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Online 1040xOnline 1040x Publication 597 - Main Content Table of Contents Application of Treaty Personal Services Pensions, Annuities, Social Security, and AlimonyRoth IRAs. Online 1040x Tax-deferred plans. Online 1040x Investment Income From Canadian Sources Other Income Charitable ContributionsQualified charities. Online 1040x Income Tax Credits Competent Authority Assistance How To Get Tax HelpText of Treaty U. Online 1040x S. Online 1040x Taxation Canadian Taxation Application of Treaty The benefits of the income tax treaty are generally provided on the basis of residence for income tax purposes. Online 1040x That is, a person who is recognized as a resident of the United States who has income from Canada, will often pay less income tax to Canada on that income than if no treaty was in effect. Online 1040x Article IV provides definitions of residents of Canada and the United States, and provides specific criteria for applying the treaty in cases where a taxpayer is considered by both countries to be a resident. Online 1040x Saving clause. Online 1040x In most instances, a treaty does not affect the right of a country to tax its own residents (including those who are U. Online 1040x S. Online 1040x citizens) or of the United States to tax its residents or citizens (including U. Online 1040x S. Online 1040x citizens who are residents of the foreign country). Online 1040x This provision is known as the “saving clause. Online 1040x ” For example, an individual who is a U. Online 1040x S. Online 1040x citizen and a resident of Canada may have dividend income from a U. Online 1040x S. Online 1040x corporation. Online 1040x The treaty provides a maximum rate of 15% on dividends received by a resident of Canada from sources in the United States. Online 1040x Even though a resident of Canada, the individual is a U. Online 1040x S. Online 1040x citizen and the saving clause overrides the treaty article that limits the U. Online 1040x S. Online 1040x tax to 15%. Online 1040x Exceptions to the saving clause can be found in Article XXIX, paragraph 3. Online 1040x Treaty-based position. Online 1040x If you take the position that any U. Online 1040x S. Online 1040x tax is overruled or otherwise reduced by a U. Online 1040x S. Online 1040x treaty (a treaty-based position), you generally must disclose that position on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and attach it to your return. Online 1040x Personal Services A U. Online 1040x S. Online 1040x citizen or resident who is temporarily present in Canada during the tax year is exempt from Canadian income taxes on pay for services performed, or remittances received from the United States, if the citizen or resident qualifies under one of the treaty exemption provisions set out below. Online 1040x Income from employment (Article XV). Online 1040x Income U. Online 1040x S. Online 1040x residents receive for the performance of dependent personal services in Canada (except as public entertainers) is exempt from Canadian tax if it is not more than $10,000 in Canadian currency for the year. Online 1040x If it is more than $10,000 for the year, it is exempt only if: The residents are present in Canada for no more than 183 days in any 12-month period beginning or ending in the year concerned, and The income is not paid by, or on behalf of, a Canadian resident and is not borne by a permanent establishment in Canada. Online 1040x Whether there is a permanent establishment in Canada is determined by the rules set forth in Article V. Online 1040x Example. Online 1040x You are a U. Online 1040x S. Online 1040x resident employed under an 8-month contract with a Canadian firm to install equipment in their Montreal plant. Online 1040x During the calendar year you were physically present in Canada for 179 days and were paid $16,500 (Canadian) for your services. Online 1040x Although you were in Canada for not more than 183 days during the year, your income is not exempt from Canadian income tax because it was paid by a Canadian resident and was more than $10,000 (Canadian) for the year. Online 1040x Pay received by a U. Online 1040x S. Online 1040x resident for work regularly done in more than one country as an employee on a ship, aircraft, motor vehicle, or train operated by a U. Online 1040x S. Online 1040x resident is exempt from Canadian tax. Online 1040x Income from self-employment (Article VII). Online 1040x Income from services performed (other than those performed as an employee) are taxed in Canada if they are attributable to a permanent establishment in Canada. Online 1040x This income is treated as business profits, and deductions similar to those allowed under U. Online 1040x S. Online 1040x law are allowable. Online 1040x If you carry on (or have carried on) business in both Canada and the United States, the business profits are attributable to each country based on the profits that the permanent establishment might be expected to make if it were a distinct and separate person engaged in the same or similar activities. Online 1040x The business profits attributable to the permanent establishment include only those profits derived from assets used, risks assumed, and activities performed by the permanent establishment. Online 1040x You may be considered to have a permanent establishment if you meet certain conditions. Online 1040x For more information, see Article V (Permanent Establishment) and Article VII (Business Profits). Online 