QUESTION:
I am a US citizen in the process of becoming a Canadian Permanent
Resident. I am a physician with a successful consulting practice
in the US. I will make much less money working in Canada,
although I plan to do so. I will continue to maintain a residence
and part-time practice in the US, where I will likely derive most
of my income. I have a residence in both US and Canada.
I assume my tax home will have to be Canada if I am a Permanent
Resident, even though I make most of my money in the USA. Are
there any major pitfalls that I should be aware of in having a
residence in both countries and deriving most of my earned and
investment income from the US while living in Canada?
------------------
david ingram replies:
To maintain your PR card, you have to be in Canada 730 out of
about 1826 days (1827 if there are two leap years in that
period). (two years out of 5 years).
If you keep a home in both countries and continue to work in both
countries, your primary tax liability would be to the country you
spend the most time in on a year by year basis under article IV
of the US / Canada Income Tax Convention.
So if you spend seven months each year in the states for the next
five years you will have been there 35 months and in Canada 25
months and your PR card will be valid for renewal.
You would then pay tax to Canada on the income actually earned in
Canada and you would pay tax to the US on your world income. Any
income earned in Canada should go on a separate Schedule C and
the income and the tax paid to Canada would go on Schedule / form
1116. It is not double taxation because of the foreign tax
credit.
Glad to look after these returns including your state return you
will go crazy trying to find anybody to do them.
What country is going to tax them? It also looks (from your
email address) that you may be in the Lower Mainland. If so, you
should make it a point to come to one of our Thursday Night
seminars in Vancouver. We can show you how to make your
"Canadian" mortgage interest deductible.
The answer to your situation is not always easy. I am going to
quote directly from the U.S. / Canada Tax Treaty because that is
the one we use most often, but the same general rules apply with
all treaty countries. At the moment, Canada has signed treaties
with 78 countries and is working on another 27. We have had
several cases where people have already paid $16,000 or $25,000
in tax to Canada because they are clearly residents under most
meanings. However, because of the following "TIE BREAKER" rules,
we are getting back all tax paid on dollars earned in the other
country.
CANADA / UNITED STATES INCOME TAX TREATY 1980
There are many, many treaties. The articles tend to be fairly
consistent so that when some one comes in from Indonesia, I am
able to quote Articles IV, IX, X, and XI etc., and look like a
real expert on Indonesia, even if I have not looked at it before.
The following ARTICLE IV for instance has been used by myself
more often for Australia and Germany than for the United States.
Please also note that a NEW US / CANADA TREATY was signed on
August 31, 1994 and with various changes took effect on Jan 1,
1996. Parts of it (estate and capital gains) are retroactive back
to November 10, 1988. This new Treaty totally changes the rules
between the two countries for estate and capital gains tax upon
death. It also completely changes the rules for the taxation of
U.S. Social Security, Canadian Old Age Pension and Canada Pension
Plan. Gambling losses are going to be allowed for Canadians as
well. See the December 1995 edition of the CEN-TAPEDE for more
information.
Article IV - Fiscal Domicile - (it is the same number in most
treaties)
For the purposes of this Convention, the term "resident of a
Contracting State" means any person who, under the law of that
State, is liable to taxation therein by reason of that person's
domicile, residence, citizenship, place of management, place of
incorporation or any other criterion of a similar nature, but in
the case of an estate or trust, only to the extent that income
derived by the estate or trust is liable to tax in that State,
either in its hands or in the hands of its beneficiaries. For the
purposes of this paragraph, a person who is not a resident of
Canada under this paragraph and who is a United States citizen or
alien admitted to the United States for permanent residence (a
"green card" holder) is a resident of the United States only if
the individual has a substantial presence, permanent home or
habitual abode in the United states and that individual's
personal and economic relations are closer to the United states
than any other third State. The term "resident" of a Contracting
State is understood to include:
(a) the Government of that State or a political subdivision or
local authority thereof or any agency or instrumentality of any
such government, subdivision or authority, and
(b) (i) A trust, organization or other arrangement that is
operated exclusively to administer or provide pension, retirement
or employee benefits, and
(ii) A not-for-profit organization that was constituted in
that State, and that is, by reason of its nature as such,
generally exempt from income taxation in that State.
2. Where by reason of the provisions of paragraph 1 an individual
is a resident of both Contracting States, then his status shall
be determined as follows:
(a) he shall be deemed to be a resident of the Contracting State
in which he has a permanent home available to him. If he has a
permanent home available to him in both Contracting States, he
shall be deemed to be a resident of the Contracting State with
which his personal and economic relations are closer (centre of
vital interests);
(b) if the Contracting State in which he has his centre of vital
interests cannot be determined, or if he has not a permanent home
available to him in either Contracting State, he shall be deemed
to be a resident of the Contracting State in which he has an
habitual abode;
(c) if he has an habitual abode in both Contracting States or in
neither of them, he shall be deemed to be a resident of the
Contracting State of which he is a national;
(d) if he is a national of both Contracting States or of neither
of them, the competent authorities of the Contracting States
shall settle the question by mutual agreement.
Where by reason of the provisions of paragraph 1 a person other
than an individual is a resident of both Contracting States, the
competent authorities of the Contracting States shall by mutual
agreement endeavour to settle the question and to determine the
mode of application of the Convention to such person.
Notwithstanding the preceding sentence, a company that was
created in a Contracting State, that is a resident of both
Contracting States and that is continued at any time in the other
Contracting state in accordance with the corporate law in that
other Contracting State shall be deemed while it is so continued,
to be a resident of that other State.
