The S. 877A “Dual Citizen” exemption: Am I still “taxed as a resident” of Canada?

Introduction:

This is the 6th of seven posts analyzing the “dual citizen exemption” to the S. 877A Exit Tax which is found in S. 877A(g)(1)(B) of the Internal Revenue Code. Please remember that the “dual citizen exemption” is available ONLY to those who meet the “five year tax compliance test”.

1. What is the S. 877A(g)(1)(B) “dual citizen exemption” and why does it encourage those “born dual citizens” to not renounce U.S. citizenship?

2. The history of Canada’s citizenship laws: Did the 1947 Canada Citizenship Act affirm citizenship or “strip” citizenship and create @LostCanadians?

3. The S. 877A “dual citizen” exemption – I was born before the first ever Canada Citizenship Act? Could I have been “born a Canadian citizen”?

4. The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act – Am I still a Canadian or did I lose Canadian citizenship? (The “Sins Of The Father”)

5. The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act and the requirements to be “born Canadian

6. “The S. 877A “Dual Citizen” exemption: I was born a dual citizen! Am I still “taxed as a resident” of Canada?

7. The S. 877A “Dual Citizen” exemption: “MUST certify tax compliance for the five years prior to relinquishment

 

In order to use your “dual citizen from birth” as a defense to being a “covered expatriate” and therefore subject to the S. 877A “Exit Tax”, you must (as both a Canadian and U.S. citizen from birth”) be subject to taxation as a Canadian resident. What does this mean? Are you actually required to live in Canada?

What are the rules for determining whether one is “taxed as a resident of Canada”?

This could be considered from each of a “U.S.” and a “Canadian” perspective.

“Resident in Canada” for tax purposes – from a Canadian Perspective

 

Living in Canada would be a “sufficient condition” for being subject to taxation as a Canadian resident (all Canadian residents pay tax).

Living in Canada may not be a “necessary condition” for being subject to taxation as a Canadian resident.

In other words, one could be treated as a “tax resident of Canada” without actually living in Canada. It seems clear that this is an issue that is decided on a “case by case” basis. That said, incredibly:

There are situations where one would want to be subject to taxation as a Canadian resident.

Here is information from the Canadian Revenue Agency (current as of the date of this post WHICH IS SUBJECT TO  CHANGE).

Determining your residency status

Under Canada’s tax system, your income tax obligations to Canada are based on your residency status. You need to know your residency status before you can know what your tax responsibilities and filing requirements to Canada are.

An individual’s residency status is determined on a case by case basis and the individual’s whole situation and all the relevant facts must be considered.

The relevant facts in determining your residency status include: the residential ties you have in Canada, the purpose and permanence of your stays abroad, and your ties abroad.

The following steps can help you determine your residency status for income tax purposes and your tax obligations to Canada.

Step 1: Determine if you have residential ties with Canada

The most important thing to consider when determining your residency status in Canada for income tax purposes is whether or not you maintain, or you establish, residential ties with Canada.

Significant residential ties to Canada include:

Secondary residential ties that may be relevant include:

  • personal property in Canada, such as a car or furniture;
  • social ties in Canada, such as memberships in Canadian recreational or religious organizations;
  • economic ties in Canada, such as Canadian bank accounts or credit cards;
  • a Canadian driver’s licence;
  • a Canadian passport; and
  • health insurance with a Canadian province or territory.

To determine residence status, all of the relevant facts in each case must be considered, including residential ties with Canada and length of time, object, intent, and continuity with respect to stays in Canada and abroad.

The information above is general in nature. For more information on your residential ties, see Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status.

