered a glass of the 50-cent lemonade.
"This is great lemonade kids," I said. "Why are you selling this type for less money?" I asked.
"Dad," my son Michael replied, "that's the jug that the dog drank out of, so we can't charge as much."
I then told my kids they had better watch out - operating the lemonade stand could require them to file a tax return in the United States.
You, too, might have to send Uncle Sam a tax return. Here's a primer on when you should be thinking of taxes south of the border.
U.S. citizens and green card holders
If you're a U.S. citizen, you're required to file a tax return annually in the U.S. (Form 1040), regardless of where you live. The usual deadline is April 15, but you've got an automatic extension to June 15 if you reside outside of the country.
If you fail to file, you'll lose the right to claim certain exemptions that can provide tax relief in the United States. This requirement also applies to green card holders since they are treated as U.S. citizens for U.S. tax purposes.
Owners of U.S. real estate
If you own a U.S. rental property, you'll be subject to a 30 per cent withholding tax on rents. Your tenants are required to remit this amount to the IRS.
Instead of facing this steep 30-per-cent tax, you can elect to file a U.S. tax return and report your actual rental income and expenses, using the "net rental income method" (NRIM) of reporting. This will often save you tax.
Here's the key: You've got to file a U.S. tax return (Form 1040NR) to be entitled to use the NRIM. The due date is June 15 when filing for the prior year.
Finally, if you sell a U.S. property, whether it's a rental or a personal use property, you should file a U.S. tax return to report that sale. Use Form 1040NR, and file by that same June 15 deadline.
Those carrying on business in the U.S.
You could be considered to be carrying on a business in the U.S. if you ship goods to the U.S. and title passes there, you actively solicit business in the U.S., you send employees to the U.S. on consulting contracts, or you establish an office in the U.S.
If so, you'll be required to file a U.S. tax return (Form 1040NR for individuals and Form 1120F for corporations, both due the 15th day of the sixth month after the business's fiscal year-end).
Now, our tax treaty with the U.S. exempts you from paying tax down south unless you have a permanent establishment there (an office, warehouse, etc.).
To claim this treaty exemption, you must file that tax return, along with U.S. Form 8833 disclosing that you're exempt under the treaty. You may also have a requirement to file in the specific states where you carry on business. Visit a tax pro to find out more.
Those spending time in the U.S.
If you spend time in the U.S. each year, you might be required to file a tax return there.
Specifically, if you meet the "substantial presence test," you'll be deemed a U.S. resident for tax purposes with a requirement to file.
Here's the test: Add the number of days you spent in the U.S. in the current year, plus one third of the days in the prior year, plus one sixth of the days spent there the year before that. If that total is 183 or more days, and you're present in the U.S. in the current year for more than 30 days, then you'll meet the test. If you spend more than 122 days (4 months) on average in the U.S. each year, you'll also meet the test.
Even if you meet the test, you could escape filing a full-blown U.S. tax return if you have a closer connection to Canada and file Form 8840 with the IRS setting out this fact. The deadline for Form 8840 is June 15 for the prior year.
Finally, if you've got to file a U.S. tax return, be sure you have a U.S. Individual Taxpayer Identification Number (ITIN). You can obtain a number by filing U.S. Form W-7.