About to be Canadian going to Iraq for a year -

Here is the situation:

Canadian wife and American husband. He is not yet a permanent resident but has applied. He has been in Canada since xxxxxx 2006. He did not work in 2006 or 2007. 

He is going overseas for one entire year to work in Iraq for american company xxxxxxxxxx. He has done this before and earned about 200000 but this was before coming to canada and us returns were filed. 

As for this year Canadian return has been completed by wife's accountant but us return not yet completed. He only has 1000 taxable income from state tax refund. 

His last home state was xxxxxxxxx which has state tax. 

The company will not deduct any federal tax as he will be out of the us for more than 365 days. 

So we have many questions;

1.        What canadian tax liabilities will he have. Can they be minimized?  Also will the per diem portion of his income be taxed?

2.        What about the us tax liabilities? Can he qualify for the exemption for this foreign earned income?

3.        What if any state, medicare and social security taxes will he have to pay?

4.        Can your firm assist us with filing the appropriate documents, advise as to the best course of action and provide guidance through this mind field. 

I will remain here in ontario with our son.   He has an ontario driver's license and health insurance. All the assets and debts are in my name. 

5.        Finally, his company will make 401k contributions on his behalf as will he. Will there be a tax consequence to this. 

It goes without saying that we want to minimize our tax and in particular we do not want to be subjected to double taxation. 

6.        Can you contact me to set up an appointment to discuss this matter as well as to discuss your terms of engagement and fees. 

Regards,
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david ingram replies:

I am afraid that you have walked into one of the worst double taxation situations that can exist.

The reason is that the US is the only country in the word that taxes its citizens on their world income.  If he has a bone fide domicile out of the USA from Jan 1 of a year to Dec 31st of the same year or if he has been out of the USA for 335 out of 365 consecutive days, he (or she) can exempt up to about $88,000 (2008 figure) of income from US taxes and then claim more with personal exemptions (including one for you) , everything above about $100,000 is subject to US personal federal income tax. 

The Government of Iraq will be taxing him on his earnings in Iraq.  Tax he pays to Iraq will act as a foreign tax credit on his US tax return if he files schedule 1116 after filing form 2555 to exempt the first $88,000 or so. depending upon the tax rate he pays in Iraq, (likely 15%) he will owe something more to the US because of his citizenship.

However, under the circumstances, Canada will want their pound of flesh or income tax at the same time.  With an application for a PR card, a wife in Canada and a Ontario Driver's licence and Health Card, he must be a resident of Ontario.  As such, he is also taxable in Canada.  Under the terms of the US Canada Income Tax Treaty, he is sort of up the middle.  You have to read Article IV of the Treaty to determine who gets him first. 

If he was working fro a Canadian Company in Iraq, he could also exempt tax on up to 80% of $100,000 by filing a form T626 otherwise known as an Overseas Employment Tax Credit.  Unfortunately, he does not qualify for this Canadian exemption as he is not working for a Canadian company.

The big question is will he be able to claim the US Medicare and Social Security as a foreign tax credit for Canadian tax purposes as Canada will not consider the Income US source as he is not working "IN" the United States.

You do have a problem.  The US tax consequences are easy.  Canada is difficult.

I charge $450 an hour for this kind of phone consultation.  other prices are buried further on.  If you do wish to talk, call Gillian Bryan at (604) 980-0321 between 10:30 and 4 PM Vancouver time to make an appointment (M to F).

Read the following and you will see what I mean.
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Hi

I am a registered nurse here in Ontario Canada and I am interested in going 

to Saudi Arabia for a year or two to work.  I will have to sever my ties with 

Canada.  I have loans I am paying so I will still have a bank account.  

Other nurses  I have known as kept there drivers license.  Will I still be

taxed if I keep my drivers license?  I don't own a home or a car so that 

won't be a problem.  What would you do in my situation?  I was also told 

I can keep my Visa but will cancel everything else.

Thank you 


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david ingram replies:

Keeping a driver's licence AND a visa card is asking to be taxed if you are 

only gone for a year or two.

Keeping the bank account as a non-resident account is fine.

Read Judge Teskey's decision in the Dennis Lee case.

what are the rules? 

