When a Canadian Has to File a US Tax Return: The Residency Triggers, the Income Triggers, and the Filings That Are Optional but Worth Money

A Canadian files a US tax return in two families of situations: when the US treats them as a resident (taxable on worldwide income like a citizen), and when they are a non-resident with particular kinds of US-source income that the withholding system does not fully handle. Residency is triggered by days or a green card; non-resident filing is triggered by effectively connected income, real estate, and the desire to recover withholding or claim a treaty position. Many Canadians with US income (dividends, interest, pensions correctly withheld) have no US filing obligation at all; many others have a filing that is optional in the sense that the IRS will not chase it and valuable in the sense that it produces a refund.

Key takeaways

• Resident filing (Form 1040): required if the Canadian meets the substantial presence test (the weighted 183-day count with 31 days in the current year) or holds a green card, unless the closer connection exception or the treaty tie-breaker applies; worldwide income is reported; the FBAR and Form 8938 come with it.
• Non-resident filing (Form 1040-NR), required: US employment income (unless fully exempt and not withheld); income effectively connected with a US trade or business (including a US rental under the section 871(d) election, and business income through a permanent establishment); sale of US real estate (FIRPTA); any year a treaty position must be disclosed on Form 8833 to avoid a penalty.
• Non-resident filing, optional but valuable: recovering 30% withholding that should have been 15% or 0% (Form 1042-S over-withholding); the section 871(d) election itself (30% of gross rent versus tax on net); the FIRPTA refund; gambling loss deductions under Article XXII(3); recovering FICA withheld in error from an exempt visa holder.
• No filing: US dividends, interest, royalties, and periodic pensions correctly withheld at the treaty rate; portfolio capital gains (not US-taxable for a non-resident present fewer than 183 days); US Social Security (taxable only in Canada).
• Information returns without a 1040: Form 8840 (closer connection) by itself; Form 8843 (exempt individual) by itself; Form 706-NA (estate of a Canadian with US assets).

Residency triggers

Substantial presence. Days in the current year plus one-third of the prior year's plus one-sixth of the second prior year's reaching 183, with at least 31 in the current year. Snowbirds at four months a year meet it in the third year. A Canadian who meets it is a US resident for the year (from the first day of presence) unless they file Form 8840 (fewer than 183 current-year days, Canadian tax home, closer connection) or claim the treaty tie-breaker on a 1040-NR with Form 8833. Meeting it and doing neither means a 1040 on worldwide income, an FBAR, and Form 8938.

Green card. From the date of admission as a permanent resident, regardless of days, until formal abandonment. A Canadian with a green card who lives in Canada files a 1040 (or claims the treaty on a 1040-NR with the immigration and expatriation risks that brings).

Election. A Canadian married to a US person can elect under section 6013(g) to be treated as a US resident and file jointly; the election continues until revoked.

Non-resident triggers: required

Employment. Wages for work performed in the US are US-source. If they are not exempt under Article XV (under $10,000, or under 183 days with a non-US employer and no US PE), the Canadian files a 1040-NR reporting them. If they are exempt but the employer withheld, a 1040-NR with Form 8833 recovers the withholding. If exempt and not withheld (Form 8233 on file), a protective 1040-NR is prudent but not required.

Effectively connected income. Business income through a US permanent establishment or fixed base; rental income under the section 871(d) election (which, once made, requires an annual 1040-NR); partnership income from a US partnership engaged in a US trade or business (the partnership withholds and issues a Schedule K-1; the partner files). A Canadian with ECI of any amount files.

Real estate. A sale of US real property is effectively connected by statute; FIRPTA withholding is a deposit; the 1040-NR for the year reports the gain and settles the tax.

Treaty disclosure. A Canadian who takes a treaty-based position that reduces US tax (the tie-breaker; an Article VII exemption for a business with a 1042-S; the XIII(7) basis election) files Form 8833 with a 1040-NR; the penalty for failing to disclose a required position is $1,000.

Non-resident filings: optional but worth money

Rental election. A Canadian with US rental income who does nothing pays 30% of gross rent through withholding, final. Filing a 1040-NR with the section 871(d) election converts that to tax on net income at graduated rates, usually far less. Once made, the election is ongoing and the annual return becomes required.

Withholding refunds. A US payer withheld 30% on dividends (treaty rate 15%), interest (0%), royalties (0% or 10%), or a periodic pension (15%) because no W-8BEN was on file; the 1040-NR with the 1042-S recovers the difference within three years.

FIRPTA excess. Withholding of 15% of the price exceeds the tax on the gain; the 1040-NR refunds the excess.

Gambling losses. Article XXII(3) lets a Canadian deduct US gambling losses against US gambling winnings on a 1040-NR, recovering the 30% withheld on the losses.

FICA refunds. A J-1 or F-1 non-resident whose employer withheld FICA in error files Form 843 (with Form 8316) after asking the employer.

No filing required

US dividends withheld at 15%, US interest at 0%, US royalties at the treaty rate, and US periodic pension payments at 15% are fully taxed by withholding; no 1040-NR 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. US Social Security paid to a Canadian resident is taxable only in Canada under the treaty. A Canadian whose only US income is these items reports them on the T1 with a foreign tax credit and files nothing in the US.

Standalone information returns

Form 8840 (closer connection exception) is filed by itself by the 1040-NR due date when no 1040-NR is required. Form 8843 (exempt individual statement) is filed by itself by F-1, J-1, and other exempt visa holders with no US income. Form 706-NA is filed by the estate of a Canadian with US-situs assets above $60,000, within nine months of death, to claim the treaty proration.

Deadlines and identification

The 1040-NR is due June 15 for a non-resident with no US wages subject to withholding, April 15 with them, with an extension to October 15 on Form 4868. An ITIN (Form W-7) is required for a non-resident without an SSN; the application accompanies the first return.

Worked example

Four Toronto residents in one year:

• A. Holds US stocks (dividends withheld at 15% with a W-8BEN), sold some at a gain, receives US Social Security. No US filing; all reported on the T1.
• B. Owns an Orlando rental; the property manager withholds 30% of gross rent. Files a 1040-NR with the section 871(d) election; tax on net income; refund of most of the withholding; annual filing thereafter.
• C. Wintered 140 days in Arizona for the third year. Substantial presence test met; files Form 8840 by June 15; no 1040.
• D. Worked 60 days at a Chicago client for her Toronto employer; the client's Chicago affiliate paid part of her salary and withheld US tax. Article XV's 183-day exemption fails (part of the pay was borne by a US entity); files a 1040-NR on the US-source wages; claims a Canadian foreign tax credit.

Official sources

A nonresident alien must file a return if "engaged or considered to be engaged in a trade or business in the United States during the year," or if "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." — Internal Revenue Service, Taxation of Nonresident Aliens, https://www.irs.gov/individuals/international-taxpayers/taxation-of-nonresident-aliens

"You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least: 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that." — Internal Revenue Service, Substantial Presence Test, https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

Practitioner note

The Canadian who has to file and doesn't is usually the one with a green card or a fourth winter in Florida. The Canadian who doesn't have to file and should is the one with a US rental at 30% of gross, or a broker that never had the W-8BEN. We sort every client's US income into the three columns every year: required, optional and worth it, and nothing to do.

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 annual US filing determination, the required 1040 or 1040-NR, and the optional refund filings that pay for themselves. See cross-border pricing or book a call.