1040x Public entertainers (Article XVI). Online 1040x The provisions under income from employment or income from self-employment do not apply to public entertainers (such as theater, motion picture, radio, or television artistes, musicians, or athletes) from the United States who receive more than $15,000 in gross receipts in Canadian currency, including reimbursed expenses, from their entertainment activities in Canada during the calendar year. Online 1040x However, this provision for public entertainers does not apply (and the other provisions will apply) to athletes participating in team sports in leagues with regularly scheduled games in both the United States and Canada. Online 1040x Compensation paid by the U. Online 1040x S. Online 1040x Government (Article XIX). Online 1040x Wages, salaries, and similar income (other than pensions) paid to a U. Online 1040x S. Online 1040x citizen by the United States or any of its agencies, instrumentalities, or political subdivisions for discharging governmental functions are exempt from Canadian income tax. Online 1040x The exemption does not apply to pay for services performed in connection with any trade or business carried on for profit by the United States, or any of its agencies, instrumentalities, or political subdivisions. Online 1040x Students and apprentices (Article XX). Online 1040x A full-time student, apprentice, or business trainee who is in Canada to study or acquire business experience is exempt from Canadian income tax on remittances received from any source outside Canada for maintenance, education, or training. Online 1040x The recipient must be or must have been a U. Online 1040x S. Online 1040x resident immediately before visiting Canada. Online 1040x An apprentice or business trainee can claim this exemption only for a period of one year from the date the individual first arrived in Canada for the purpose of training. Online 1040x Pensions, Annuities, Social Security, and Alimony Under Article XVIII, pensions and annuities from Canadian sources paid to U. Online 1040x S. Online 1040x residents are subject to tax by Canada, but the tax is limited to 15% of the gross amount (if a periodic pension payment) or of the taxable amount (if an annuity). Online 1040x Canadian pensions and annuities paid to U. Online 1040x S. Online 1040x residents may be taxed by the United States, but the amount of any pension included in income for U. Online 1040x S. Online 1040x tax purposes may not be more than the amount that would be included in income in Canada if the recipient were a Canadian resident. Online 1040x Pensions. Online 1040x A pension includes any payment under a pension or other retirement arrangement, Armed Forces retirement pay, war veterans pensions and allowances, and payments under a sickness, accident, or disability plan. Online 1040x It includes pensions paid by private employers and the government for services rendered. Online 1040x Pensions also include payments from individual retirement arrangements (IRAs) in the United States, registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) in Canada. Online 1040x Pensions do not include social security benefits. Online 1040x Roth IRAs. Online 1040x A distribution from a Roth IRA is exempt from Canadian tax to the extent it would be exempt from U. Online 1040x S. Online 1040x tax if paid to a U. Online 1040x S. Online 1040x resident. Online 1040x In addition, you may elect to defer any tax in Canada on income accrued within the Roth IRA but not distributed by the Roth IRA. Online 1040x However, you cannot defer tax on any accruals due to contributions made after you become a Canadian resident. Online 1040x Tax-deferred plans. Online 1040x Generally, income that accrues in a Canadian RRSP or RRIF is subject to U. Online 1040x S. Online 1040x tax, even if it is not distributed. Online 1040x However, a U. Online 1040x S. Online 1040x citizen or resident can elect to defer U. Online 1040x S. Online 1040x tax on income from the plan until the income is distributed. Online 1040x Form 8891 is used to make the election. Online 1040x Annuities. Online 1040x An annuity is a stated sum payable periodically at stated times, during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). Online 1040x Annuities do not include: Non-periodic payments, or An annuity the cost of which was deductible for tax purposes. Online 1040x Special rules. Online 1040x Special rules apply to pensions and annuities with respect to: Short-term assignments, Cross-border commuters, and Individuals who participate in a Canadian qualifying plan. Online 1040x Generally, distributions in such cases are deemed to be earned in the country in which the plan is established, without regard to where the services were rendered. Online 1040x Social security benefits. Online 1040x U. Online 1040x S. Online 1040x social security benefits paid to a resident of Canada are taxed in Canada as if they were benefits under the Canada Pension Plan, except that 15% of the amount of the benefit is exempt from Canadian tax. Online 1040x Alimony. Online 1040x Alimony and similar amounts (including child support payments) from Canadian sources paid to U. Online 1040x S. Online 1040x residents are exempt from Canadian tax. Online 1040x For purposes of U. Online 1040x S. Online 1040x tax, these amounts are excluded from income to the same extent they would be excluded from income in Canada if the recipient was a Canadian resident. Online 1040x Investment Income From Canadian Sources