Sources and References

Primary textbook — Course materials provided by instructors Nathan Kozak and Kathleen Guanling Li (Fall 2025).

Supplementary — Bittker, B.I. and Lokken, L. Federal Taxation of Income, Estates and Gifts (Warren, Gorham & Lamont). — Reimer, E. and Rust, A. (eds.). Klaus Vogel on Double Taxation Conventions, 4th ed. (Wolters Kluwer). — Smith, J.K., Raabe, W.A., and Maloney, D.M. South-Western Federal Taxation (Cengage).

Online resources — Internal Revenue Service (irs.gov), IRS Publication 519 (U.S. Tax Guide for Aliens), IRS Publication 515 (Withholding of Tax on Nonresident Aliens), U.S.-Canada Tax Treaty (1980, as amended), Department of Finance Canada treaty texts.

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Chapter 1: Overview of the U.S. Tax System

Section 1.1: Structure and Administration

The United States federal income tax is administered by the Internal Revenue Service (IRS) under the authority of the Internal Revenue Code (IRC), codified at Title 26 of the United States Code. The U.S. tax system is remarkably broad in its jurisdictional reach: the United States taxes its citizens and permanent residents (green card holders) on their worldwide income, regardless of where they live or where the income is earned. This citizenship-based taxation is unique among major economies and stands in sharp contrast to Canada’s residence-based taxation system.

The filing unit in the U.S. individual system is the taxpayer, who may file as single, married filing jointly (MFJ), married filing separately (MFS), head of household (HOH), or qualifying widow(er). Filing status affects the applicable tax brackets, standard deduction amount, and eligibility for certain credits.

The federal income tax rate structure for individuals uses progressive marginal rates (10%, 12%, 22%, 24%, 32%, 35%, and 37% as of post-TCJA law). Long-term capital gains (assets held over 12 months) are taxed at preferential rates of 0%, 15%, or 20% depending on taxable income, plus the 3.8% Net Investment Income Tax (NIIT) for higher-income taxpayers.

Section 1.2: The Tax Cuts and Jobs Act (TCJA) of 2017

The Tax Cuts and Jobs Act, effective January 1, 2018, was the most significant reform of U.S. federal income tax law since 1986. Key changes relevant to this course include:

• Individual top marginal rate reduced from 39.6% to 37%.
• Standard deduction roughly doubled ($12,000 single / $24,000 MFJ in 2018, indexed for inflation).
• Personal exemptions eliminated (replaced by larger child tax credit).
• State and local tax (SALT) deduction capped at $10,000.
• Corporate rate reduced from a graduated rate with 35% top rate to a flat 21%.
• Shift to a territorial (participation exemption) system for U.S. corporations with foreign subsidiaries.
• Introduction of GILTI (Global Intangible Low-Taxed Income), BEAT (Base Erosion Anti-Abuse Tax), and FDII (Foreign-Derived Intangible Income).

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Chapter 2: U.S. Individual Taxation

Section 2.1: Computing U.S. Individual Taxable Income

The calculation of U.S. individual taxable income follows a structured reduction from gross income:

\[ \text{Gross Income} - \text{Above-the-line deductions} = \text{Adjusted Gross Income (AGI)} \]\[ \text{AGI} - \text{Standard deduction (or itemized deductions)} = \text{Taxable Income} \]\[ \text{Tax} = f(\text{Taxable Income, filing status}) - \text{Credits} = \text{Tax Liability} \]

Gross income (IRC § 61) is defined broadly as “all income from whatever source derived,” including wages, salaries, tips, business income, interest, dividends, rents, royalties, alimony (pre-2019 agreements), capital gains, gambling winnings, and prizes. Notable exclusions from gross income (IRC §§ 101–140) include gifts and inheritances, life insurance proceeds, employer-provided health insurance, qualified scholarships, and foreign earned income up to the FEIE exclusion amount.

Above-the-line deductions are deductible whether or not the taxpayer itemizes. They include:

• Self-employed health insurance premiums
• SEP, SIMPLE, and qualified plan contributions for the self-employed
• Educator expenses (up to $300)
• Moving expenses (limited to military personnel post-TCJA)
• Student loan interest (up to $2,500, subject to phase-out)

Standard deduction vs. itemized deductions: Post-TCJA, the standard deduction is significantly higher, meaning fewer taxpayers benefit from itemizing. Itemized deductions include:

• Medical expenses exceeding 7.5% of AGI
• State and local taxes (capped at $10,000)
• Mortgage interest on qualified residence debt
• Charitable contributions (up to 60% of AGI in cash)
• Casualty and theft losses (only federally declared disasters, post-TCJA)

Section 2.2: Key Deductions in Detail

Qualified Business Income (QBI) Deduction — IRC § 199A: For tax years after 2017, non-corporate taxpayers with income from a pass-through entity (sole proprietorship, S corporation, partnership) may deduct up to 20% of their qualified business income, subject to W-2 wage and property limitations for higher-income taxpayers. Specified service trades (law, health, consulting, financial services) face phase-outs above income thresholds.

