Canadian & Foreign Treaties
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
In addition to U.S. Social Security benefits, I receive monthly benefits from the Canada Pension Plan. I am a resident alien. Are my Canada Pension Plan benefits taxable? How do I report them?
Benefits paid under the Canada Pension Plan (CPP), Quebec Pension Plan (QPP), and Old Age Security (OAS) program to a U.S. resident or resident alien are taxable, if at all, only in the United States. These Canadian benefits are treated as U.S. social security benefits for U.S. tax purposes. Thus, under section 86 of the Internal Revenue Code, the portion of the benefits that is taxable will depend on your total income. If your total income is above certain limits, a maximum of 85% of your benefits will be subject to U.S. tax. Any benefit under the social security legislation of Canada that would not be subject to Canadian tax if paid to a resident of Canada is not subject to U.S. tax.
Canadian benefits that are treated as U.S. social security benefits are reported on line 20a and 20b of Form 1040 or line 14a and 14b of Form 1040A.
References:
For an American citizen residing in Canada using Form 1040A, should the taxable amount of U. S. social security benefits shown on line 14b be $0.00 due to the Canada-U.S. tax treaty?
Under the 1997 protocol the Canada - U.S. tax treaty, the Canadian and US governments agreed to return to a residence-based system under which social security benefits are taxable exclusively in the country where the recipient resides. As a result, the entry for line 14b would be $0.00.
References:
- Publication 597 (PDF), Information on the United States-Canada Income Tax Treaty
- Publication 915 (PDF), Social Security and Equivalent Railroad Retirement Benefits
- Tax Topic 423, Social security and equivalent railroad retirement benefits
In addition to U.S. Social Security, I also receive British Social Security. How should I report the British Social Security income?
Under the U.S.-United Kingdom income tax treaty that entered into force in 1980, social security income is taxable only by the country of residence. If you are a resident of the U.S. for tax purposes, the income would be reported and taxed in the U.S. You would not treat the income as U.S. social security benefits. The entire amount would be taxable as pension income on your U.S. tax return. Your "investment in the contract" for purposes of determining the portion of each payment that is taxable would be $0.
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Are Social Security benefits received from Austria and Germany treated like U.S. Social Security benefits? If not, how are they reported?
Austrian social security benefits paid to a U.S. resident or a citizen of the US are taxable only by Austria and not by the United States. German social security benefits paid to a U.S. resident are taxable, if at all, only by the United States. These German benefits are treated like U.S. social security benefits. Thus, under section 86 of the Internal Revenue Code, the portion of the benefits that is taxable will depend on your income level. If your total income is above certain limits, a maximum of 85% of your benefits will be subject to U.S. tax.
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13.1 Aliens and U.S. Citizens Living Abroad: Canadian & U.S. Tax Issues
I am a Canadian citizen living and working in the U.S. for a U.S. employer on a visa. Do I need to file both a U.S. tax return and a Canadian tax return?
You must comply with both U.S. and Canadian filing requirements. In the United States, you generally are required to file a return if you have income from the performance of personal services within the United States. However, under certain circumstances, that income may be exempt from U.S. tax pursuant to the U.S.-Canada income tax treaty. You need to determine what type of visa you have, and how that impacts your residency status in the United States. If based on the code and your visa status you are treated as a U.S. resident, then your entitlement to treaty benefits will be impacted.
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I am a Canadian citizen who worked in the U.S. for 4 months. Do I have to file a U.S. income tax return as well as my income tax return in Canada?
That would depend upon whether you are a resident of the U.S. for purposes of U.S. tax law. There are several tests to determine residency, including the substantial presence test, which is based on how many days you are present in the U.S. over a period of three years. If you are simultaneously a U.S. resident under U.S. law and a Canadian resident under Canadian law, you should consult the U.S.-Canada income tax treaty for rules that would treat you as a resident of only one country. It is also possible that you may have to file a dual-status return in the U.S. if you qualify as a U.S. resident for only part of the year.
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I am a U.S. citizen who lived in Canada and invested in Registered Retirement Savings Plans (RRSPs) which are similar to IRAs. Under the Canada - U.S. Tax Treaty, I am not sure how to treat the income on these investments. Is the income tax deferred or must it be claimed as earned?
