My_question_is: Canadian-specific
Subject: Residency, Non residency and Deemed Disposition
of Assets
Expert: taxman at centa.com
Date: Wednesday May 03, 2006
Time: 05:28 PM -0700
QUESTION:
I would like to live in New Zealand for more than 182 days.
If I stay here longer, do I 'automatically' become a non-resident
of Canada and then incur the dreaded "deemed disposition of
assets" rule?
Why is it that I meet US citizens and UK citizens and they were
not 'deemed' to dispose of their assets. If NZ and Canada are
both in the "commonwealth", why aren't we permitted to live
anywhere in the commonwealth without triggering this asset
depletion rule?
Help!
thanks,
-----------------------------------------------------
david ingram replies:
Yes, but the US citizen has to file a US return and pay tax
(after foreign tax credits and exemptions) to the US for every
year that he or she is a US citizen. And a US citizen in Canada
is taxable on the sale of his or her CANADIAN family house.
today, I calculated the US tax a $900,000 Canadian dollars on a
house being sold because of a court order in a Canadian divorce.
It was bought for $238,000 and is now selling for about
$7,000,000 Canadian tax free but because the owners are American
citizens, they only get $500,000 tax free and owe US taxes on the
balance.
But you are incorrect when you say that there is no deemed
disposition for the US citizen as well in some cases.
Until Sept 30, 1996 there was no expatriation or deemed
disposition rules for the US. However, President Clinton signed
the Legal Immigrant and Illegal Immigrant Responsibility Act of
1996 on Sept 30, 1996 and as of Oct 1, 1996, US citizens who gave
up their citizenship or US green card holders who were in the US
for eight years or more had to fill in form 8854
http://www.irs.gov/pub/irs-pdf/f8854.pdf which required the
departing green card holder r ex US citizen to report their net
worth and their taxable income for the past five years in a
manner which allowed the IRS to tax their assets as Canada does.
This means that a Canadian or New Zealand or Australian or French
or any other country couple in the US with green cards for 10 or
12 years or more has to pay a deemed disposition tax when leaving
the US.
Take a look at the form at
http://www.irs.gov/pub/irs-pdf/f8854.pdf
------------------------
On the other hand the UK has no such rule that I know of but will
be happy to be corrected if I have missed it because few US tax
preparers let alone the general population is aware of the US
rules and I have yet to see a return come in prepared by someone
else where Canadian form 1161 was prepared. And, even though we
do a lot of them, we received an email yesterday from a New York
resident and it appears that we may have missed one as well when
preparing his first New York and 1040 tax return for 2004..
Canada has had this rule for quite some time in one manner ort
another. It was made much stronger in 1996 when they added
private corporations to the mix.
However, to invoke the deemed disposition rules, you have to be
leaving Canada and not paying tax to Canada. You always have the
right to pay Canada tax on your world wide earnings and maintain
your residency. Article IV of the Canada New Zealand Income Tax
Convention allows you to elect to be taxed in New Zealand but you
do not have to invoke it if your closer ties are to Canada
In other words, if you do not intend to leave for ever,
theoretically, the 1161 deemed disposition rules do NOT apply.
So, if you are not intending to make New Zealand your home, do
not file a departing Canada tax return. Make sure that your
Canadian return includes any New Zealand income and claim credit
for New Zealand tax on lines 431 and 433 of your Canadian return.
Claim any tax paid to Canada on Canadian source income on your
New Zealand return which you will have to file once you have been
there more than 183 days.
And remember that if your home was in California and you were a
travelling nurse who worked in New York, Philadelphia, and
Denver, you would be filing New York and Philadelphia City
returns, a Pennsylvania County (don't remember which one) return,
New York, Pennsylvania, Colorado and California State returns
and, of course, a US federal return.
Hoping this makes you feel a "little" bit better.
david ingram
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