Know Your Tax Residence Status – Part 2

What Is “Tax Resident”?

Read Know Your Tax Residence – Part 1 of this article to understand why it is importants to know your Tax Residence. In this article we will provide examples of determining your tax residences.

Tax Residence Examples

Let us apply determining your tax residence to a more practical level by utilizing the following examples:

1) A Canadian resident is assigned to a 24 month temporary assignment in the United States and at the end of the assignment intends to return to Canada.
Canada will continue to treat the individual as a resident because they have not permanently severed their ties to Canada. Most likely the individual continues to carry a Canadian driver’s license and has not disposed of other legal ties. The individual’s permanent and habitual home is Canada from a broader multiyear perspective. Under United States tax law however, the individual has spent more than 183 days in the US and is deemed to be a tax resident. However, by invoking the treaty, US domestic law is superseded and the individual will continue to be a Canadian resident for tax purposes during the entirety of their assignment and a nonresident for tax purposes in the United States. When they file their tax return, they will report all US source income to the United States and will report worldwide income to Canada, regardless of source. Canada will provide a credit for the tax paid to the United States to avoid double taxation as required under the treaty.

2) A dual citizen lives in Windsor Ontario Canada, and daily commutes to a job in Detroit. On a number of days they have on-call duties and remain in Detroit in an apartment that they maintain for that purpose.
Keeping in mind that spending one hour constitutes a “day of presence”, the individual is considered a tax resident of the United States when they spend more than 183 days a year within its borders. They also have a permanent home available to them in both nations and their center of economic interest is in the United States; however, the center of their personal interests still remains in Canada. If the individual has a spouse and/or dependent children residing in Ontario, then the treaty would consider this taxpayer to be a Canadian resident since they have a habitual abode in Canada with their family. Since the individual spends more time living in the Canadian home, this will reinforce the conclusion.

3) A Canadian citizen accepts a four-year assignment in the US and intends to return to Canada.
The length of this assignment is normally beyond the treaty’s application. It is not a written rule, but absences longer than two years generally make the individual a non-resident of Canada. Things might be complicated if the individual had a spouse and/or dependent children still residing in Canada and they returned home on a regular basis. However, one will normally take their family with them during a four-year contract unless the location of that assignment is close to the border. In this situation, the individual will file a final return with Canada Revenue and begin filing resident tax returns in the United States. At this juncture, there are other disclosures that must be made when one “departs” from Canada.

Final Thoughts

As mentioned in the last article, there is one additional thing to keep in mind. Most individuals coming from Canada to work in the United States are admitted under a TN Visa. These visas are temporary. However, the fact that the visas are temporary does not automatically mean that the assignment or work demands are equally temporary as it applies to tax residency. The temporary nature of a TN Visa plays no role in the determination of tax residency as one can renew this type of visa indefinitely.

Every taxpayer has a different and unique situation and their tax residence can hinge on one or two variables. When in doubt, consult a tax profession that deals with cross border taxation on a regular basis.

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