The treaty provides beneficial treatment for certain items of Canadian source income that result from an investment of capital. Online 1040x Dividends (Article X). Online 1040x For Canadian source dividends received by U. Online 1040x S. Online 1040x residents, the Canadian income tax generally may not be more than 15%. Online 1040x A 5% rate applies to intercorporate dividends paid from a subsidiary to a parent corporation owning at least 10% of the subsidiary's voting stock. Online 1040x However, a 10% rate applies if the payer of the dividend is a nonresident-owned Canadian investment corporation. Online 1040x These rates do not apply if the owner of the dividends carries on, or has carried on, a business in Canada through a permanent establishment and the holding on which the income is paid is effectively connected with that permanent establishment. Online 1040x Interest (Article XI). Online 1040x Generally, Canadian source interest received by U. Online 1040x S. Online 1040x residents is exempt from Canadian income tax. Online 1040x The exemption does not apply if the owner of the interest carries on, or has carried on, a business in Canada through a permanent establishment and the debt on which the income is paid is effectively connected with that permanent establishment. Online 1040x Gains from the sale of property (Article XIII). Online 1040x Generally, gains from the sale of personal property by a U. Online 1040x S. Online 1040x resident having no permanent establishment in Canada are exempt from Canadian income tax. Online 1040x However, the exemption from Canadian tax does not apply to gains realized by U. Online 1040x S. Online 1040x residents on Canadian real property, and on personal property belonging to a permanent establishment in Canada. Online 1040x If the property subject to Canadian tax is a capital asset and was owned by the U. Online 1040x S. Online 1040x resident on September 26, 1980, not as part of the business property of a permanent establishment in Canada, generally the taxable gain is limited to the appreciation after 1984. Online 1040x Royalties (Article XII). Online 1040x The following are exempt from Canadian tax: Copyright royalties and other like payments for the production or reproduction of any literary, dramatic, musical, or artistic work (other than payments for motion pictures and works on film, videotape, or other means of reproduction for use in connection with television, which may be taxed at 10%), Payments for the use of, or the right to use, computer software, Payments for the use of, or the right to use, any patent or any information concerning industrial, commercial, or scientific experience (but not within a rental or franchise agreement), and Payments for broadcasting as agreed to in an exchange of notes between the countries. Online 1040x This rate or exemption does not apply if the owner of the royalties carries on, or has carried on, a business in Canada through a permanent establishment and the right or property on which the income is paid is effectively connected with that permanent establishment. Online 1040x This exemption (or lower rate) does not apply to royalties to explore for or to exploit mineral deposits, timber, and other natural resources. Online 1040x Other Income Generally, Canadian source income that is not specifically mentioned in the treaty, may be taxed by Canada. Online 1040x Gambling losses. Online 1040x Canadian residents may deduct gambling losses in the U. Online 1040x S. Online 1040x against gambling winnings in the U. Online 1040x S. Online 1040x in the same manner as a U. Online 1040x S. Online 1040x resident. Online 1040x Charitable Contributions United States income tax return. Online 1040x Under Article XXI, you may deduct contributions to certain qualified Canadian charitable organizations on your United States income tax return. Online 1040x Besides being subject to the overall limits applicable to all your charitable contributions under U. Online 1040x S. Online 1040x tax law, your charitable contributions to Canadian organizations (other than contributions to a college or university at which you or a member of your family is or was enrolled) are subject to the U. Online 1040x S. Online 1040x percentage limits on charitable contributions, applied to your Canadian source income. Online 1040x If your return does not include gross income from Canadian sources, charitable contributions to Canadian organizations are generally not deductible. Online 1040x Example. Online 1040x You are a U. Online 1040x S. Online 1040x citizen living in Canada. Online 1040x You have both U. Online 1040x S. Online 1040x and Canadian source income. Online 1040x During your tax year, you contribute to Canadian organizations that would qualify as charitable organizations under U. Online 1040x S. Online 1040x tax law if they were U. Online 1040x S. Online 1040x organizations. Online 1040x To figure the maximum amount of the contribution to Canadian organizations that you can deduct on your U. Online 1040x S. Online 1040x income tax return, multiply your adjusted gross income from Canadian sources by the percentage limit that applies to contributions under U. Online 1040x S. Online 1040x income tax law. Online 1040x Then include this amount on your return along with all your domestic charitable contributions, subject to the appropriate percentage limit required for contributions under U. Online 1040x S. Online 1040x income tax law. Online 1040x The appropriate percentage