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Taxslayer 2012

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Taxslayer 2012

Taxslayer 2012 Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Taxslayer 2012 Property not disposed of or abandoned. Taxslayer 2012 Special rule for normal retirements from item accounts. Taxslayer 2012 Abandoned property. Taxslayer 2012 Single item accounts. Taxslayer 2012 Multiple property account. Taxslayer 2012 Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Taxslayer 2012 If your property qualified for MACRS, you must depreciate it under MACRS. Taxslayer 2012 See Publication 946. Taxslayer 2012 However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Taxslayer 2012 Also, you can elect to exclude certain property from being depreciated under MACRS. Taxslayer 2012 Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Taxslayer 2012 Intangible property. Taxslayer 2012   You cannot depreciate intangible property under ACRS or MACRS. Taxslayer 2012 You depreciate intangible property using any other reasonable method, usually, the straight line method. Taxslayer 2012 Note. Taxslayer 2012 The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Taxslayer 2012 For more information, see chapter 12 of Publication 535. Taxslayer 2012 Public utility property. Taxslayer 2012   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Taxslayer 2012 This type of property is subject to depreciation under a special rule. Taxslayer 2012 Videocassettes. Taxslayer 2012   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Taxslayer 2012 You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Taxslayer 2012 The straight line method, salvage value, and useful life are discussed later under Methods To Use. Taxslayer 2012 You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Taxslayer 2012 How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Taxslayer 2012 These methods are straight line and declining balance. Taxslayer 2012 To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Taxslayer 2012 They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Taxslayer 2012 The amount of the deduction in any year also depends on which method of depreciation you choose. Taxslayer 2012 Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Taxslayer 2012 The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Taxslayer 2012 Your original basis is usually the purchase price. Taxslayer 2012 However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Taxslayer 2012 Adjusted basis. Taxslayer 2012   Events will often change the basis of property. Taxslayer 2012 When this occurs, the changed basis is called the adjusted basis. Taxslayer 2012 Some events, such as improvements you make, increase basis. Taxslayer 2012 Events such as deducting casualty losses and depreciation decrease basis. Taxslayer 2012 If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Taxslayer 2012   Publication 551 explains how to figure basis for property acquired in different ways. Taxslayer 2012 It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Taxslayer 2012 Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Taxslayer 2012 It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Taxslayer 2012 It is how long it will continue to be useful to you, not how long the property will last. Taxslayer 2012 Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Taxslayer 2012 The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Taxslayer 2012 Consider all these factors before you arrive at a useful life for your property. Taxslayer 2012 The useful life of the same type of property varies from user to user. Taxslayer 2012 When you determine the useful life of your property, keep in mind your own experience with similar property. Taxslayer 2012 You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Taxslayer 2012 Change in useful life. Taxslayer 2012   You base your estimate of useful life on certain facts. Taxslayer 2012 If these facts change significantly, you can adjust your estimate of the remaining useful life. Taxslayer 2012 However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Taxslayer 2012 Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Taxslayer 2012 You generally cannot depreciate property below a reasonable salvage value. Taxslayer 2012 Determining salvage value. Taxslayer 2012   Salvage value is the estimated value of property at the end of its useful life. Taxslayer 2012 It is what you expect to get for the property if you sell it after you can no longer use it productively. Taxslayer 2012 You must estimate the salvage value of a piece of property when you first acquire it. Taxslayer 2012   Salvage value is affected both by how you use the property and how long you use it. Taxslayer 2012 If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Taxslayer 2012 However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Taxslayer 2012 Changing salvage value. Taxslayer 2012   Once you determine the salvage value for property, you should not change it merely because prices have changed. Taxslayer 2012 However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Taxslayer 2012 When you redetermine the salvage value, take into account the facts that exist at the time. Taxslayer 2012 Net salvage. Taxslayer 2012   