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Know Your Tax Residence Status

What Is “Tax Resident”?

When an individual is involved in cross-border employment, it is important to determine which nation they are considered a “resident” of for tax purposes. The residence is a loaded term. It has many shades of meaning highly dependent upon context. When applied to cross-border tax issues, residence is often confused with citizenship, particularly when dealing with a citizen of the United States. Since the majority of our readers are Canadian citizen/residents working in the United States, we will focus on how the term residence applies in that context. Much of the material that follows also applies to United States citizens working in Canada, but there are particular nuances which space does not allow us to address. In a later installment, we can explore those issues.

What is Tax Residence ?

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 However, by invoking the treaty, US domestic law is superseded and the individual will continue to be a Canadian resident for tax purposes during the entirety of their assignment and a nonresident for tax purposes in the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.

Why Is Tax Residence Important?

The identification of a taxpayer’s residence is significant as the nation of residence has the right to tax the global income of the taxpayer, regardless of where the income was earned. In determining the nation of residence, an understanding of the role that the US – Canada tax treaty plays is imperative. Every country imposes its own domestic tax laws on its taxpayers, but when an individual or corporate entity is subject to the tax laws of two nations on the same item of income, expense or status, there is a potential for conflict and double taxation. Tax treaties can be described as an arbitrator between conflicting laws and when an individual is eligible, the treaty will supersede the domestic laws of the participating nations to prevent adverse situations arising from conflicting assessments. The residence of a taxpayer is often dependent on the application of the treaty.

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Tax Residence for NAFTA TN Visa Holders

When a Canadian goes to the United States, does he lose his tax residence in Canada? If one intends to move to the United States permanently, the moment they arrived in the US is generally the moment in which they cease to be a tax resident of Canada and commence their tax residency in the United States. But what about an individual who maintains a home in Canada and commutes over the border, or spends short periods in the United States, returning home to Canada frequently. Where is the tax residence of an individual who has a 12 month temporary assignment in the United States, satisfying the substantial presence test of 183 days (qualifying as a tax resident of the US) but then returns to Canada? One can only be a resident of one country at any given time. But when there is conflict in the domestic laws regarding residence or doubt as to where the individual taxpayer is a resident, the tax treaty inserts a sequential analysis to remedy this conflict.

The first criterion the treaty uses is the location of the individual’s permanent home. If one is only temporarily in the United States and maintains a permanent home in Canada, then the treaty will declare the individual a resident of Canada. The fact that US domestic tax law considers the individual a tax resident when they spend more than 183 days in the US is blocked by the treaty. An individual that has a home in Canada who has a one-year temporary assignment in the US can invoke the treaty and continue as a Canadian resident for tax purposes and a nonresident of the United States.

But what if the individual does not have a permanent home or maintains a permanent home in both nations? When the taxpayers permanent home does not provide an answer, the treaty then looks to the taxpayer’s center of economic and personal interests. If the individual taxpayer is working predominantly in one country during the period, the treaty will deem them a resident of the nation where they earn the majority of their income.

But what if the individual does not have a permanent home and his or her personal and economic interest are roughly the same in both nations? In these cases the treaty looks to where the individual has a habitual abode. This basically asks the question, where does the individual spend the majority of his time? This how many Canadian snowbirds are able to maintain their Canadian tax residence despite the fact they spend significant amounts of time in the United States during the winter.

But what if individual does not have a permanent home; has equal economic and personal interest in both countries; and habitually resides in both nations? In these rare cases, the treaty will then look to citizenship.

But the treaty goes even one step further in its attempt to exhaust all possible scenarios. If residence cannot be determined by any of the preceding criteria, then the treaty specifies that the Competent Authority will make the determination of residence. The Competent Authority is basically a tribunal made up equally of representatives from the United States and Canada that meet on a regular basis to rule on situations in which there are no solutions in in either the domestic law or the treaty. We will not speculate whether the individuals that serve on the tribunal are truly competent as their titles suggest, but we can certainly leave that to our imaginations.

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.

Conclusion

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.

Taxes: Your Next Steps

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Eric Nghiem
Tax Consultants – U.S., Canada, International
E-mail: taxes@tnvisaexpert.com

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