[CheapScotsman]

Dual Status (Moved from US to CDN) Attack Plan

So I know I am cutting it a little close to the wire time wise buy, hey, I got to have some excitement in my life …

Here is the situation for 2004 tax year

• Wife and I are Canadian citizens with 3 kids.
• I worked on a H1 visa till end of Feb 2004. My wife was not employed.
• We met the substantial presence test and historically filed Married Filing Joint (based in WA).

Before leaving the states we …
• Earned and was paid about $15000 in income during Jan/Feb 2004
• Sold our home ($50K in capital gains, owned the house for 2.5 years) and receive the proceeds
• Exercised stock options before leaving the US (cashed enough to pay for the taxes)

We moved back to Canada in Mar 2004 with NO ties left in the US
• I have zero income
• Wife started working in Canada in August 2004. Approc US$6000 in income in 2004
• I filed w8-ben forms with brokers to indicate that I am no longer a US resident and claimed “exemptions” under Cdn/US Tax Treaty.
• Sold all US shares by end of Dec 2004 (approx US$20k in gains)



Attack Plan
• Option 1: File as dual status.. a 1040 for Jan/Feb and 1040NR for the rest of year. Note: can’t file Married filing joint so I will loose the standard deductions

• Option 2: File a 1040 for the entire year
Note: can claim standard deductions but this will haul in both my wife's income AND my capital gains BUT I will get a foreign tax credit for paying taxes on these in Canada


Questions

• Which one is most likely (given the numbers above) to result in the least amount of tax?

• If I file dual status, I need to file married filing separate … so … my wife had no US income, does she need to file a return (or would it help?? ) If she doesn’t file a return how does she handle RRSP information reporting?

• If I choose option 2, I may be able to exclude my wife income (Foreign Income Exclusion) … any ways to exclude capital gains?

• Which form do I use for the options exercise?

• How is the sale of the shares at year end handled … from an IRS reporting point of view.

[AtlantaTaxExpert]

CheapScotsman:

Cannot answer your first bullet with actually preparing the returns, and will not do that without proper compensation.

Under dual status: If your wife had no income, then she does not to file. That being the case, you may be able to claim her as a dependent (not sure how U.S. Canada tax treaty addresses this issue). Have to admit that I do not know what you mean by "RRSP information reporting".

No way to exclude the capital gains that I know of.

The profit from the options exercise is normally included in the W-2 tby the employer to be taxed as compensation. Now, once exercised, most people then sell the stock that results from the exercise of the stock option. You therefore have two different transactions. The first is reported by the employer and included in the W-2. The second is reported on Schedule D, and, if done on the same day, shows a slight loss due to the fees being added to the stock basis.

Proceeds from stock sold by a foreign national normally has 30% withheld to ensure that the foreign national filed a Form 1040NR to report the income so that taxes can be assessed. The IRS may not have done that in your case because they did not know you moved back to Canada. Regardless, because the sale took place in the U.S. the U.S. government sees the transaction as subject to U.S. taxes.

[CheapScotsman]

CheapScotsman:
Cannot answer your first bullet with actually preparing the returns, and will not do that without proper compensation.

Under dual status: If your wife had no income, then she does not to file. That being the case, you may be able to claim her as a dependent (not sure how U.S. Canada tax treaty addresses this issue). Have to admit that I do not know what you mean by "RRSP information reporting".

No way to exclude the capital gains that I know of.

Thanks for your quick reply. Guess I'll do the taxes both ways and see if there is much of a difference.

Under dual status, with the 1040NR covering the period AFTER we left... for my wife, we only need to claim US sourced income, correct? If my wife made only CDN source income only during the NR period then she does not have to file either a 1040 or a 1040NR, correct?

The profit from the options exercise is normally included in the W-2 tby the employer to be taxed as compensation. Now, once exercised, most people then sell the stock that results from the exercise of the stock option. You therefore have two different transactions. The first is reported by the employer and included in the W-2. The second is reported on Schedule D, and, if done on the same day, shows a slight loss due to the fees being added to the stock basis.

Perfect. I see now that the W2 does include extra monies as a result of the option exercise... and they did send me a 1099-b which I will try plugging into Schedule D... THANKS!!

Proceeds from stock sold by a foreign national normally has 30% withheld to ensure that the foreign national filed a Form 1040NR to report the income so that taxes can be assessed. The IRS may not have done that in your case because they did not know you moved back to Canada. Regardless, because the sale took place in the U.S. the U.S. government sees the transaction as subject to U.S. taxes.

FYI... Canada/US Tax treaty allows capital gains (stocks) and interest to be zero taxed in the US as they are fully taxed in Canada... but preferential treatment is available in Canada as the initial cost of the stock (for tax purposes) is not the price you bought it at but the open market price when you arrived in Canada.

Thanks for all your help.

[AtlantaTaxExpert]

The citation you made about your wife's income is correct. If she only made Canadian $, then no U.S. taxes will be due on it.