Form 1040-NR: The Seven Situations Where a Canadian Has to File a US Non-Resident Return

Short version: Form 1040-NR Explained: The U.S. Return for Nonresidents

A Canadian resident who is not a US person files a US return only when US law requires it or when filing produces a refund. The requirement turns on the kind of income: income effectively connected with a US trade or business (including rental income under an election and business income through a permanent establishment) always requires a return; fixed or determinable US-source income (dividends, interest, royalties, pensions) is taxed by withholding at source and requires a return only if the withholding was wrong or a refund is due. Real estate sales, gambling winnings, and treaty claims each have their own rule. Here are the seven situations.

Key takeaways

• Required: engaged in a US trade or business (including the section 871(d) rental election); US real property sold (FIRPTA); US employment income not fully withheld or exempt under the treaty but reportable; effectively connected income of any amount.
• Optional but valuable: recovering over-withholding on a Form 1042-S; claiming gambling loss deductions under the treaty; claiming a treaty exemption that the payer did not apply.
• Not required: dividends, interest, and pensions correctly withheld at the treaty rate with no other US filing obligation; portfolio capital gains (not US-taxable for a non-resident present fewer than 183 days).
• Deadline: June 15 for a non-resident with no US wages subject to withholding; April 15 with them; extension to October 15 on Form 4868.
• ITIN: a non-resident without a Social Security number needs an Individual Taxpayer Identification Number, applied for on Form W-7 with the first return.

The seven situations

1. US rental property. A Canadian who owns a US rental and elects under section 871(d) to be taxed on net income files a 1040-NR every year reporting the rental on Schedule E, whether or not there is net income. Without the election, 30% is withheld on gross rent and no return is required, but the election is almost always better.

2. Selling US real estate. FIRPTA withholding of 15% of the gross price is a deposit; the seller files a 1040-NR for the year of sale to report the gain and recover the excess. Required whenever there is a gain; advisable whenever withholding exceeded the tax.

3. US employment income. A Canadian who works in the US for a US employer, or for a Canadian employer beyond the Article XV exemption, has US-source wages subject to withholding and files a 1040-NR reporting them, with a Canadian foreign tax credit. A Canadian whose US wages are exempt under Article XV (under $10,000, or under 183 days with a Canadian employer and no US PE) but who had withholding files to recover it.

4. US business income. A Canadian self-employed person or company with a US permanent establishment or fixed base files on the effectively connected income; one without a PE files a 1040-NR (or 1120-F) with Form 8833 to claim the Article VII exemption and report the position, particularly if a Form 1042-S was issued.

5. Over-withholding on a 1042-S. A US payer that withheld 30% on dividends, interest, royalties, or pension income because no Form W-8BEN or NR301 was on file has over-withheld against the treaty rate (15% on dividends, 0% on interest, 15% on periodic pensions). The recipient files a 1040-NR to claim the refund.

6. Gambling winnings. US casinos withhold 30% on slot, keno, and bingo winnings paid to non-residents (table games are exempt). Under Article XXII(3), a Canadian can deduct US gambling losses against US winnings by filing a 1040-NR with records, recovering some or all of the withholding.

7. Other treaty claims. Income exempt under the treaty but on which the payer withheld: scholarship or fellowship income, certain pensions, or amounts where the treaty position needs disclosure on Form 8833.

What does not require a return

Dividends withheld at 15%, interest at 0%, and periodic pension or RRIF-equivalent payments at the treaty rate are fully taxed by the withholding; no return is required. Capital gains on US stocks and bonds are not US-taxable for a non-resident present fewer than 183 days in the year (real estate is the exception). A Canadian with only these items files nothing in the US and reports them on the Canadian T1 with a foreign tax credit.

Mechanics

The 1040-NR reports effectively connected income at graduated rates (with itemized deductions limited to state taxes, charitable contributions, and casualty losses) and FDAP income at the flat or treaty rate on Schedule NEC. A non-resident cannot claim the standard deduction (except Indian students) or file jointly. The return is due June 15 if the filer had no US wages subject to withholding; April 15 otherwise. An ITIN is required; the Form W-7 application is filed with the first return, with a certified passport copy or through an acceptance agent.

Worked example

A Toronto resident owns a Scottsdale rental, sold US stock at a gain, received $8,000 of US dividends withheld at 30% because her broker had no W-8BEN, and won $6,000 on a Las Vegas slot machine (withheld $1,800) while losing $4,000 at the same casino.

• Rental. 1040-NR required; section 871(d) election; Schedule E; Arizona non-resident return.
• Stock gain. Not US-taxable; reported on the T1 only.
• Dividends. Treaty rate 15%; $1,200 over-withheld; recovered on the same 1040-NR; W-8BEN filed with the broker going forward.
• Gambling. $6,000 of winnings; $4,000 of documented losses deductible under Article XXII(3); tax on $2,000 at 30% is $600; refund of $1,200 on the same return.
• Deadline. June 15 (no US wages); ITIN application with the return if she does not have one.

Official sources

"A nonresident alien individual who is not engaged in a trade or business in the United States and has U.S. income on which the tax liability was not satisfied by the withholding of tax at the source" must file a return. — Internal Revenue Service, Taxation of Nonresident Aliens, https://www.irs.gov/individuals/international-taxpayers/taxation-of-nonresident-aliens

"Use Form 1042-S to report income and amounts withheld as described in the Instructions for Form 1042-S." — Internal Revenue Service, About Form 1042-S, https://www.irs.gov/forms-pubs/about-form-1042-s

"Losses incurred by a resident of a Contracting State with respect to wagering transactions the gains on which may be taxed in the other Contracting State shall, for the purpose of taxation in that other State, be deductible to the same extent that such losses would be deductible if they were incurred by a resident of that other State." — Canada-United States Tax Convention, Article XXII(3), https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997.html

Practitioner note

The 1040-NR most Canadians should file and do not is the one that produces a refund: the 871(d) rental election, the FIRPTA excess, the 30% dividend withholding that should have been 15%, the gambling losses. None of these is required in the sense that the IRS will chase it. All of them are money left in Washington. We file them every year for clients who thought they had no US filing.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the 1040-NR with the rental election, FIRPTA refund, treaty claims, and ITIN application, and the Canadian return with the matching foreign tax credit. See cross-border pricing or book a call.