You can see that the countries themselves have set it up so that
they will get tax. It is up to you to arrange your affairs to pay
the least tax possible.
Both Canada and the U.S. will tax you on any money you earn
within the country. The BIG question is:
WHEN ARE THEY GOING TO TAX YOU ON THE REST OF YOUR WORLD INCOME?
Canada taxes on RESIDENCY, not citizenship. Basically, if you
have been in Canada for more than 183 days (counting the hours -
one hour is only one hour, not one day as in the States), you are
taxable on your world income, no matter where it is located and
under whose name you have your assets stashed away. That is why
Howard Hughes left Canada when he did back in the 70's. If he had
stayed in Canada (even as a visitor) two more days, he would have
been taxable on his world wide holdings.
Note that in March, 1999 Denise Rondpre of Revenue Canada
Customs Excise and Income Tax issued a policy letter to Foreign
Air Crew flying for Canadian Airlines and Air Canada. This
directive stated that it was Revenue Canada's opinion that one
hour in Canada constituted a full day in spite of the fact that
the courts have ruled against them and the law, itself, has not
changed. I do not think that this is enforceable, but you must be
aware of it.
If you are in Canada for any period and earn more than $10,000,
you must pay tax on the total amount to Canada, or vice versa if
a Canadian is in the U.S. Entertainers and sports figures are
exempt for up to $15,000 but they are to have 15% tax withheld
from their gross salaries or remuneration (including hotel rooms,
plane tickets, car rentals, meals, etc.). Remember that even
though the first $10,000 or $15,000 above is not "taxable", you
must file a return and quote the treaty article number
specifically to claim the exemption. The U.S. has a minimum
$1,000 fine for failure to report the treaty number to claim the
exemption, even if there is no tax owing. In practical terms,
this means you only get fined if not taxable. (Although this was
always here, Revenue Canada rarely enforced the rule. In this
case the enforcement laws DID change in March, 1998 and the US
resident MUST file if working in Canada.)
Remember also, this refers to "where" the work is performed, not
where the money comes from. Therefore, if you worked in San
Francisco for one month for your Canadian employer and were paid
$6,000 U.S. by Bell Telephone in Ontario, you would have to file
a California return reporting your world income and exempting the
amount earned in Canada and would have some tax to pay to
California on the $6,000. On the Federal return, you would file
for an exemption under Article XV of the U.S. / CANADA Tax Treaty
and pay no federal tax to the U.S. You would then claim a credit
for the California tax paid on your Canadian income tax return.
You should also get BELL to agree to pay the $400 to $1,000
accountant's bill to prepare these complicated tax returns.
The U.S. taxes on citizenship first and residency or physical
presence second. If you have another tax home, and are just an
extensive visitor in the States, you can escape U.S. tax on your
income from other countries. However, if you renounce your other
tax home or become a "green card" holder or are in the U.S. for
more than 183 days in one year, you are subject to U.S. income
tax on your world income.
The U.S. taxes its citizens and green card holders wherever they
are and no matter what they are doing. The U.S. taxes its
citizens in Canada and they will tax them in the North Sea. The
U.S. will add on the benefit of housing allowances, car
allowances, servants, and education allowances for people who
have not been in the U.S. for twenty years but who are still U.S.
citizens. If you want the benefit of U.S. Citizenship, you pays
your taxes.) The first $70,000 U.S. of income earned from
personal services (as opposed to capital) is exempt if you have
been out of the country for a full calendar year in one test or
for 330 out of 365 days in another test using a fiscal year.
However, being "exempt" does NOT mean that you do not have to
file a tax return. You must still file your U.S. 1040, report the
Canadian Earnings in U.S. dollars and claim the "up to $72,000
U.S." by filing a form 2555 with the 1040. If you have
investment, [INCLUDING AMOUNTS EARNED WITHIN YOUR CANADIAN RRSP],
rental, royalty, or any income other than from services, you must
also report the income in U.S. dollars. Since you will have paid
tax to Canada first, you will file a Form 1116 with the 1040 to
claim your foreign tax credit. A separate Form 1116 must be filed
for each kind of income, i.e. rental, pension, dividends, etc.
Answers to this and other similar questions can be obtained free
on Air every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, I, david ingram am
a permanent guest on Fred Snyder of Dundee Wealth Managers' LIVE
talk show called "ITS YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the
internet at
www.600AM.com
Call (604) 280-0600 to have your question answered. BC listeners
can also call 1-866-778-0600.
Callers to the show and questioners on this board can also attend
the Thursday Night seminars on finance and making your Canadian
Mortgage Interest deductible.
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa
Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Res (604) 980-3578 Cell (604) 657-8451
(604) 980-0321
New email to davidingram at shaw.ca
www.centa.com www.david-ingram.com
Disclaimer: This question has been answered without detailed
information or consultation and is to be regarded only as general
comment. Nothing in this message is or should be construed as
advice in any particular circumstances. No contract exists
between the reader and the author and any and all non-contractual
duties are expressly denied. All readers should obtain formal
advice from a competent and appropriately qualified legal
practitioner or tax specialist in connection with personal or
business affairs such as at www.centa.com. If you forward this
message, this disclaimer must be included."
Be ALERT, the world needs more "lerts"
This from "ask an income tax and immigration expert" from
www.centa.com or www.jurock.com or www.featureweb.com. David
Ingram deals on a daily basis with expatriate tax returns with:
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Immigration Tips, Income Tax and Immigration Wizard Income Tax
and Immigration Guru Income Tax and Immigration Consultant Income
Tax and Immigration Specialist Section 216(4) 216(1) NR6 NR-6 NR
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