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Taxslayer 2012 You can choose either salvage value or net salvage when you figure depreciation. Taxslayer 2012 You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Taxslayer 2012 However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Taxslayer 2012 Your salvage value can never be less than zero. Taxslayer 2012 Ten percent rule. Taxslayer 2012   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Taxslayer 2012 You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Taxslayer 2012 If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Taxslayer 2012 Methods To Use Two methods of depreciation are the straight line and declining balance methods. Taxslayer 2012 If ACRS or MACRS does not apply, you can use one of these methods. Taxslayer 2012 The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Taxslayer 2012 Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Taxslayer 2012 One of these methods was the straight line method. Taxslayer 2012 This method was also used for intangible property. Taxslayer 2012 It lets you deduct the same amount of depreciation each year. Taxslayer 2012 To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Taxslayer 2012 Subtract the salvage value, if any, from the adjusted basis. Taxslayer 2012 The balance is the total amount of depreciation you can take over the useful life of the property. Taxslayer 2012 Divide the balance by the number of years remaining in the useful life. Taxslayer 2012 This gives you the amount of your yearly depreciation deduction. Taxslayer 2012 Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. Taxslayer 2012 If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Taxslayer 2012 Example. Taxslayer 2012 In April 1994, Frank bought a franchise for $5,600. Taxslayer 2012 It expires in 10 years. Taxslayer 2012 This property is intangible property that cannot be depreciated under MACRS. Taxslayer 2012 Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Taxslayer 2012 He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Taxslayer 2012 He must prorate the $560 for his 9 months of use in 1994. Taxslayer 2012 This gives him a deduction of $420 ($560 ÷ 9/12). Taxslayer 2012 In 1995, Frank can deduct $560 for the full year. Taxslayer 2012 Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Taxslayer 2012 The rate cannot be more than twice the straight line rate. Taxslayer 2012 Rate of depreciation. Taxslayer 2012   Under this method, you must determine your declining balance rate of depreciation. Taxslayer 2012 The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Taxslayer 2012 (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Taxslayer 2012 ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Taxslayer 2012 Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Taxslayer 2012 Depreciation deductions. Taxslayer 2012   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Taxslayer 2012 This gives you the amount of your deduction. Taxslayer 2012 For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Taxslayer 2012 To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Taxslayer 2012 Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Taxslayer 2012 Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Taxslayer 2012 Your depreciation deduction for the second year is $1,600. Taxslayer 2012   As you can see from this example, your adjusted basis in the property gets smaller each year. Taxslayer 2012 Also, under this method, deductions are larger in the earlier years and smaller in the later years. Taxslayer 2012 You can make a change to the straight line method without consent. Taxslayer 2012 Salvage value. Taxslayer 2012   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Taxslayer 2012 However, you cannot depreciate the property below its reasonable salvage value. Taxslayer 2012 Determine salvage value using the rules discussed earlier, including the special 10% rule. Taxslayer 2012 Example. Taxslayer 2012 If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Taxslayer 2012 But if your estimate of salvage value was $900, you can only deduct $100. Taxslayer 2012 This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Taxslayer 2012 Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Taxslayer 2012 You can group the videocassettes by title for making this projection. Taxslayer 2012 You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Taxslayer 2012 The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Taxslayer 2012 For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Taxslayer 2012 How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Taxslayer 2012 If you change your method of depreciation, it is generally a change in your method of accounting. Taxslayer 2012 You must get IRS consent before making the change. Taxslayer 2012 However, you do not need permission for certain changes in your method of depreciation. Taxslayer 2012 The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Taxslayer 2012 For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Taxslayer 2012 Change to the straight line method. Taxslayer 2012   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Taxslayer 2012 However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Taxslayer 2012 When the change is made, figure depreciation based on your adjusted basis