Alternative Minimum Tax (AMT): The individual AMT exists alongside the regular tax to prevent high-income taxpayers from zeroing out their liability through certain preferences. AMT income adds back items such as the standard deduction, incentive stock option spreads, and certain accelerated deductions. Post-TCJA exemptions were substantially increased ($72,900 single / $113,400 MFJ for 2023), limiting AMT exposure largely to upper-middle-income taxpayers.

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Chapter 3: Sourcing and Taxability of Income — Foreign Tax Credits

Section 3.1: Source of Income Rules

Whether income is U.S.-source or foreign-source matters enormously for both U.S. taxpayers with foreign income and for foreign persons with U.S.-source income. The general rules under IRC §§ 861–865:

Income Type	Source Rule
Interest	Residence of the payer
Dividends	Jurisdiction of incorporation of paying corporation
Personal services	Place where services are performed
Rents and royalties	Location or use of the property
Gains on sale of personal property	Residence of the seller (generally)
Gains on sale of real property	Location of the property
Business income	Where the business is conducted (effectively connected)

These rules interact with treaty provisions that may override or modify domestic sourcing.

Section 3.2: Foreign Tax Credit (FTC)

U.S. citizens and residents earning income from foreign jurisdictions often pay foreign income taxes on the same income that is taxed by the U.S. The foreign tax credit (IRC § 901) prevents double taxation by allowing a credit (not merely a deduction) for foreign taxes paid or accrued.

FTC Limitation formula:

\[ \text{FTC Limit} = \text{U.S. Tax Before Credit} \times \frac{\text{Foreign-Source Taxable Income}}{\text{Worldwide Taxable Income}} \]

Credits are computed separately for different baskets of income — the general limitation basket and the passive income basket — to prevent high-taxed foreign income from sheltering low-taxed U.S. income.

Foreign Earned Income Exclusion (FEIE): U.S. citizens or resident aliens who meet the bona fide residence test or physical presence test may elect to exclude foreign earned income up to an annual inflation-adjusted limit ($120,000 in 2023). The FEIE applies only to earned income (wages, self-employment) not to passive income, and cannot be used with the FTC for the same income.

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Chapter 4: Special Topics for Americans in Canada

Section 4.1: Dual Filing Obligations

A U.S. citizen residing in Canada faces obligations under both Canadian and U.S. tax law. In Canada, they are taxed as a Canadian resident under the ITA. In the U.S., they are taxed on worldwide income as a citizen. The Canada-U.S. Tax Treaty (1980, as amended through the Fifth Protocol 2007) coordinates these regimes and is implemented domestically through treaty-based positions claimed on the taxpayer’s returns.

RRSP treatment: The Canada-U.S. Tax Treaty, Article XVIII(7), allows a U.S. citizen residing in Canada to elect to defer U.S. taxation on RRSP income (and RRIF, DPSP) until it is distributed. This election must be made annually by attaching Form 8891 (now replaced by Form 8833 treaty disclosure) to the U.S. return. Without the election (or treaty position), RRSP earnings are taxable annually on the U.S. return.

TFSA complications: The Tax-Free Savings Account (TFSA) has no equivalent in U.S. law. The IRS treats a TFSA as a foreign grantor trust, requiring the U.S. person to report income earned inside the TFSA annually on U.S. Form 3520 / 3520-A and pay current U.S. tax on it. The Canadian tax exemption does not extend to U.S. tax obligations.

FBAR and FATCA reporting: U.S. persons with foreign financial accounts exceeding USD $10,000 in aggregate at any time during the year must file FinCEN Form 114 (FBAR). FATCA (Foreign Account Tax Compliance Act, IRC § 6038D) additionally requires disclosure of foreign financial assets above $50,000 on Form 8938. Canadian banks report U.S. person account information to the CRA, which shares it with the IRS under the intergovernmental agreement.

Section 4.2: Treaty Residency Tie-Breaker

The U.S.-Canada Tax Treaty Article IV provides that where an individual is resident in both countries under each country’s domestic law (a “dual resident”), their residency for treaty purposes is determined by a tie-breaker sequence:

1. Permanent home — the country where the individual has a permanent home available.
2. Centre of vital interests — closer personal and economic relations.
3. Habitual abode — where the individual spends more time.
4. Nationality — citizenship.
5. Competent authority determination — mutual agreement between the two countries’ tax authorities.

A successful treaty-based tie-breaker claim changes which country has primary taxing rights over the individual’s worldwide income. The “losing” country still taxes income sourced within its territory.

