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The Globe and Mail

Uncle Sam's long arm can reach into your pockets

Perhaps you heard the story. According to the BBC, a 64-year-old retired man in Gumperda, Germany, had been arrested in November after drilling a hole through a neighbour's wall in his duplex home. As it turns out, the man had been trapped in his own basement for two days after laying bricks and mortar for a room he was creating. He forgot to leave himself an exit.

It's proof that sometimes we get so busy doing what we're doing that we fail to step back and consider the consequences of it all. This happens all the time in the world of tax and personal finance.

Want an example? Consider that there is no shortage of Canadian residents and citizens that have created tax issues south of the border in the U.S. and may not even realize it. Let me share the most common scenarios where you should be aware of your tax obligations in the United States. This week, let's focus on income taxes.

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There are four common scenarios where you may be required to file tax returns in the United States. I'm talking to Canadian citizens and residents here - not those with U.S. citizenship (who are always required to file; see my article from last week).

1. Green Card Holders

First, if you're a green card holder, you're treated like a U.S. citizen from a tax perspective and the Internal Revenue Service expects you to file tax returns annually in the U.S.

2. Landlords

If you own a U.S. rental property you should plan on filing in the U.S. annually. You'll be subject to a 30-per-cent withholding tax on rents you collect (your tenants are required to remit this amount to the IRS). Instead, you can elect to file a U.S. tax return and report your rental income and expenses, using the "net rental income method" of reporting. This will likely allow you to pay less tax. So, you'll need to file a U.S. tax return (Form 1040NR) to be entitled to use the net rental income method. File this return by June 15 following the tax year in question.

3. Time in the U.S.

If you spend a lot of time in the U.S., you might meet the "substantial presence test", which will deem you to be a U.S. resident for tax purposes, and require you to file a tax return. Here's the deal: Add up 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 in the year before that. If the total comes to 183 days or more, and you're present in the U.S. for more than 30 days in the current year, then you've met the SPT. If you spend more than 122 days (about four months) on average in the U.S. each year, the math will work against you and you'll be caught under the SPT.

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Now, even if you meet the SPT, you can escape the requirement to file a U.S. tax return if you have a closer connection to Canada and file U.S. Form 8840 with the IRS stating this fact. The deadline for Form 8840 is June 15 each year following the tax year in question.

4. Business in the U.S.

If you ship goods to the U.S. and title passes there, actively solicit business in the U.S., send employees to the U.S. on consulting contracts, or establish an office in the U.S., you could be considered to be carrying on business in the U.S. with a requirement to file a tax return there (Form 1040NR for individuals, or Form 1120F for corporations, both due on the 15th day of the sixth month after the business's fiscal year end). Our tax treaty does exempt you from paying tax in the U.S. unless you have a permanent establishment there, but 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. And don't forget about the specific states where you're carrying on business - there may be filing requirements there too. Speak to a tax pro about it.

Keep in mind, if you've got to file a U.S. tax return, be sure you have a U.S. Individual Taxpayer Identification Number. You can obtain an ITIN number by filing U.S. Form W-7.

Income taxes aren't the only potential tax obligation south of the border. There are also U.S. estate taxes and gift taxes that can also apply. I'll talk about these next.

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About the Author
Author and founder of WaterStreet Family Offices

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices. More

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