Canadian’s U.S. unemployment income subject to U.S. tax

In a case of first impression, a Canadian citizen was not entitled to exclude from income unemployment benefits she received from a U.S. state (Ohio). Article XV of the U.S.-Canada treaty did not exempt her unemployment compensation from U.S. income tax. The tax treatment of the individual’s unemployment compensation was governed by Article XXII of the treaty, which permitted the U.S. to tax it.

Background.

The individual worked as a post-doctoral fellow at a U.S. university under a nonimmigrant professional visa. After her employment ended, she returned to Canada, applied for and received unemployment compensation from the state. However, when she filed her U.S. income tax return, she treated her unemployment compensation as exempt from tax under Article XV of the U.S.-Canada treaty, which covers dependent personal services.

U.S. unemployment income.

Generally, nonresident aliens are taxed on their U.S.-source income and her unemployment compensation was U.S.-source income. Moreover, this income was effectively connected with the conduct of a U.S. trade or business. Further, Article XV did not govern the tax treatment of her unemployment compensation because that income was not remuneration derived from employment. In addition, even if Article XV applied, its provisions would permit the U.S. to tax that income because it is U.S.-source income. Therefore, Article XXII, Other Income, determined the tax treatment of the individual’s unemployment compensation. This provision expressly permits the U.S. to tax the individual’s unemployment compensation because it arose in the U.S.

Double taxation.

Finally, the individual’s claim that she would be subject to double taxation was rejected. Since the individual was a Canadian citizen, double taxation is avoided by Canada’s allowance of a deduction from Canadian income tax for income taxes paid to the U.S. Because such relief would be granted by Canada, the court lacked jurisdiction to consider her entitlement to this relief. (P.F. Guo, 149 TC -, No. 14, Dec. 61,031.)

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