Well, to leave Canada for tax purposes, you must give up clubs, bank accounts, memberships, driving licences, provincial health care plans, family allowance payments (if you are a returning resident, you can continue to get Family Allowance out of the country), your car, and furniture. You can keep a house here as an investment and rent it out, but it must be rented on lease terms of a year or more. And you MUST have an agent sign an NR6 for you (see example). This NR6 has the Canadian Resident AGENT ** guarantee the Canadian Government that if YOU do not pay your tax to Canada, the AGENT WILL. Even after fulfilling the foregoing, the Canadian government can still tax you or "try" to tax you on your income out of the country. If you are being paid by a Canadian Company, they can quite often succeed.

Even though you can collect family allowance out of the country, don't! One client's wife found out that she could get family allowance out of the country if she said they were coming back to Canada. She got some $3,000 of family allowance and cost the family some $80,000 in income tax when they came back to Canada from Brazil. I will never forget the husband's expression when he found out why he had been reassessed and I will never forget his wife's explanation. She said he was a skinflint and never gave her any money. The total episode cost them their house.

** The "agent" referred to above can be a friend, relative, or a business such as ours. We charge a minimum of $40.00 per month to be an "AGENT" for an NR-6 filing. This $480 per year is "in addition" to any other fees but "well worth it" of course. It stops your mother, father, brother, next door neighbour or ex-best-friend from being plagued by paperwork they do not understand.

OUT OF CANADA AND RESIDENT - IN CANADA AND NON-RESIDENT

It is possible to be physically "in Canada" and be treated as a Non-Resident and it is possible to be out of the country for seven years, or never have even lived in Canada, but wanted to, and be taxed as a Canadian resident as the following three cases show. In case you missed it, the reason for the different rulings is the "INTENT" of the parties involved.  Wolf Bergelt intended to leave Canada.  David MacLean was only working out of the country.  He still maintained a residence and could not ever become a resident of Saudi Arabia anyway. Dennis Lee "wanted" to live in Canada.

In 1986, Wolf Bergelt won non-resident status before Judge Collier of the Federal Court, even though he was only out of the country for four months and his family stayed behind to sell his house. He had given up his memberships, kept only one bank account and rented an apartment in California until his house in Canada was sold. Four months after his move, his company advised him that he was being transferred back to Canada. Judge Collier said his move was a permanent (although short) move and he was a non-resident for tax purposes for those four months.

In 1985, David MacLean lost his claim for non-residence status even though he was gone for seven years. He kept a house and investments in Canada and returned a couple of times a year to visit parents. He had even been to the Tax Office and received a letter on January 29, 1980 stating that his Canadian Employer could waive tax deductions because he was a non-resident. However, he did not advise his banks, etc. that he was a non-resident so that they would withhold tax, he did not rent his house out on a long term lease and he did not do any of the things that makes a person a "NON-RESIDENT". Judge Brule of the Tax court of Canada said that he thought Mr. MacLean had stumbled on the non-resident status by chance rather than by design. In other words, to become a non-resident of Canada, you must become a bone fide resident of another country.  As a rule, only a Muslim born in Saudi Arabia to Saudi Arabian parents can become a Saudi Arabian citizen.  The best that David MacLean can hope for is that he has a Saudi Arabian temporary work permit.

In other words, when a person leaves a place, they usually leave and establish a new identity where they are because the "new place" is where they live now. Trying to "look" like a non-resident is not the same as "BEING" a non-resident - think about it.

In 1989, Denis Lee won part but lost most of his claim for non-resident status. He was a British Subject who worked on offshore oil rigs. He maintained a room at his parents house in England and held a mortgage on his ex-wife's house in England. For the years 1981, 82 and 83 he did not pay income tax anywhere. in 1981 he married a Canadian and she bought a house in Canada in June of 1981. On September 13, 1981, he guaranteed her mortgage at the bank and swore an affidavit that he was "not" a non-resident of Canada. [As I have said in the capital gains section of this book, bank documents will get you every time.] During this time he had a Royal Bank account in Canada and the Caribbean but no Canadian driver's licences or club memberships, etc.

