Filing a U.S. Tax Return as a Canadian Citizen or Resident

A U.S. flag representing Canadians who need to file personal income taxes in the U.S.

Unless they work part-time in the U.S., most Canadians never consider whether they need to file a U.S. tax return. While this may not be a legitimate consideration for most, there are certain circumstances besides working income that could require a Canadian to pay taxes in the U.S. If any of the following circumstances apply, you might need to file a U.S. tax return for a specific year:

  • Have you sold a property in the U.S. sometime during the current year?
  • Do you rent out your U.S.-based cottage to earn some additional income?
  • Have you invested in U.S.-based rental properties?
  • Have you won money at gambling locations in the U.S.?
  • Is any of your pension income from a U.S.-based source?

If any of these items are applicable, then you need to need to file a U.S. tax return.

Filing the U.S. return is not a simple process; you can’t just go to an accounting firm, provide them with your information and have them take care of the filing. If you don’t have an Individual Taxpayer Identification Number (ITIN), your U.S. tax return can not be filed.

As a Canadian, how do I get an ITIN?

Unfortunately, it’s not just something that you can mail away for.

An ITIN is issued by the IRS to certain taxpayers who – for one reason or another – are not eligible to have a Social Security Number issued to them. Some of these individuals include foreign exchange students, non-resident aliens, foreign nationals, and a variety of international or domestic individuals who are required by unique circumstances to pay U.S. taxes or file an annual U.S. tax return.

U.S. citizens who do not have a Social Security Number for one reason or another are still required to pay U.S. taxes or file a U.S. tax return. People who fall into this category may request the issuance of an ITIN by completing Form W-7 and submitting it to the Internal Revenue Service (IRS). Make sure to pay close attention to this form, as there are items that require additional supporting documentation to be submitted.

Taxpayers residing outside of the United States can apply for an ITIN using a certifying acceptance agent. A certifying acceptance agent is a person or an entity (business or organization) who, pursuant to a written agreement with the IRS, is authorized to assist individuals and other foreign persons who do not qualify for a Social Security Number but who still need an ITIN to file a Form 1040NR (and individual tax return). A certifying acceptance agent can verify original documentation and certified copies of the documentation from the issuing agency for primary and secondary applicants and their dependents.

It is important to manage and maintain your ITIN. According to U.S. tax rules, an ITIN that hasn’t been included on a U.S. federal tax return at least once in the last 3 consecutive tax years will expire.

ESS is a Certifying Acceptance Agent and can make it easy for you to apply for and maintain your ITIN.

ITIN’s are normally required to be submitted to the IRS along with Form 1040NR (individual tax return) during tax filing season. However, the IRS does permit a few exceptions wherein the ITIN can be applied for separately, in advance of filing the 1040NR. For example, one of the exceptions includes obtaining an exemption for 30% withholding tax on gross rents from a property management company or tenant. Specific templates and instructions are required to be followed by the IRS for this and other exceptions. It is best to review these requirements with a tax professional.

ITIN’s are issued by the IRS by way of a letter mailed to the applicant’s address. You will receive a letter from the IRS assigning your tax identification number usually within seven weeks if you qualify for an ITIN and your application is complete.

As we have talked about filing U.S. tax returns, let’s talk about income tax from a Canadian and U.S. basis.

Tax Differences Between Canada and the U.S.

Income tax in Canada is assessed upon those who work in Canada while maintaining residential ties, which has a rather broad and flexible definition. The U.S. bases taxation on both residence and citizenship. This difference leads to a number of situations, but as a bottom line, a U.S. citizen generally files a U.S. tax return every year, regardless of where they maintain a residence unless they formally renounce their U.S. citizenship.

Canada and the U.S. have an agreement that exempts a U.S. citizen from being taxed by the U.S. on income earned and taxed in Canada. The same is true for Canadian citizens.

If you are a Canadian citizen who spends a lot of time in the U.S. on vacation, you need to make sure that you are in Canada for at least 183 days (half a year) or you may be required to pay U.S. income tax on your Canadian income.

For assistance with filing and paying U.S. income taxes, or for questions about how residence can affect your tax obligations, please contact the tax professionals at Edelkoort Smethurst CPAs LLP by phone at 905-517-2297 or by contacting us online.