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Chapter 5: U.S. Corporate Taxation

Section 5.1: Types of Business Entities

U.S. tax law recognizes several forms of business organization, each with distinct default and elective tax treatment:

Entity Type	Default Tax Treatment	Election Available
C Corporation	Separate taxpayer (21% flat rate)	None (always a C corp)
S Corporation	Pass-through (income to shareholders)	S election under IRC § 1362
Partnership (general/limited)	Pass-through (income to partners)	—
LLC (multi-member)	Partnership (pass-through)	Check-the-box to C corp or S corp
LLC (single-member)	Disregarded entity (sole proprietor)	Check-the-box to C corp

C Corporation taxation involves double taxation: corporate income is taxed at 21% at the entity level; dividends paid to shareholders are taxed again at the qualified dividend rate (0%, 15%, or 20%) at the individual level. The TCJA’s territorial system partially mitigates this for multinational corporations through the dividends received deduction (DRD) on foreign subsidiary distributions.

S Corporation: Not available to foreign shareholders. An S corporation is restricted to 100 shareholders, all of whom must be U.S. citizens or residents. Income, losses, deductions, and credits flow through pro rata to shareholders, who report them on their personal returns. Appreciated property distributions can still trigger gain at the entity level.

Section 5.2: U.S. Trade or Business

A foreign corporation or individual is subject to U.S. federal income tax on income that is effectively connected with the conduct of a U.S. trade or business (ECI). The concept of a U.S. trade or business is not defined in the IRC, but courts have interpreted it to require a regular, continuous, and considerable presence of activities in the United States.

FDAP income: Passive U.S.-source income (dividends, interest, rents, royalties) earned by foreign persons is FDAP income and is subject to 30% withholding at source under IRC § 1441 (individuals) or § 1442 (corporations). Withholding agents (U.S. payors) are required to withhold and remit this tax. Tax treaties often reduce FDAP withholding rates; for example, the Canada-U.S. Treaty reduces dividend withholding to 15% (5% for corporate shareholders owning ≥ 10% of votes), and interest withholding to 0% between arm’s length parties.

Section 5.3: Permanent Establishment

Under the Canada-U.S. Tax Treaty Article V, a Canadian corporation is subject to U.S. tax on its business profits only if it has a permanent establishment (PE) in the United States through which those profits are attributable.

Importantly, certain activities do not constitute a PE: maintaining a stock of goods solely for storage, display, or delivery; using a fixed place solely for purchasing goods; or maintaining a fixed place for preparatory or auxiliary activities. A Canadian business that merely sells into the U.S. (even with a warehouse for delivery) can often avoid a PE.

Section 5.4: Book-to-Tax Adjustments

U.S. corporations prepare financial statements under U.S. GAAP and a separate tax return on Form 1120. Reconciling the two requires identifying items where GAAP and tax treatment diverge. These book-to-tax adjustments are summarized on Schedule M-1 (or M-3 for larger corporations):

Common additions to book income to arrive at taxable income:

• Federal income tax expense (deducted per GAAP, not deductible for tax)
• Non-deductible meals and entertainment (50% limit post-TCJA)
• Capital losses in excess of capital gains
• Non-deductible penalties and fines

Common subtractions from book income:

• Depreciation in excess of GAAP depreciation (bonus depreciation and MACRS)
• Tax-exempt interest income
• Dividends received deduction (DRD)
• Life insurance proceeds received (non-taxable)

Depreciation: U.S. tax depreciation uses the Modified Accelerated Cost Recovery System (MACRS), which provides fixed recovery periods and methods (200% declining balance switching to straight line for personal property; straight line for real property). Bonus depreciation (100% first-year expensing for qualified property placed in service 2017–2022, phasing down 20% per year) dramatically accelerates deductions. IRC § 179 allows immediate expensing of up to $1,160,000 (2023) of qualified business property.

Section 5.5: Earnings and Profits

Earnings and profits (E&P) is a corporate tax concept with no direct counterpart in GAAP. E&P measures a corporation’s economic ability to pay dividends. A distribution by a C corporation to its shareholders is a taxable dividend only to the extent of current or accumulated E&P; distributions in excess of E&P are first a return of capital (reducing the shareholder’s stock basis) and then capital gain.

Section 5.6: Repatriation of Income — International Tax Considerations

Post-TCJA, the U.S. moved toward a territorial system for U.S. multinational corporations. A 100% dividends received deduction (DRD) under IRC § 245A is available for dividends from 10%-owned foreign corporations (paid out of foreign E&P). This eliminates residual U.S. tax on foreign subsidiary profits repatriated as dividends.

However, the territorial system comes with anti-avoidance measures:

GILTI (Global Intangible Low-Taxed Income) — IRC § 951A: U.S. shareholders of controlled foreign corporations (CFCs) include in income their share of the CFC’s high-return income (broadly, CFC income in excess of a 10% return on qualified business asset investment). GILTI is taxed at a reduced effective rate for corporations (effectively 10.5% before foreign tax credits, rising to 13.125% post-2025) and at full individual rates.

