The Tax Court held that a Canadian citizen must pay U.S. income tax on unemployment compensation received from the state of Ohio. According to the court, an exemption claimed by the taxpayer under the tax treaty between the United States and Canada for salaries, wages, or "similar remuneration" was inapplicable.
Facts: Pei Fang Guo, a Canadian citizen and a nonresident alien of the United States, was employed by the University of Cincinnati from October 2010 until Nov. 30, 2011. In 2012, while she resided in Canada and was present in the United States for only two days, she received unemployment benefits of $15,972 from the Ohio Department of Job and Family Services. For tax year 2012, she completed Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents. She reported the unemployment compensation on Schedule OI, "Other Information," indicating the amount was exempt from U.S. tax under the U.S.-Canada tax treaty. On her 2012 Canadian return, Guo reported the unemployment compensation as income. The IRS, contending that the benefits were taxable to the United States, sent her a deficiency notice of $1,391 for 2012. The taxpayer petitioned the Tax Court for relief.
Issues: Nonresident aliens, persons who are not a resident or citizen of the United States, pay U.S. income tax on their U.S.-source income. Income that is effectively connected with a U.S. trade or business is taxed at the same rates as that of U.S. citizens, while income that is not effectively connected with a U.S. trade or business is taxed at 30%, unless a tax treaty has specified a lower rate. A tax treaty between the United States and another country can exempt certain income from U.S. tax.
The U.S.-Canada tax treaty makes one reference to unemployment compensation: Under the treaty, it is not considered social security benefits. Article XV of the treaty exempts the salaries, wages, and "other similar remuneration ... in respect of an employment" of a Canadian nonresident alien from U.S. income tax. It allows Canada rather than the United States to tax remuneration if (1) its amount is not more than $10,000 (in U.S. dollars), or (2) the Canadian nonresident alien was present in the United States for less than 184 days during the tax year and the remuneration was not borne by an employer who is a U.S. resident. Article XXII of the treaty allows the United States to tax any income arising in the United States that is not covered in other...