in the property at that time. Taxslayer 2012 Your adjusted basis takes into account all previous depreciation deductions. Taxslayer 2012 Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Taxslayer 2012   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Taxslayer 2012 You cannot make the change on an amended return filed after the due date of the original return (including extensions). Taxslayer 2012   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Taxslayer 2012   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Taxslayer 2012 Changes that require permission. Taxslayer 2012   For most other changes in method of depreciation, you must get permission from the IRS. Taxslayer 2012 To request a change in method of depreciation, file Form 3115. Taxslayer 2012 File the application within the first 180 days of the tax year the change is to become effective. Taxslayer 2012 In most cases, there is a user fee that must accompany Form 3115. Taxslayer 2012 See the instructions for Form 3115 to determine if a fee is required. Taxslayer 2012 Changes granted automatically. Taxslayer 2012   The IRS automatically approves certain changes of a method of depreciation. Taxslayer 2012 But, you must file Form 3115 for these automatic changes. Taxslayer 2012   However, IRS can deny permission if Form 3115 is not filed on time. Taxslayer 2012 For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Taxslayer 2012 B. Taxslayer 2012 420. Taxslayer 2012 Changes for which approval is not automatic. Taxslayer 2012   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Taxslayer 2012   You must request and receive permission for these changes. Taxslayer 2012 To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Taxslayer 2012 Change from an improper method. Taxslayer 2012   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Taxslayer 2012 You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Taxslayer 2012 If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Taxslayer 2012 However, you must file the amended return before the filing date for the next tax year. Taxslayer 2012 Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Taxslayer 2012 You can do this by selling, exchanging, or abandoning the item of property. Taxslayer 2012 You can also withdraw it from use without disposing of it. Taxslayer 2012 For example, you could place it in a supplies or scrap account. Taxslayer 2012 Retirements can be either normal or abnormal depending on all facts and circumstances. Taxslayer 2012 The rules discussed next do not apply to MACRS and ACRS property. Taxslayer 2012 Normal retirement. Taxslayer 2012   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Taxslayer 2012 A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Taxslayer 2012 Abnormal retirement. Taxslayer 2012   A retirement can be abnormal if you withdraw the property early or under other circumstances. Taxslayer 2012 For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Taxslayer 2012 Gain or loss on retirement. Taxslayer 2012   There are special rules for figuring the gain or loss on retirement of property. Taxslayer 2012 The gain or loss will depend on several factors. Taxslayer 2012 These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Taxslayer 2012 A single property account contains only one item of property. Taxslayer 2012 A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Taxslayer 2012 Sale or exchange. Taxslayer 2012   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Taxslayer 2012 See Publication 544. Taxslayer 2012 Property not disposed of or abandoned. Taxslayer 2012   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Taxslayer 2012 You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Taxslayer 2012 However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Taxslayer 2012   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Taxslayer 2012 Special rule for normal retirements from item accounts. Taxslayer 2012   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Taxslayer 2012 However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Taxslayer 2012   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Taxslayer 2012 Abandoned property. Taxslayer 2012   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Taxslayer 2012 However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Taxslayer 2012 Basis of property retired. Taxslayer 2012   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Taxslayer 2012 Single item accounts. Taxslayer 2012   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Taxslayer 2012 This is generally the cost or other basis of the item of property less depreciation. Taxslayer 2012 See Publication 551. Taxslayer 2012 Multiple property account. Taxslayer 2012   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Taxslayer 2012 If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Taxslayer 2012   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Taxslayer 2012 The method of depreciation used for the multiple property account is used. Taxslayer 2012 You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Taxslayer 2012 Prev  Up  Next   Home   More Online Publications
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The Taxslayer 2012

