Thousands of Canadian expats living in the U.S. needlessly pay Canadian tax! How do I know that? Well, I don’t really know for sure, but I can tell you that, over the years, I have seen dozens of situations where that is the case, and I have to assume that what I am seeing is just a tiny fraction of such situations.
Let’s start with some basics: Canadian citizens are not subject to Canadian tax on worldwide income if they are not resident in Canada. Rather, a Canadian citizen who is a non-resident of Canada is only subject to Canadian tax on certain Canadian source income (most commonly, rents or capital gains from Canadian real estate; dividends from Canadian companies; income from employment in Canada). This is no different than any other non-resident. Citizenship generally is not relevant in determining liability for Canadian taxation.
Every year thousands of Canadians move to the U.S. to continue their careers there. In many cases, these Canadian expats continue to file Canadian tax returns and pay Canadian tax on their U.S. employment income under the assumption that they are still tax residents of Canada. This generally translates into a big tax cost. Even though Canada will grant a foreign tax credit for any U.S taxes paid, there will usually be a substantial residual Canadian tax liability, because of the fact that personal income tax rates in Canada are generally significantly higher that they are in the U.S.
In numerous cases, the decision to continue to file Canadian tax returns as a resident is based on a lack of understanding of the law.
Sometimes the expat has the (mistaken) belief that, in order for a Canadian to be a non-resident, they must go through some sort of process under which they formally “apply “ to the Canada Revenue Agency, and get some sort of “approval “ from them. This is not true at all.
Or, in many cases, Canadian expats will think that, if they still maintain certain “residential ties” to Canada, such as bank accounts, drivers’ licenses, club memberships, credit cards, and membership in professional organizations, they will still be Canadian residents for tax purposes, even though they are living in the U.S. Information found on the website of the Canada Revenue Agency will often reinforce that conclusion.
However, what those expats usually fail to understand is the fact that the “tie breaker rule” found in Article IV(2) of the Canada-U.S. Tax Convention (“the Treaty”) will usually have the effect of overriding the fact that, based on domestic law concepts of residency, they may still be Canadian residents.
In the simplest, and most common, situations, a Canadian living in the U.S. will be a U.S. resident, and not a Canadian resident, under this rule, as long as the following three elements are present:
(a) The individual is a resident alien of the U.S. for tax purposes (whether by virtue of holding a “Green Card” or by virtue of the “substantial presence” test),
(b) There is no “permanent home available” to that individual in Canada, and
(c) There is a “permanent home available” to that individual in the U.S. (NB-a rented apartment will normally qualify).
In that scenario, subsection 250(5) of the Income Tax Act will deem the Canadian expat to be a non-resident of Canada. This will be the case regardless of how many “residential ties” he or she may maintain to Canada.
In most such cases, the individual will not even have to file any Canadian tax return at all, unless they are earning income from renting Canadian real estate.
Canadian expats living in the U.S. may be able to ask CRA to look at their situation and refund taxes incorrectly paid for up to ten prior taxation years.
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