Even if you have never set foot in the United States, you are required to file a US income tax return and report worldwide income to the IRS.
Now this does not necessarily mean that you will have to pay any tax to the US on top of what you have already paid to Canada. US federal tax on Canadian residents may be eliminated through the use of the Canada-US tax treaty or by US domestic law itself.
However, there are times when differences in the tax laws of the two countries may result in US tax being paid over and above what you have already paid to Canada. As an example, when you sell your Canadian principal residence any gain you realize will generally be tax-free here in Canada. However, if the gain is substantial, as a US citizen you may have to pay US tax on this sale.
You may also be subject to onerous reporting requirements in respect of your Canadian assets and/or financial interests. This woud include reporting with respect to ownership of shares of a family corporation, interest in a family trust or other items (such as RESPs) that the IRS considers to be a foreign trust, as well as Canadian financial assets in which you are the beneficial owner or have signing authority over. IRS penalities for non-compliance are significant.
Canadian Tax Residents
(Non -US Citizens)
Situations where you will generally have a US tax filing requirement include:
When you carry out employment or self-employment activities in the US;
When you sell real property located in the US.
With respect to employment, you do not necessarily have to be working for a US company. For example: carrying out business in the US as an employee of your own Canadian corporation will likely result in a requirement to file a US tax return. In this case, whether you would have to pay US tax on your Canadian T4 earnings would depend on the facts of your case vis-a-vis the Canada-US tax treaty (with any such tax payable to the US being used to reduce your Canandian tax bill).
There are other situations in which you may want to file a US tax return. Under US tax law, a Canadian citizen-resident who owns a US rental property would be subject to tax at 30% of the gross rental revenue. Therefore, you would instead elect to file a US return to pay tax on a net income-basis. Also, you may want to file when you have tax withheld at source on passive income that exceeds the tax rate as set out in the Canada-US tax treaty. The reason for doing so would be that, if reviewed, the Canada Revenue Agency would deny a foreign tax credit on the Canadian return for the excess tax paid -therefore a US return would have to be filed to recover this amount.
In certain situations, US state tax filings may be required in addition to a federal return. In such situations, the relief relied upon to eliminate US federal tax may not apply for state tax purposes. In most cases however, any taxes paid should be eligible for a foreign tax credit claim on your Canadian return.
If a tax filing requirement exists, you must have an identifying number for the IRS. Normally this is a social security number, which US citizens or Canadians with US employers will have.
Otherwise, an application with the IRS for an individual taxpayer identification number ('ITIN') must be made. For individuals requiring an ITIN, the process can be facilitated through an affiliated corporation, JBM Cross-Border Tax Services Inc., which is a certifying acceptance agent for the Internal Revenue Service.
Green Card Holders