Taxslayer 2012 Publication 597 - Main Content Table of Contents Application of Treaty Personal Services Pensions, Annuities, Social Security, and AlimonyRoth IRAs. Taxslayer 2012 Tax-deferred plans. Taxslayer 2012 Investment Income From Canadian Sources Other Income Charitable ContributionsQualified charities. Taxslayer 2012 Income Tax Credits Competent Authority Assistance How To Get Tax HelpText of Treaty U. Taxslayer 2012 S. Taxslayer 2012 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. Taxslayer 2012 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. Taxslayer 2012 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. Taxslayer 2012 Saving clause. Taxslayer 2012   In most instances, a treaty does not affect the right of a country to tax its own residents (including those who are U. Taxslayer 2012 S. Taxslayer 2012 citizens) or of the United States to tax its residents or citizens (including U. Taxslayer 2012 S. Taxslayer 2012 citizens who are residents of the foreign country). Taxslayer 2012 This provision is known as the “saving clause. Taxslayer 2012 ”   For example, an individual who is a U. Taxslayer 2012 S. Taxslayer 2012 citizen and a resident of Canada may have dividend income from a U. Taxslayer 2012 S. Taxslayer 2012 corporation. Taxslayer 2012 The treaty provides a maximum rate of 15% on dividends received by a resident of Canada from sources in the United States. Taxslayer 2012 Even though a resident of Canada, the individual is a U. Taxslayer 2012 S. Taxslayer 2012 citizen and the saving clause overrides the treaty article that limits the U. Taxslayer 2012 S. Taxslayer 2012 tax to 15%. Taxslayer 2012    Exceptions to the saving clause can be found in Article XXIX, paragraph 3. Taxslayer 2012 Treaty-based position. Taxslayer 2012   If you take the position that any U. Taxslayer 2012 S. Taxslayer 2012 tax is overruled or otherwise reduced by a U. Taxslayer 2012 S. Taxslayer 2012 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. Taxslayer 2012 Personal Services A U. Taxslayer 2012 S. Taxslayer 2012 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. Taxslayer 2012 Income from employment (Article XV). Taxslayer 2012   Income U. Taxslayer 2012 S. Taxslayer 2012 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. Taxslayer 2012 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. Taxslayer 2012    Whether there is a permanent establishment in Canada is determined by the rules set forth in Article V. Taxslayer 2012 Example. Taxslayer 2012 You are a U. Taxslayer 2012 S. Taxslayer 2012 resident employed under an 8-month contract with a Canadian firm to install equipment in their Montreal plant. Taxslayer 2012 During the calendar year you were physically present in Canada for 179 days and were paid $16,500 (Canadian) for your services. Taxslayer 2012 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. Taxslayer 2012 Pay received by a U. Taxslayer 2012 S. Taxslayer 2012 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. Taxslayer 2012 S. Taxslayer 2012 resident is exempt from Canadian tax. Taxslayer 2012 Income from self-employment (Article VII). Taxslayer 2012   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. Taxslayer 2012 This income is treated as business profits, and deductions similar to those allowed under U. Taxslayer 2012 S. Taxslayer 2012 law are allowable. Taxslayer 2012   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. Taxslayer 2012 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. Taxslayer 2012   You may be considered to have a permanent establishment if you meet certain conditions. Taxslayer 2012 For more information, see Article V (Permanent Establishment) and Article VII (Business Profits). Taxslayer 2012 Public entertainers (Article XVI). Taxslayer 2012   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. Taxslayer 2012 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. Taxslayer 2012 Compensation paid by the U. Taxslayer 2012 S. Taxslayer 2012 Government (Article XIX). Taxslayer 2012   Wages, salaries, and similar income (other than pensions) paid to a U. Taxslayer 2012 S. Taxslayer 2012 citizen by the United States or any of its agencies, instrumentalities, or political subdivisions for discharging governmental functions are exempt from Canadian income tax. Taxslayer 2012   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. Taxslayer 2012 Students and apprentices (Article XX). Taxslayer 2012   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. Taxslayer 2012 The recipient must be or must have been a U. Taxslayer 2012 S. Taxslayer 2012 resident immediately before visiting Canada. Taxslayer 2012   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. Taxslayer 2012 Pensions, Annuities, Social Security, and Alimony Under Article XVIII, pensions and annuities from Canadian sources paid to U. Taxslayer 2012 S. Taxslayer 2012 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). Taxslayer 2012 Canadian pensions and annuities paid to U. Taxslayer 2012 S. Taxslayer 2012 residents may be taxed by the United States, but the amount of any pension included in income for U. Taxslayer 2012 S. Taxslayer 2012 tax purposes may not be more than the amount that would be included in income in Canada if the recipient were a Canadian resident. Taxslayer 2012 Pensions. Taxslayer 2012   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. Taxslayer 