Step 2: Determine your residency status and its tax implications

Your residency status if you left Canada

  • If you are working temporarily outside Canada, vacationing outside Canada, commuting (going back and forth daily or weekly) from Canada to your place of work in the United States, or teaching or attending school in another country, and you maintain residential ties with Canada, you may be considered a factual resident of Canada.
  • If you left Canada and established a permanent home in another country and you severed your residential ties with Canada and ceased to be a resident of Canada in the tax year, you may be considered an emigrant.
  • If you established ties in a country that Canada has a tax treaty with and you are considered a resident of that country, but you are otherwise a factual resident of Canada, meaning you maintain significant residential ties with Canada, you may be considered a deemed non-resident of Canada. The same rules apply to deemed non-residents as non-residents of Canada.
  • If you left Canada and you are a government employee outside Canada, which includes members of the Canadian Forces posted abroad, you are usually considered a factual resident or a deemed resident of Canada. For more information, see Government employees outside Canada.

Your residency status if you entered Canada

  • If you left another country to settle in Canada and you established significant residential ties with Canada and became a resident of Canada in the tax year, you may be considered an immigrant.
  • If you have ties in a country that Canada has a tax treaty with and you are considered to be a resident of that country, but you are also a factual resident of Canada because you established significant residential ties with Canada, you may be considered a deemed non-resident of Canada. The same rules apply to deemed non-residents as non-residents of Canada.
  • If you have not established significant residential ties with Canada to be considered a factual resident, but you stayed in Canada for 183 or more days in the year, you may be considered a deemed resident of Canada.

Your residency status if you normally, customarily, or routinely live in another country

  • If you did not have significant residential ties with Canada and you lived outside Canada throughout the year (except if you were a deemed resident of Canada), you may be considered a non-resident of Canada.
  • If you did not have significant residential ties with Canada and you stayed in Canada for less than 183 days in the tax year, you may be considered a non-resident of Canada.

If you want the Canada Revenue Agency’s opinion on your residency status, complete either Form NR74, Determination of Residency Status (Entering Canada) or Form NR73, Determination of Residency Status (Leaving Canada), whichever applies, and send it to the International and Ottawa Tax Services Office. To get the most accurate opinion, provide as many details as possible on your form.

Forms and publications

 

 

“Resident in Canada” for tax purposes – from a U.S. Perspective (if the issue is whether the taxpayer is a resident of Canada or the U.S. for tax purposes)

In the 2016 Topsnick case, decision released on January 20, 2016, the U.S. tax court in determining whether Mr. Topsnick was a “resident” of Germany or the U.S., for U.S. tax purposes, looked to the U.S. Germany Tax Treaty.

The court commented:

To determine whether petitioner was a German resident in 2010, we must
look to the U.S.-Germany Tax Treaty.

Topsnick2016

Therefore, I suggest that, if the issue of whether one is subject to taxation as a resident of Canada or the U.S., was in doubt, that the U.S. might consider the rules for residency in the Canada U.S. Tax Treaty. These rules are found in Article IV of the Treaty and read as follows:

Article IV

Residence

1. For the purposes of this Convention, the term “resident” of a Contracting State means any person that, under the laws of that State, is liable to tax 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, an individual who is not a resident of Canada under this paragraph and who is a United States citizen or an 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 to any 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 States or in neither State, 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, 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 States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1 a company is a resident of both Contracting States, then if it was created under the laws in force in a Contracting State, it shall be deemed to be a resident of that State. 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 State shall be deemed while it is so continued to be a resident of that other State.

4. Where by reason of the provisions of paragraph 1 an estate, trust or other person (other than an individual or a company) is a resident of both Contracting States, the competent authorities of the States shall by mutual agreement endeavor to settle the question and to determine the mode of application of the Convention to such person.

5. Notwithstanding the provisions of the preceding paragraphs, an individual shall be deemed to be a resident of a Contracting State if:

(a) the individual is an employee of that State or of a political subdivision, local authority or instrumentality thereof rendering services in the discharge of functions or a governmental nature in the other Contracting State or in a third State; and

(b) the individual is subjected in the first-mentioned State to similar obligations in respect of taxes on income as are residents of the first-mentioned State.

The spouse and dependent children residing with such an individual and meeting the requirements of subparagraph (b) above shall also be deemed to be residents of the first-mentioned State.

By the way, fascinating commentary on the Topsnick case(s) is here.