|
Since both Canada and the U.S. impose an income tax on residents based upon their world income earned within and outside their respective countries, and
since both countries have income tax laws dealing with the taxation of the activities of non residents within each country, it is important to understand the role that residence plays in determining the liability
for income tax.
(a) U.S. Residence Rules
Under U.S. law, persons who satisfy the "green card test", including anyone who holds a permanent resident visa and others who
reside permanently in the U.S. are considered taxable in the U.S. on their world income from the day they obtain their permanent resident status. Green card holders may therefore find themselves or their
business interests subject to U.S. tax rules, even if the business activities or controlled business entities are outside the U.S.
Canadians who meet the "green card test" may find, for example, that their corporation incorporated in Canada may be subject to
the Accumulated Earnings Tax, or Personal Holding Company Tax rules in the U.S. due to differences in the income tax planning, distribution, and earnings accumulation conventions and rules in Canada and the U.S.
(ii) Substantial Presence Test
A person who spends a considerable amount of time in the U.S. may find that they are considered residents of the U.S. even if they do not spend 183 days or
more in the U.S. in any given tax year. These rules apply to all persons present in the U.S. for any reason, including extended vacations, and care should be taken to avoid an unintentional classification as a
resident. The time required to meet the substantial presence test is 183 days, counting all of the days in the current year, one third of the days in the first preceding year, and one sixth of the days in the
second preceding year. For example, if a Canadian resident spends the number of days outlined in Table 1 in the U.S., he/she will automatically be considered a U.S. resident for income tax purposes for 1999
unless he meets the criteria for exception, even though the person was not in the U.S. for more than 183 days in any year.
Table 1
|
Year
|
Days Present
|
Portion Counted
|
Days Included
|
|
2006
|
130
|
1/1
|
130
|
|
2007
|
126
|
1/3
|
42
|
|
2008
|
72
|
1/6
|
12
|
|
Total
|
|
|
184
|
Canadians who meet the substantial presence test but who spend fewer than 183 days in the U.S. in any one year can apply for exception from the substantial presence test rule by filing form
8840 (Closer Connection Exception Statement) to prove that they have closer ties to Canada than to the U.S. In order to qualify for exception, the Canadian resident must be able to
establish that the usual indicators of residence (i.e. drivers license, club and religious affiliation, income, etc. ) indicate stronger ties to Canada than to the U.S.
Many Canadians file form 8840 by itself with the IRS in Philadelphia as a protective measure
each year, and Canadians who have U.S. source income and are required to file form 1040 NR file form 8840 along with the form 1040 NR. However, Canadians who have applications
pending with the Immigration and Naturalization Service for adjustment of their status to permanent resident are not eligible to file form 8840, but must file the appropriate U.S. tax return
if they meet the substantial presence test.
  
(b) Canadian Residence Rules:
Surprisingly, there is no specific definition of residence in the Canadian Income Tax Act, but residence is determined as a question of fact. Primarily, any person who spends more than 183
days in any year in Canada is considered a resident. In other cases the court system in Canada has held that the residence of an individual is the place where he customarily lives. In determining
residence, such factors as the following are taken into account:
Ø Permanence and purpose of being outside Canada. Generally, absences of less than two
years are not considered sufficiently permanent to sever residential ties with Canada for tax purposes.
Ø Residential ties in Canada, including the maintenance of a home, location of
dependents, investments, bank accounts, health coverage, drivers license, club memberships, professional memberships dependent on residence, personal property, vehicles, social ties, telephone listings, etc.
Ø Residential ties abroad, including visa status outside Canada, income, occupation and
social ties. If a Canadian has not established a domicile
in another country, he may be considered to have maintained Canadian residence. The type and duration of visas have a role in this factor.
Ø Regularity and length of visits to Canada, can establish continued residence in
Canada.
Although visa status in the U.S. by itself will not determine Canadian residence, and even though
immigration rules and income tax rules do not always maintain the same definitions of terms, care should be taken not to upset immigration status through an improperly planned elimination of
residential ties to Canada. For example, persons working in the U.S. under the NAFTA TN visa are expected to be temporary residents of the U.S. An inability to prove an intention to
return to Canada upon the expiry of the visa may affect the determination of visa status or renewal.
Canadians who give up residence in the year are deemed to have disposed of all of their capital
properties at fair market value at the time of departure from Canada, giving rise to deemed capital gains or losses which are reportable in the year of departure. "Taxable Canadian
Property" such as Canadian real estate or shares of non listed corporations, resource property and trusts.
(ii) Deemed Residents of Canada
Persons who have sojourned in Canada for 183 days or more in any year are deemed to be
residents of Canada, and must report world income on their Canadian income tax return for the year. In the year of departure from Canada, both spouses are deemed to be resident in Canada
until the date of the latter of the two to depart. Care should therefore be taken to ensure that unplanned periods of tax residence in Canada are not encountered.
Under new interpretations of the tie breaker rule contained in the Treaty, certain persons, after
February 25, 1998, are deemed to be non residents of Canada if they maintain closer connections to a country other than Canada. Persons in this category would pay tax to Canada
only on Canadian source income regardless of the amount of time they spend in Canada.
(c) Residents of Both Canada and the U.S.
Many individuals may find themselves residents of both Canada and the U.S. as a result of the application of the above rules. Under these circumstances, the individual is taxable on world
income in each jurisdiction, and careful planning must be undertaken to apply the tax laws of both countries in the appropriate order and in a proper manner. Failure to fully understand the
special needs and obligations of dual residents can result in adverse income tax treatment in either or both jurisdictions, including the imposition of penalties and interest.
Under dual residence circumstances, double taxation can be eliminated if filings are made on a
timely and accurate basis, as described in the following section.
|
