Article XXV - United States and Canada Income Tax Treaty

When a Form 1040-NR is received from a married Canadian resident (who is not a U.S. citizen) who has U.S. source wages that are subject to tax in the United States, they may be able to compute their U.S. tax liability in accordance with the special provision contained in Article XXV(3) of the U.S.- Canada Tax Treaty.

Review Form 1040-NR from Canadian resident taxpayers for the following indications that they are computing their U.S. tax on wages using Article XXV(3):

Two names are present in the entity section of the return; or

Hypothetical married filing joint tax computation using worldwide income for both taxpayers (Form 1040 or statement); or

A statement is attached indicating that a special computation permitted by the U.S.- Canada Tax Treaty has been used; or

A notation of "Article XXV" is found on the return or its attachments.

Article XXV(3) limits the Canadian resident taxpayer’s U.S. liability with respect to his or her U.S. source employment income to an amount computed using the following formula: (Form 1040-NR Taxable Income/Form 1040 Taxable Income) × Form 1040 Tentative Tax. The tentative tax reported on Form 1040 or statement is the total U.S. tax payable by the taxpayer and his or her spouse as if both were U.S. citizens and all of their income arose in the United States. An income deficit (or loss) of the spouse shall not be taken into account.

EC 265 generates on Form 1040-NR when the taxpayer uses this special tax calculation. See EC 265 at IRM 3.22.3.198.2.

Article XXV(3) does not provide a basis for Canadian residents who are not U.S. citizens to claim on their actual Form 1040-NR a standard deduction or any credits for which they would not be eligible under the Internal Revenue Code.