limit for U. Online 1040x S. Online 1040x tax purposes is applied to your total adjusted gross income from all sources. Online 1040x Qualified charities. Online 1040x These Canadian organizations must meet the qualifications that a U. Online 1040x S. Online 1040x charitable organization must meet under U. Online 1040x S. Online 1040x tax law. Online 1040x Usually an organization will notify you if it qualifies. Online 1040x For further information on charitable contributions and the U. Online 1040x S. Online 1040x percentage limits, see Publication 526, Charitable Contributions. Online 1040x Canadian income tax return. Online 1040x Under certain conditions, contributions to qualified U. Online 1040x S. Online 1040x charitable organizations may also be claimed on your Canadian income tax return if you are a Canadian resident. Online 1040x Income Tax Credits The treaty contains a credit provision (Article XXIV) for the elimination of double taxation. Online 1040x In general, the United States and Canada both allow a credit against their income tax for the income tax paid to the other country on income from sources in that other country. Online 1040x For detailed discussions of the U. Online 1040x S. Online 1040x income tax treatment of tax paid to foreign countries, see Publication 514, Foreign Tax Credit for Individuals. Online 1040x See paragraphs (4) and (5) of Article XXIV for certain provisions that affect the computation of the credit allowed by the United States for Canadian income taxes paid by U. Online 1040x S. Online 1040x citizens residing in Canada. Online 1040x Competent Authority Assistance Under Article XXVI, a U. Online 1040x S. Online 1040x citizen or resident may request assistance from the U. Online 1040x S. Online 1040x competent authority when the actions of Canada, the United States, or both, potentially result in double taxation or taxation contrary to the treaty. Online 1040x The U. Online 1040x S. Online 1040x competent authority may then consult with the Canadian competent authority to determine if the double taxation or denial of treaty benefits in question can be avoided. Online 1040x If the competent authorities are not able to reach agreement in a case, binding arbitration proceedings may apply. Online 1040x It is important that your request for competent authority assistance be made as soon as you have been notified by either Canada or the United States of proposed adjustments that would result in denial of treaty benefits or in double taxation. Online 1040x This is so that implementation of any agreement reached by the competent authorities is not barred by administrative, legal, or procedural barriers. Online 1040x For information that you should include with your request for competent authority assistance, see Revenue Procedure 2006-54, 2006-49 IRB 1035, available at www. Online 1040x irs. Online 1040x gov/irb/2006-49_IRB/ar13. Online 1040x html. Online 1040x The request should be addressed to: Deputy Commissioner (International) Large Business and International Division Attn: Office of Tax Treaty Internal Revenue Service 1111 Constitution Ave. Online 1040x , NW Routing: MA3-322A Washington, D. Online 1040x C. Online 1040x 20024 In addition to a timely request for assistance, you should take the following measures: File a timely protective claim for credit or refund of U. Online 1040x S. Online 1040x taxes on Form 1040X, Form 1120X, or amended Form 1041, whichever is appropriate. Online 1040x This will, among other things, give you the benefit of a foreign tax credit in case you do not qualify for the treaty benefit in question. Online 1040x For figuring this credit, attach either Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), or Form 1118, Foreign Tax Credit — Corporations, as appropriate. Online 1040x Attach your protective claim to your request for competent authority assistance. Online 1040x Take appropriate action under Canadian procedures to avoid the lapse or termination of your right of appeal under Canadian income tax law. Online 1040x How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS and the Canada Revenue Agency in several ways. Online 1040x Text of Treaty You can get the text of the U. Online 1040x S. Online 1040x —Canada income tax treaty from: Superintendent of Documents U. Online 1040x S. Online 1040x Government Printing Office P. Online 1040x O. Online 1040x Box 371954 Pittsburgh, PA 15250-7954 The treaty can also be found on the Internet at IRS. Online 1040x gov. Online 1040x U. Online 1040x S. Online 1040x Taxation During the filing season, the IRS conducts a taxpayer assistance program in Canada. Online 1040x To find out if IRS personnel will be in your area, you should contact the consular office at the nearest U. Online 1040x S. Online 1040x Embassy or consulate. Online 1040x Mail. Online 1040x For answers to technical or account questions, you can write to: Internal Revenue Service International Section Philadelphia, PA 19255-0525 Phone. Online 1040x You can call the IRS for help at (267) 941-1000 (not a toll-free call). Online 1040x Canadian Taxation You can get information on Canadian taxation from the Canada Revenue Agency. Online 1040x The International Tax Services Office can be contacted on 1-800-267-5177 (from anywhere in Canada and the U. Online 1040x S. Online 1040x ) or on the Internet at www. Online 1040x cra-arc. Online 1040x gc. Online 1040x ca. Online 1040x Prev Up Next Home More Online Publications
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