Form 1040-NR Guide for Canadians with US Income: When You Must File and What to Report

Form 1040-NR is the US income tax return for nonresident aliens. A Canadian resident (who is not a US citizen or green card holder) files this form to report US-source income, claim treaty benefits, and request refunds of excess withholding. Not every Canadian with US income needs to file. The filing obligation depends on the type of income, whether it was subject to withholding, and whether the Canadian wants to claim a treaty exemption or a refund.

Who must file Form 1040-NR?

A nonresident alien must file Form 1040-NR if any of the following apply:

1. They are engaged in a trade or business in the US. This includes operating a business, providing services in the US (even temporarily), or making the IRC 871(d) election to treat rental income as ECI. Filing is required even if no tax is owed after deductions and credits.

2. They have US-source income that was not fully withheld. If a Canadian received US income that should have been subject to withholding but was not (for example, a US company paid a Canadian contractor without withholding), the Canadian must file to report and pay the tax.

3. They want to claim a refund of overwithholding. If a US payer withheld at 30% on dividends but the treaty rate is 15%, the Canadian files Form 1040-NR to claim a refund of the 15% excess.

4. They want to claim a treaty exemption for income that would otherwise be taxable. Treaty-based positions (claiming an exemption under Article VII for business profits, Article XV for employment income, or Article XIII for capital gains) must be disclosed on Form 8833 (Treaty-Based Return Position Disclosure), which is filed with the 1040-NR.

5. They sold US real property. FIRPTA requires nonresidents who sell US real estate to file a US return reporting the gain, even if the withholding exceeds the actual tax owed.

Who does NOT need to file: A Canadian whose only US income is dividends and interest that were correctly withheld at the treaty rate. The withholding is the final US tax on that income, and no return is required (unless the Canadian wants to claim a refund for some reason).

What income is reported on Form 1040-NR?

Form 1040-NR has two types of income:

Effectively connected income (ECI): Income connected with a US trade or business. ECI is taxed at graduated rates (the same rates as US citizens), and the taxpayer can claim deductions and credits against it. ECI includes US employment income (wages, salary), US business income (from a sole proprietorship or partnership), US rental income (if the IRC 871(d) election is made), and gain from the sale of US real property.

FDAP income (Fixed, Determinable, Annual, Periodical): Passive income like dividends, interest, rents (if the 871(d) election is NOT made), royalties, and certain other payments. FDAP income is taxed at a flat 30% rate (reduced by treaty), with no deductions allowed. The withholding on FDAP income is usually the final tax, so FDAP income is reported on the 1040-NR only if the withholding was incorrect (too much or too little).

How do treaty benefits work on the 1040-NR?

The US-Canada treaty can reduce or eliminate US tax on various types of income. To claim treaty benefits on the 1040-NR, the Canadian must:

1. Report the income on the appropriate line of the return.
2. Claim the treaty exemption or reduced rate on the treaty benefits page (Schedule OI of Form 1040-NR).
3. File Form 8833 (Treaty-Based Return Position Disclosure) disclosing the specific treaty article and the amount of income exempted.

Common treaty claims:

• Article VII (Business Profits): A Canadian business that earns income from US clients but does not have a permanent establishment (PE) in the US can exempt those profits from US tax. The business income is reported, then exempted on Form 8833.
• Article XV (Employment Income): A Canadian employee who works temporarily in the US (fewer than 183 days, paid by a non-US employer, cost not borne by a US PE) can exempt the employment income from US tax.
• Article XIII (Capital Gains): Gains from the sale of property (other than US real property) by a Canadian resident are generally exempt from US tax.

How do you report US rental income?

A Canadian who owns US rental property has two options:

Option 1: FDAP treatment (no election). The US treats the gross rental income as FDAP and withholds 30% (reduced to 15% by the treaty) on gross rents. No deductions are allowed. This is usually a terrible result because the effective tax rate on net rental income can be far higher than 30% of gross.

Option 2: IRC 871(d) election (ECI treatment). The Canadian elects to treat the rental income as effectively connected with a US trade or business. This allows deductions for mortgage interest, property taxes, insurance, maintenance, depreciation, and management fees. The net rental income is taxed at graduated rates. This election almost always produces a lower tax than the flat-rate withholding on gross rents.

To make the 871(d) election, the Canadian files Form 1040-NR with the rental income reported on Schedule E and attaches a statement electing ECI treatment. The election, once made, applies to all future years unless revoked with IRS consent.

The tenant or property manager withholds under FIRPTA rules (not the FDAP rules) if no NR6/election is in place. The withholding can be reduced or eliminated by filing Form W-8ECI (Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States).

How do you report a FIRPTA sale?

When a Canadian sells US real property, the buyer (or closing agent) withholds 15% of the gross sale price under IRC 1445. The Canadian files Form 1040-NR to report the actual gain and claim a refund of excess withholding.

The gain is the sale price minus the adjusted basis (original purchase price plus improvements, minus depreciation if the property was rented). The gain is taxed at capital gains rates (0%, 15%, or 20%, depending on the income level), plus any depreciation recapture at 25% for the unrecaptured Section 1250 gain.

If the withholding (15% of gross) exceeds the actual tax on the gain (which is common, especially if the property appreciated modestly), the Canadian claims the excess as a refund on the 1040-NR.

The Canadian can apply for a withholding certificate (Form 8288-B) before the sale to reduce or eliminate the withholding at closing. This is useful when the actual tax will be significantly less than 15% of gross, but the application must be filed well before closing (processing time: 60 to 90 days).

What is the filing deadline?

• June 15: The automatic filing deadline for nonresidents who did not receive US wages subject to withholding. No extension form is needed for the June 15 date; it is automatic.
• April 15: If the nonresident received US wages subject to withholding (e.g., a Canadian who worked in the US and had W-2 wages), the April 15 deadline applies.
• October 15: An extension to October 15 can be obtained by filing Form 4868 by the original due date.

Interest on unpaid tax runs from April 15, regardless of the June 15 filing deadline. If tax is owed, the Canadian should pay an estimated amount by April 15 to minimize interest.

What forms accompany the 1040-NR?

• Form 8833: Required for any treaty-based return position (claiming an exemption or reduced rate under the treaty).
• Schedule E: US rental income (if the 871(d) election is made).
• Schedule D and Form 8949: Capital gains from FIRPTA sales or other US property dispositions.
• Schedule OI (Other Information): Reports the taxpayer’s country of residence, treaty country, and visa type.
• Form W-8BEN (not filed with the return): Provided to the withholding agent, not the IRS. But the IRS uses the W-8BEN information reported by the withholding agent to match against the 1040-NR.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.