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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I am a Canadian citizen planning to study on F-1 in US. Since

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I am a Canadian citizen planning to study on F-1 in US. Since I have a brokerage account in US and have stock investment in US, I wonder if I need to file tax return for the time I'm spending in US (c.a 2 yrs on F-1) on my capital gains to US and pay capital gains tax too?

Please note I have applied to be a non-resident for tax purposes for part of the year 2011 and onwards. And for the rest part of 2011 I lived in China. On my 2011 canadian tax return form, my country of residence on December 31, 2011 is 'China'.

According the irs website foreign student on F-1 are subject to flat rate 30% capital gains taxation.
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
Hi and welcome to Just Answer!
A resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether from sources within or outside the United States.
A nonresident alien usually is subject to U.S. income tax only on U.S. source income.

Under the residency rules of IRC section 7701(b) most foreign students are considered to be "exempt individuals." That is, they are exempt for extended periods of time from counting days of presence in the United States for the purposes of determining whether they are resident aliens of the United States. Thus, most foreign students remain nonresident aliens in the United States for extended periods of time.

If your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are not engaged in a trade or business in the United States. Thus - such income is NOT is treated as effectively connected income.- and is taxes at flat 30% federal income tax rate.

However if these gains will be taxable for you depends if you physically present in the United States for 183 days or more during the taxable year. This 183-day rule bears no relation to the 183-day rule under the substantial presence test of IRC section 7701(b)(3). Thus, there are situations in which the 183-day rule of IRC section 871(a)(2) may apply to individuals who have not crossed the threshold of U.S. residency under IRC section 7701(b)(3).
In most situations - you must provide Form W8-BEN to your broker and establish that you are a nonresident alien and claim that you are the beneficial owner of the income.

See for reference - http://www.irs.gov/Individuals/International-Taxpayers/The-Taxation-of-Capital-Gains-of-Nonresident-Alien-Students,-Scholars-and-Employees-of-Foreign-Governments
IRC regulations - http://www.gpo.gov/fdsys/pkg/CFR-2012-title26-vol9/pdf/CFR-2012-title26-vol9-sec1-871-7.pdf
As we see a nonresident alien who spent in the US less than 183 days DO NOT pay any taxes on capital gains realized from trading stocks.
Let me know if you need any help.
Be sure to ask for clarification if needed.
Customer: replied 2 years ago.

I have read this information. The actual tax rate also depends on if there is tax treaty between US and the original country which might provide for a lesser rate of taxation. I am concerned that if such treaty is for Canada residents or citizens. As mentioned I am canadian citizen but a Canadian non-resident for tax purposes. I want to know if the US-Canada treaty applies to me and if so, what's the exact tax rate for capital gains.


 

Expert:  Lev replied 2 years ago.
You are correct that the tax treaty overrides the tax law of either country.
There is an US-Canada tax treaty in effect - see here - http://www.irs.gov/pub/irs-trty/canada.pdf
See page 20 - Article XIII, paragraph 4:
Gains from the alienation of any property other than that referred to in paragraphs 1, 2 and 3 shall be taxable only in the Contracting State of which the alienator is a resident.

That means your gain would be taxed in Canada only.
However - that provision would apply if you are a Canadian tax resident only. If you are a Canadian non-resident for tax purposes - the tax treaty would not apply for your situation.
If this case you need to verify in which country you are a resident?
Sorry if you expected differently.
Customer: replied 2 years ago.

'Please note I have applied to be a non-resident for tax purposes for part of the year 2011 and onwards. And for the rest part of 2011 I lived in China.'


 


Thanks for the link and I read http://www.irs.gov/pub/irs-trty/china.pdf


esp article 12 (gains) but still can't figure out how much capital gains tax will be levied by US.


 

Expert:  Lev replied 2 years ago.

You are correct - there is a tax treaty between the US and China - http://www.irs.gov/pub/irs-trty/china.pdf

However - in order that tax treaty to be in effect - you should be a tax resident of China and your income should be taxed in China as for the resident.

 

See page 5 - ARTICLE 4 (Residence)
1. For the purposes of this Agreement, the term "resident of a Contracting State" means any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of head office, place of incorporation or any other criterion of a similar nature.

 

It is not clear from your information if you are liable for income taxes in China or not?

 

Relating to US taxes on capital gains - see page 20 - ARTICLE 12 (Gains)

6. Gains derived by a resident of a Contracting State from the alienation of any property other than that referred to in paragraphs 1 through 5 and arising in the other Contracting State may be taxed in that other Contracting State.

Thus - the treaty allows either country to tax capital gains.

As a result - the 183-day rule mentioned above will be in effect - if you spent more than 183 days in the US during 2011 - the gains are taxed at 30% rate; If you spent less than 183 days in the US during 2011 - the gains are NOT taxed.

Let me know if you need any help.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22967
Experience: Taxes, Immigration, Labor Relations
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Taxes, Immigration, Labor Relations