Determining whether a Canadian who obtains a TN Visa to work in the United States should file 1040 or 1040NR tax returns is not always straight forward. There are many factors that must be considered when assessing each situation.
What is a TN Visa?
A TN Visa is a work Visa for certain professionals of Canada and Mexico, under the terms of the North American Free Trade Agreement (NAFTA). If you fall into one of the professions covered under NAFTA (see list here) and possess the criteria needed by a U.S. employer, you may qualify for a TN Visa. TN Visas are temporary in nature and are generally valid for three years; however they can be extended, if allowed. Due to the temporary nature, the applicant must demonstrate their intention to return to their home country (Canada or Mexico) upon the expiration of the TN Visa.
Spouses and children of TN Visa holders are often entitled to a derivative status visa, which generally allows them to live, but not to work, in the United States.
How to determine what U.S. tax returns to be filed – 1040 or 1040NR?
To determine what tax returns are required, you need to assess whether or not you are considered a resident alien or a non-resident alien for U.S. purposes. As a resident alien, you would be required to file a 1040 and any other requirements of resident aliens. If you are considered a non-resident alien, you would be required to file a 1040NR and any other requirements of non-resident aliens.
There are two tests that are assessed to determine whether an individual is a resident alien during a calendar year. These are the green card test and the substantial presence test.
The green card test is met if you were a lawful permanent resident of the U.S. under immigration laws. This would be met by individuals with U.S. citizenship or those who hold a green card. Due to the nature of the TN Visa, you would not be considered a resident alien under the green card test.
The substantial presence test involves assessing whether an individual will be considered a resident alien based on the number of days they are physically present in the United States. The calculation of number of days spent includes a formula which factors the number of days spent in the U.S. not only the current year but also the previous 2 years. You can refer to IRS Publication 519 or Topic 851 – Resident and Non-resident Aliens for more information on this calculation. If you meet the substantial presence test, you would be considered a U.S. resident for income tax purposes and therefore may be required to file a 1040 and any other forms required of resident aliens. The key is that, even when you meet the substantial presence test, you may still be considered a non-resident alien under the U.S.-Canada income tax treaty as these terms may overrule the substantial presence test.
Article IV of the Canadian-U.S. Tax Convention (Treaty) discusses the residence of the taxpayer, and must be considered when assessing residency for those Canadian’s working on TN Visas in the U.S.
The treaty provides guidance on situations where a taxpayer would otherwise be considered both a resident of the United States and a resident of Canada for tax purposes. The treaty also provides “tie breaking” rules for these instances to help prevent double taxation and to provide guidance to determine your filing status in each country while on a TN Visa.
To assess how your situation fits within Article IV, there are many factors to consider. These include, but are not limited to, the following:
1) Is your family moving to the United States with you or will they be staying in Canada? Will any immediate family members or dependants still be in Canada?
2) Is your intention to move back to Canada in the short term, or are you hoping that you can continually renew your TN Visa for an extended length of time, or attempt to attain green card status?
3) What ties (personal/social/economical) will you maintain in Canada while you are in the U.S.? Do you have a home in Canada? Is it available for your personal use or is it rented? How often do you travel back to Canada? What is the main purpose?
Many of these questions are intended to determine, in situations where you may be considered both a resident of the U.S. and Canada, whether you have severed ties with Canada for tax purposes and also determine which country you have closer ties to (i.e. ‘the centre of your vital interests’).
Based on your situation, an experienced cross-border tax accountant will be able to guide you to ensure you are fully tax compliant in both countries.
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