Although Canadian registered retirement savings plans are similar to individual retirement accounts (IRAs), they do not meet the requirements for qualification as IRAs under section 408(a) of the Internal Revenue Code. As a result, the earnings of such a plan are includable currently in the gross income of the beneficiary of the plan for United States income tax purposes. However, a beneficiary of certain Canadian retirement plans may elect for a tax year (the current year) to defer United States income tax on certain current-year earnings of the plan that are not distributed to the beneficiary. An election to defer is made by the beneficiary attaching to the beneficiary's United States federal income tax return, a statement that contains for each plan the information specified in Rev. Proc. 2002-23, 2002-15 I.R. B. 744, or in any future Revenue Procedure that supersedes Rev. Proc. 2002-23.
Copies of Internal Revenue Bulletins can be obtained by writing to:
Superintendent of Documents, U.S. Government Printing Office
P.O. Box 371954,
Pittsburgh, PA, 15250-7954
or by calling 202-512-1800 (There is a charge for copies of bulletins), by web site at Superintendent of Documents or by modem (the Federal Bulletin Board) at 202-512-1387. You can also download the most recent Internal Revenue Bulletins by visiting our Tax Info For Business section.
References:
- Publication 597 (PDF), Information on the United States - Canada Income Tax Treaty
- Revenue Procedure 2002-23, 2002-15 I.R.B. 744 (April 15, 2002)
13.4 Aliens and U.S. Citizens Living Abroad: Nonresident Alien - General
I am a nonresident alien and invested money in U. S. stock market through a U.S. brokerage company. Are the dividend and the capital gains taxable? If yes, how are they taxed?
Generally, capital gains received by a nonresident alien not present in the United States for 183 days or more are not taxable in the United States. Certain gains, however, are subject to the 30% withholding rate or if applicable, a reduced tax treaty rate on the gross amount of the following items:
- Gains on disposal of timber, coal, or domestic iron ore with a retained economic interest, unless an election is made to treat those gains as income effectively connected with a U.S. trade or business,
- Gains on contingent payments received from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, goodwill, trade marks, trade brands, franchises, and other sale property,
- Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966, and
- Certain gains from the sale or exchange of original issue discount obligations issued after March 31, 1972.
Dividends are withheld upon at the 30% or lower tax treaty rate. If your withholding is not at the correct rate, a nonresident alien should file Form 1040NR (PDF), U.S. Nonresident Alien Income tax return to claim a refund of withheld taxes.
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13.5 Aliens and U.S. Citizens Living Abroad: Nonresident Alien - Tax Withholding
I entered the U.S. in August and I have a J-2 visa with an Employment Authorization (work permit). Can I be considered as a U.S. resident for tax purposes under the substantial presence test? Since my visa does not allow me to stay in this country am I subjected to social security tax and Medicare tax?
You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
For purposes of the substantial presence test, certain days of physical presence do not count. Please refer to Publication 519 (PDF), U.S. Tax Guide for Aliens, for additional information.
In general, U.S. social security and Medicare taxes apply to payments of wages for services performed as an employee in the United States, regardless of the citizenship or residence of either the employee or the employer. In limited situations, these taxes apply to wages for services performed outside the United States. Your employer should be able to tell you if social security and Medicare taxes apply to your wages.
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Under my visa as a temporary nonresident alien, I'm not subject to social security and Medicare withholding. My employer withheld the taxes from my pay. What should I do to get a refund of my social security and Medicare?
If social security tax was withheld in error from pay received which was not subject to the tax, contact the employer who withheld the tax for reimbursement. If you are unable to get a refund from the employer, file a claim for refund with the Internal Revenue Service on Form 843 (PDF), Claim for Refund and Request for Abatement.
Attach the following to your claim:
- a copy of the [Form W-2], Wage and Tax Statement, to prove the amount of social security tax withheld,
- a copy of INS Form I-94, Arrival/Departure Record,
- a copy of INS Form I-538, Application of Nonimmigrant Student (F1) for Extension to Stay, School Transfer or Permission to Accept or Continue Employment, and
- a statement signed by the student stating that he/she has asked the employer for reimbursement of social security tax withheld in error but has been unable to get a refund.
File the claim for refund (with attachments) with the IRS office where the employer's returns were filed. If you do not know where the employer's returns were filed, file the claim with the Internal Revenue Service Center, Philadelphia, PA 19255
For more information, refer to Publication 519 (PDF), U.S. Tax Guide for Aliens.
References:
I am a U.K. resident and I need to recover withholding tax on a U.S. capital gain. Do I need an ITIN?