Subpart F Income: Pre-TCJA, U.S. shareholders of CFCs were required to include certain passive and base erosion income (Subpart F income) currently in their taxable income, regardless of whether distributions were made. Subpart F remains in effect alongside GILTI.

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Chapter 6: State Taxation

Section 6.1: Overview of the State Tax System

In addition to federal income tax, most U.S. states impose their own income taxes on corporations and individuals. State taxation creates an additional layer of complexity, particularly for businesses operating in multiple states.

State tax conformity: States generally start with federal taxable income (or federal AGI for individuals) as the base and then apply their own additions and subtractions. Some states conform to the IRC as it exists on a specific date (static conformity), while others adopt the IRC as of the current date (rolling conformity) — meaning states may or may not have adopted TCJA changes.

Apportionment: A business operating in multiple states must apportion its income among those states using a formulary approach. The traditional three-factor formula — equally weighted sales, payroll, and property — has largely given way to single-sales-factor apportionment in many states, which weighs only the portion of sales occurring within the state.

Section 6.2: State Corporate Income Taxation

State corporate income tax rates vary considerably, from 0% (Nevada, Wyoming, Texas — though Texas has a gross receipts tax) to over 11% (New Jersey, Pennsylvania). Most states require a minimum tax or franchise tax. Combined federal and state effective rates for corporations can reach 25–30% in high-tax states.

Intercompany transactions: State taxation of U.S. corporate groups is complex. Many states require (or allow) combined reporting (unitary tax), aggregating the income of all affiliated entities that form a unitary business and then apportioning the combined income to the state. This limits income-shifting within related party groups.

Foreign corporations doing business in a U.S. state: A foreign (non-U.S.) corporation with nexus in a U.S. state must file and pay that state’s income tax on apportioned income. The Canada-U.S. Treaty limits PE-based federal taxation but does not bind state governments — states may tax beyond the Treaty’s federal limitations, though most conform in practice.

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Chapter 7: Cross-Border Issues and Treaty Application

Section 7.1: The Canada-U.S. Tax Treaty Framework

The Canada-U.S. Income Tax Convention (the “Treaty”) was signed in 1980 and subsequently amended by five Protocols (1983, 1984, 1995, 1997, and 2007). It allocates taxing rights between the two countries, reduces or eliminates withholding taxes on cross-border payments, and provides mechanisms for resolving double taxation.

Key articles:

• Article IV — Residence, including the tie-breaker rule.
• Article V — Permanent establishment definition.
• Article VII — Business profits attributable to a PE.
• Article X — Dividends (withholding rate 15%; 5% for corporate shareholders with ≥ 10% votes).
• Article XI — Interest (0% for arm’s length; 10% for related parties in some cases — Protocol amendments eliminated most interest withholding).
• Article XII — Royalties (0% for copyright royalties; 10% for other royalties).
• Article XV — Dependent personal services (employment income).
• Article XVI — Artistes and athletes.
• Article XVIII — Pensions and annuities, RRSP/RRIF treatment.
• Article XXVI-A — Collection assistance between the two governments.

Section 7.2: Treaty Benefits — The Limitation on Benefits Clause

The Fifth Protocol (2007) introduced a comprehensive Limitation on Benefits (LOB) article (Article XXIX-A) to prevent treaty shopping — the use of the treaty by persons not entitled to its benefits.

A company resident in Canada qualifies for treaty benefits if it is publicly traded on a recognized Canadian or U.S. exchange, is a subsidiary of a public company, or meets the “ownership-and-base-erosion” test (50% owned by qualifying residents, with more than 50% of gross income used for purposes other than making deductible payments to non-residents). Otherwise, the company must demonstrate that its activities are substantial enough that it is the legitimate owner of the income.

Section 7.3: Applying the Treaty to Specific Scenarios

Individual moving from Canada to the U.S.: On departure from Canada, the individual is deemed to have disposed of most property at FMV (departure tax). Entering the U.S., the individual becomes a U.S. resident. The treaty may allow stepped-up basis in the U.S. for property already subject to Canadian departure tax.

Canadian employee temporarily working in the U.S.: Under Treaty Article XV, employment income earned for services rendered in the U.S. is taxable in the U.S. However, if the employee is present in the U.S. for fewer than 183 days in any 12-month period, is paid by a non-U.S. employer, and the remuneration is not borne by a U.S. PE of the employer, then the income is exempt from U.S. tax and taxed only in Canada.

Canadian corporation selling goods into the U.S.: If the corporation lacks a U.S. PE, its business profits are taxable only in Canada under Treaty Article VII. FDAP income (interest, dividends, royalties received from U.S. payors) is subject to reduced withholding under Articles X, XI, XII.