Judge Teskey said:

"The question of residency is one of fact and depends on the specific facts of each case. The following is a list of some of the indicia relevant in determining whether an individual is resident in Canada for Canadian income tax purposes. It should be noted that no one of any group of two or three items will in themselves establish that the individual is resident in Canada. However, a number of the following factors considered together could establish that the individual is a resident of Canada for Canadian income tax purposes":

• - past and present habits of life;

• - regularity and length of visits in the jurisdiction asserting residence;

• - ties within the jurisdiction;

• - ties elsewhere;

• - permanence or otherwise of purposes of stay;

• - ownership of a dwelling in Canada or rental of a dwelling on a long-term basis (for example, a lease of one or more years);

• - residence of spouse, children and other dependent family members in a dwelling maintained by the individual in Canada;

• - memberships with Canadian churches, or synagogues, recreational and social clubs, unions and professional organizations (left out mosques);

• - registration and maintenance of automobiles, boats and airplanes in Canada;

• - holding credit cards issued by Canadian financial institutions and other commercial entities including stores, car rental agencies, etc.;

• - local newspaper subscriptions sent to a Canadian address;

• - rental of Canadian safety deposit box or post office box;

• - subscriptions for life or general insurance including health insurance through a Canadian insurance company;

• - mailing address in Canada;

• - telephone listing in Canada;

• - stationery including business cards showing a Canadian address;

• - magazine and other periodical subscriptions sent to a Canadian address;

• - Canadian bank accounts other than a non-resident account;

• - active securities accounts with Canadian brokers;

• - Canadian drivers licence;

• - membership in a Canadian pension plan;

• - holding directorships of Canadian corporations;

• - membership in Canadian partnerships;

• - frequent visits to Canada for social or business purposes;

• - burial plot in Canada;

• - legal documentation indicating Canadian residence;

• - filing a Canadian income tax return as a Canadian resident;

• - ownership of a Canadian vacation property;

• - active involvement with business activities in Canada;

• - employment in Canada;

• - maintenance or storage in Canada of personal belongings including clothing, furniture, family pets, etc.;

• - obtaining landed immigrant status or appropriate work permits in Canada;

• - severing substantially all ties with former country of residence.

"The Appellant claims that he did not want to be a resident of Canada during the years in question. Intention or free choice is an essential element in domicile, but is  entirely absent in residence."

Even though Dennis Lee was denied residency by immigration until 1985 (his passport was stamped and limited the number of days he could stay in the country) and he did not purchase a car until 1984, or get a drivers licence until 1985, Judge Teskey ruled that he was a non-resident until September 13, 1981 (the day he guaranteed the mortgage and signed the bank guarantee) and a resident thereafter.

My point is made. Residency for "TAX PURPOSES" has nothing to do with legal presence in the country claiming the tax. It is a question of fact. My thanks to Judge Teskey for an excellent list. The italics are mine and refer to the items which I usually see people trying to "hold on to" after they leave and are trying to become non-residents. No single item will make you a resident, but there is a point where the preponderance of "numbers" leap out and say, "He / She is a resident of Canada, no matter what he / she says." 

The case above is not unusual in any way. It is a fairly typical situation in my office.

In 1990, John Hale was taxed as a resident on $25,000 of directors fees he had received from his Canadian Employer and on $125,000 he received for exercising a share stock option given to him when he had been a resident of Canada (the option, not the stock). Judge Rouleau of the Federal Court ruled that section 15(1) of the Great Britain / Canada Tax Convention did not protect the $125,000 as it was not "salaries, wages, and other remuneration". It was, however a benefit received by virtue of employment within the meaning of section 7(1)(b) of the act.

Even a car you do not own can make you a resident as the next sailor found out.

In 1988, Frederick Reed was claimed by the Canadian Government as one of their own. He lived on board ship and shared an apartment with a friend in Bermuda but only occasionally. He also stayed with his parents in Canada when visiting his employer in Halifax. Judge Bonner of the Tax court ruled that he could not claim his place of employ or the ship as his residence and just because he did not have a fixed abode, did not make him a non-resident. He was also the beneficial owner of a car in Canada which even though of minor consequence, served to add to his Canadian Residency. He had in fact borrowed money from a credit union to buy the car, even though it was registered in his father's name. He had maintained his Canadian Driver's licence as well.