Yes, you need to secure an Individual Taxpayer Identification Number, or ITIN. To secure an ITIN, you must file Form W-7 (PDF), Application for IRS Individual Taxpayer Identification Number. Along with the completed Form W-7, you must submit document that verify both your identity, that is, contain your name and photography, and your foreign status. If you have one document that verify both, such as a passport, then that one document is enough. You may, however, have to provide a combination of documents for this purpose.
You can apply for your ITIN by mail or in person at most IRS offices in the U.S. If you apply in person, your documents will be reviewed and returned to you. Publication 1915 (PDF), Understanding Your IRS Individual Taxpayer Identification Number, has a list of IRS offices abroad which can accept Form W-7. If you apply by mail, use the address shown in the W-7 instructions and the Publication 1915. If you send original supporting documentation with your application, your documentation will be returned within 14 days. Once you have applied, you should get acknowledgment that your Form W-7 was received within 14 days; you should receive your ITIN within 4 to 6 weeks.
References:
- Publication 515 (PDF), Withholding of Tax on Nonresident Aliens and Foreign Corporations
- Publication 519 (PDF), U.S. Tax Guide for Aliens
- Publication 1915 (PDF), Understanding Your IRS Individual Taxpayer Identification Number
- Form W-7 (PDF), Application for IRS Individual Taxpayer Identification Number
- Tax Topic 857, Individual Taxpayer Identification Number - Form W-7
I am a foreign citizen and resident from the European Union. I plan to buy U.S. stocks, but what tax will I have to pay if I have earnings on stocks?
U.S. source dividend income is subject to 30% tax rate when paid to nonresident aliens. A lower rate may apply to residents of a country with which the United States has an income tax treaty.
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I am a nonresident alien. Our broker withholds 30% tax on dividends. Can I get this tax back since I already owe tax in my resident country on overseas income?
Generally, this type of income paid to nonresident aliens is taxable at the 30% or lower treaty rate. If your country has a tax treaty with the U.S., you may have a reduced rate of tax. If that is the case, you should file Form 1040NR (PDF), U.S. Nonresident Alien Income Tax Return, to claim a refund of federal income taxes withheld.
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13.6 Aliens and U.S. Citizens Living Abroad: Nonresident Alien - Students
I am an F-1 student status who was employed during my school studies and directly afterwards I completed practical training. Do I have to pay FICA taxes? Which taxes should be taken out of my pay?
Generally, services performed by you as a nonresident alien temporarily in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act are not covered under the social security program if the services are performed to carry out the purpose for which you were admitted to the United States. This means that there will be no withholding of social security or Medicare taxes from the pay you receive for these services. These types of services are very limited, and generally include only on-campus work, practical training, and economic hardship employment. However, you are covered under the social security program for these services if you are considered a resident alien, even though your nonimmigrant classification ("F," "J," "M," or "Q") remains the same. Social security and Medicare taxes will be withheld from your pay.
Additionally, any student who is enrolled and regularly attending classes at a school, college, or university may be exempt from social security and Medicare taxes on pay for services performed for such school, college, or university.
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Are nonresident alien students, with F-1 visas and employed by a U.S. company during the summer, required to have federal income taxes withheld from their paychecks?
The following discussion generally applies only to nonresident aliens. Wages and other compensation paid to a nonresident alien for services performed as an employee are usually subject to graduated withholding at the same rates as resident aliens and U.S. citizens. Therefore, your compensation, unless it is specifically excluded from the term "wages" by law, or is exempt from tax by treaty, is subject to graduated withholding. Nonresident aliens must follow modified instructions when completing Form W-4. Please refer to Publication 519 (PDF), U.S. Tax Guide for Aliens, for directions on completing Form W-4 (PDF), Employees Withholding Allowance Certificate.
References:
- Publication 519 (PDF) , U.S. Tax Guide for Aliens
- Publication 597 (PDF), Information on the United States-Canada Income Tax Treaty
- Form W-4 (PDF), Employees Withholding Allowance Certificate
I am a student from the People's Republic of China currently studying in the United States. How does the income tax treaty between the U.S. and China apply, especially for students with scholarships and fellowships?
If you are in the United States solely for the purpose of your education, training, or obtaining special technical experience, you may be able to exclude from your income grants or awards that you receive from a government, scientific, educational, or other tax-exempt organization. You also may be able to exclude payments that you receive from abroad for the purpose of your maintenance, education, study, research, or training and up to $5,000 of income that you receive from personal services performed in the United States. Please refer to Publication 519 (PDF), U.S. Tax Guide for Aliens.
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13.8 Aliens and U.S. Citizens Living Abroad: Other
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