2012 It includes pensions paid by private employers and the government for services rendered. Taxslayer 2012   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. Taxslayer 2012   Pensions do not include social security benefits. Taxslayer 2012 Roth IRAs. Taxslayer 2012   A distribution from a Roth IRA is exempt from Canadian tax to the extent it would be exempt from U. Taxslayer 2012 S. Taxslayer 2012 tax if paid to a U. Taxslayer 2012 S. Taxslayer 2012 resident. Taxslayer 2012 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. Taxslayer 2012 However, you cannot defer tax on any accruals due to contributions made after you become a Canadian resident. Taxslayer 2012 Tax-deferred plans. Taxslayer 2012   Generally, income that accrues in a Canadian RRSP or RRIF is subject to U. Taxslayer 2012 S. Taxslayer 2012 tax, even if it is not distributed. Taxslayer 2012 However, a U. Taxslayer 2012 S. Taxslayer 2012 citizen or resident can elect to defer U. Taxslayer 2012 S. Taxslayer 2012 tax on income from the plan until the income is distributed. Taxslayer 2012 Form 8891 is used to make the election. Taxslayer 2012 Annuities. Taxslayer 2012    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). Taxslayer 2012 Annuities do not include: Non-periodic payments, or An annuity the cost of which was deductible for tax purposes. Taxslayer 2012 Special rules. Taxslayer 2012    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. Taxslayer 2012 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. Taxslayer 2012 Social security benefits. Taxslayer 2012   U. Taxslayer 2012 S. Taxslayer 2012 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. Taxslayer 2012 Alimony. Taxslayer 2012   Alimony and similar amounts (including child support payments) from Canadian sources paid to U. Taxslayer 2012 S. Taxslayer 2012 residents are exempt from Canadian tax. Taxslayer 2012 For purposes of U. Taxslayer 2012 S. Taxslayer 2012 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. Taxslayer 2012 Investment Income From Canadian Sources The treaty provides beneficial treatment for certain items of Canadian source income that result from an investment of capital. Taxslayer 2012 Dividends (Article X). Taxslayer 2012   For Canadian source dividends received by U. Taxslayer 2012 S. Taxslayer 2012 residents, the Canadian income tax generally may not be more than 15%. Taxslayer 2012   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. Taxslayer 2012 However, a 10% rate applies if the payer of the dividend is a nonresident-owned Canadian investment corporation. Taxslayer 2012   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. Taxslayer 2012 Interest (Article XI). Taxslayer 2012   Generally, Canadian source interest received by U. Taxslayer 2012 S. Taxslayer 2012 residents is exempt from Canadian income tax. Taxslayer 2012   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. Taxslayer 2012 Gains from the sale of property (Article XIII). Taxslayer 2012   Generally, gains from the sale of personal property by a U. Taxslayer 2012 S. Taxslayer 2012 resident having no permanent establishment in Canada are exempt from Canadian income tax. Taxslayer 2012 However, the exemption from Canadian tax does not apply to gains realized by U. Taxslayer 2012 S. Taxslayer 2012 residents on Canadian real property, and on personal property belonging to a permanent establishment in Canada. Taxslayer 2012   If the property subject to Canadian tax is a capital asset and was owned by the U. Taxslayer 2012 S. Taxslayer 2012 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. Taxslayer 2012 Royalties (Article XII). Taxslayer 2012   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. Taxslayer 2012   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. Taxslayer 2012   This exemption (or lower rate) does not apply to royalties to explore for or to exploit mineral deposits, timber, and other natural resources. Taxslayer 2012 Other Income Generally, Canadian source income that is not specifically mentioned in the treaty, may be taxed by Canada. Taxslayer 2012 Gambling losses. Taxslayer 2012   Canadian residents may deduct gambling losses in the U. Taxslayer 2012 S. Taxslayer 2012 against gambling winnings in the U. Taxslayer 2012 S. Taxslayer 2012 in the same manner as a U. Taxslayer 2012 S. Taxslayer 2012 resident. Taxslayer 2012 Charitable Contributions United States income tax return. Taxslayer 2012   Under Article XXI, you may deduct contributions to certain qualified Canadian charitable organizations on your United States income tax return. Taxslayer 2012 Besides being subject to the overall limits applicable to all your charitable contributions under U. Taxslayer 2012 S. Taxslayer 2012 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. Taxslayer 2012 S. Taxslayer 2012 percentage limits on charitable contributions, applied to your Canadian source income. Taxslayer 2012 If your return does not include gross income from Canadian sources, charitable contributions to Canadian organizations are generally not deductible. Taxslayer 2012 Example. Taxslayer 2012 You are a U. Taxslayer 2012 S. Taxslayer 2012 citizen living in Canada. Taxslayer 2012 You have both U. Taxslayer 2012 S. Taxslayer 2012 and Canadian source income. Taxslayer 2012 During your tax year, you