An interesting case in June, 1989 involved Deborah and James Provias who left Canada in October of 1984. They had sold a multiple unit building to James' father on September 21, 1984 but the statement of adjustments did not take place until December 1, 1984. They tried to write off rental losses and a terminal loss against other income as `departing Canadians'. Judge Christie of the Tax Court ruled that they had left before the sale and were not entitled to the terminal loss or another capital loss as these could only be applied against income earned in Canada from October 13, 1984 (the day they left) to November 30, 1984 (the day before the sale) and there was no income, only a rental loss.

But June, 1989 was a good month for Henry Hewitt. He had been a non-resident living in Libya for four years and received some back pay after returning to Canada. DNR tried to tax him on the money but Judge Mogan of the Tax Court came to the rescue. He ruled that although Canadians were usually taxable on money when received, that assumed that the money itself was taxable in Canada, which was not true in this case.

In 1989, James Ferguson lost his claim for non-residency status but from the information, it didn't stand a chance anyway. He had been in Saudi Arabia on a series of one year contracts for four years. His wife remained employed in Canada, and he kept his house, car, driver's licence, union membership, and master plumber's licence. Judge Sarchuk ruled that he had always intended to return to Canada and was a resident.

A similar situation involved John and Johnnie M. Eubanks in the United States. He was working on an offshore oil rig in Nigeria with a Nigerian work permit and attempted to claim non-resident status for the purposes of exempting the foreign earned income exclusion. His wife was in the United States at all times and because he worked 28 days on and 28 days off, he returned to the U.S. for his rest periods using 4 days for travel and 24 days for rest with his family. He did not spend any 330 day period (out of a year) in Nigeria and only had a residency permit for the purposes of working in Nigeria. Judge Scott ruled he was a resident of the U.S. and taxed him some $20,000 with another $6,000 penalties and interest.

The Tax departments in Canada and the U.S. issue Interpretation Bulletins and Information Circulars and Guidance Pamphlets. These documents sometimes get people in trouble because the individual reads the good part and doesn't pay any attention to the exceptions. The following case ran contrary to a Guidance Pamphlet issued by the IRS.

On and Off-shore Oil rigs were involved with William and Margaret Mount and Jesse and Mary Wells. William and Jesse worked in the United Arab Emirates. However, they kept their homes and families in Louisiana and kept their driver's licences in Louisiana and voted in Louisiana. No evidence was shown that they had tried to settle in The United Arab Emirates. Judge Jacobs turned down claimed exclusions of approximately $75,000 each.

There isn't any question about what oil rig people talk about on oil rigs. It has to be "how to beat the tax man". Unfortunately, they all seem to think it is easy. Another such story follows.

In 1989, Clarence Ritchie found out that bona fide residence means just what it says. You cannot be a non-resident of the U.S. for tax purposes if you are not a bona fide resident of another country. He was working on the Mobil Oil Pipeline in Saudi Arabia and although when he left he was married with a couple of kids, by the time he returned permanently, he was a happily divorced man. Judge Scott ruled that though he did not have an abode in the United States, he had not established one in Saudi Arabia and therefore was not entitled to the foreign earned income exclusion which requires you to be away for 330 days out of 365. He had worked a 42 days on, 21 days off schedule and usually returned to the U.S. for his days off although he did spend time in Tunisia, England, Italy and Greece.

On a final note, as explained on page 143 of the "PINK" 17th edition of my ULTIMATE TAX BOOK, it is possible to have three countries after you for tax. If you are thinking of taking a job because a recruiter told you the money is tax free, think twice and check three times with competent individuals about what the rules "really are". No government likes giving up the right to tax its citizens.

DEBT SECURITIES - BANK ACCOUNTS

Non-residents of Canada with investments in Canada are subject to a 25% non-resident withholding tax on any money paid to them while they are out of the Canada. Therefore, if they have $10,000 in the Bank of Montreal and they live in Argentina, The Bank of Montreal must withhold 25 cents out of every dollar of interest paid to the account. Most tax treaty countries such as Great Britain, Germany, the United States, and Australia have a reciprocal agreement with Canada that limits the withholding to 15%.

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