contribute to Canadian organizations that would qualify as charitable organizations under U. Taxslayer 2012 S. Taxslayer 2012 tax law if they were U. Taxslayer 2012 S. Taxslayer 2012 organizations. Taxslayer 2012 To figure the maximum amount of the contribution to Canadian organizations that you can deduct on your U. Taxslayer 2012 S. Taxslayer 2012 income tax return, multiply your adjusted gross income from Canadian sources by the percentage limit that applies to contributions under U. Taxslayer 2012 S. Taxslayer 2012 income tax law. Taxslayer 2012 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. Taxslayer 2012 S. Taxslayer 2012 income tax law. Taxslayer 2012 The appropriate percentage limit for U. Taxslayer 2012 S. Taxslayer 2012 tax purposes is applied to your total adjusted gross income from all sources. Taxslayer 2012 Qualified charities. Taxslayer 2012   These Canadian organizations must meet the qualifications that a U. Taxslayer 2012 S. Taxslayer 2012 charitable organization must meet under U. Taxslayer 2012 S. Taxslayer 2012 tax law. Taxslayer 2012 Usually an organization will notify you if it qualifies. Taxslayer 2012 For further information on charitable contributions and the U. Taxslayer 2012 S. Taxslayer 2012 percentage limits, see Publication 526, Charitable Contributions. Taxslayer 2012 Canadian income tax return. Taxslayer 2012   Under certain conditions, contributions to qualified U. Taxslayer 2012 S. Taxslayer 2012 charitable organizations may also be claimed on your Canadian income tax return if you are a Canadian resident. Taxslayer 2012 Income Tax Credits The treaty contains a credit provision (Article XXIV) for the elimination of double taxation. Taxslayer 2012 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. Taxslayer 2012 For detailed discussions of the U. Taxslayer 2012 S. Taxslayer 2012 income tax treatment of tax paid to foreign countries, see Publication 514, Foreign Tax Credit for Individuals. Taxslayer 2012 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. Taxslayer 2012 S. Taxslayer 2012 citizens residing in Canada. Taxslayer 2012 Competent Authority Assistance Under Article XXVI, a U. Taxslayer 2012 S. Taxslayer 2012 citizen or resident may request assistance from the U. Taxslayer 2012 S. Taxslayer 2012 competent authority when the actions of Canada, the United States, or both, potentially result in double taxation or taxation contrary to the treaty. Taxslayer 2012 The U. Taxslayer 2012 S. Taxslayer 2012 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. Taxslayer 2012 If the competent authorities are not able to reach agreement in a case, binding arbitration proceedings may apply. Taxslayer 2012 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. Taxslayer 2012 This is so that implementation of any agreement reached by the competent authorities is not barred by administrative, legal, or procedural barriers. Taxslayer 2012 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. Taxslayer 2012 irs. Taxslayer 2012 gov/irb/2006-49_IRB/ar13. Taxslayer 2012 html. Taxslayer 2012 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. Taxslayer 2012 , NW Routing: MA3-322A Washington, D. Taxslayer 2012 C. Taxslayer 2012 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. Taxslayer 2012 S. Taxslayer 2012 taxes on Form 1040X, Form 1120X, or amended Form 1041, whichever is appropriate. Taxslayer 2012 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. Taxslayer 2012 For figuring this credit, attach either Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), or Form 1118, Foreign Tax Credit — Corporations, as appropriate. Taxslayer 2012 Attach your protective claim to your request for competent authority assistance. Taxslayer 2012 Take appropriate action under Canadian procedures to avoid the lapse or termination of your right of appeal under Canadian income tax law. Taxslayer 2012 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. Taxslayer 2012 Text of Treaty You can get the text of the U. Taxslayer 2012 S. Taxslayer 2012 —Canada income tax treaty from: Superintendent of Documents U. Taxslayer 2012 S. Taxslayer 2012 Government Printing Office P. Taxslayer 2012 O. Taxslayer 2012 Box 371954 Pittsburgh, PA 15250-7954 The treaty can also be found on the Internet at IRS. Taxslayer 2012 gov. Taxslayer 2012 U. Taxslayer 2012 S. Taxslayer 2012 Taxation During the filing season, the IRS conducts a taxpayer assistance program in Canada. Taxslayer 2012 To find out if IRS personnel will be in your area, you should contact the consular office at the nearest U. Taxslayer 2012 S. Taxslayer 2012 Embassy or consulate. Taxslayer 2012 Mail. Taxslayer 2012 For answers to technical or account questions, you can write to:   Internal Revenue Service International Section Philadelphia, PA 19255-0525 Phone. Taxslayer 2012 You can call the IRS for help at (267) 941-1000 (not a toll-free call). Taxslayer 2012 Canadian Taxation You can get information on Canadian taxation from the Canada Revenue Agency. Taxslayer 2012 The International Tax Services Office can be contacted on 1-800-267-5177 (from anywhere in Canada and the U. Taxslayer 2012 S. Taxslayer 2012 ) or on the Internet at www. Taxslayer 2012 cra-arc. Taxslayer 2012 gc. Taxslayer 2012 ca. Taxslayer 2012 Prev  Up  Next   Home   More Online Publications