Justin K. Hoffman, CPA, CA, CPA (Illinois), CFP, TEP, Tax Manager, Davis Martindale, London, ON, DFK Affiliate Firm
As the world becomes more interconnected, careers often require individuals to move outside of Canada. Given our proximity to the United States, a permanent move to the US may be contemplated.
Unfortunately, inadequate planning for departure results in tax inefficiencies, including taxation as a resident in multiple jurisdictions, taxation in a high-tax jurisdiction longer than necessary, and the missing of crucial tax filings due to inadequately severed residential ties. The following provides a general commentary on determining residence and when the changeover of tax residence occurs for individuals moving to the US.
Residency for Canadian Income Tax Purposes
For Canadian tax purposes, the primary residential ties that will be examined by the Canada Revenue Agency (“CRA”) are whether the individual has a home, spouse or dependants in Canada. If these ties are inconclusive, a non-exhaustive list of other factors that may be examined by the CRA includes the presence of Canadian property, memberships, passports, licenses, bank accounts, and credit cards. If there is any uncertainty as to whether the ties constitute residency, Form NR73—Determination of Residency Status—can be submitted to allow the CRA to provide a written determination of residency status.
Residency for US Income Tax Purposes
For US income tax purposes, an individual is resident if they meet one of the following tests:
1) The date the individual has been issued a green card
- 2) The Substantial Presence Test
The individual is present for more than 31 days in the current year and 183 days in the past 3 years, determined by the following formula: Days in the current year + 1/3 of the days last year + 1/6 of the days two years ago. This became a concern, especially for people who, on average, spend approximately 120 days or more per year in the US.
3) The First-Year Choice
- If an individual did not satisfy the substantial presence test until a subsequent year, but wishes to be considered resident in the current year, they may choose to be considered resident effective the 1 st day of the 31-day period in the current year if the individual was present in the US for at least 31 consecutive days in the year and 75% of the days from the 1st day of the 31-day period to the end of the year.
Applying the Treaty in Determining Residency
In cases where the domestic law results in residency in both countries, the “tie breaker rules” under Article IV of the Canada–US Tax Convention will determine in which country the individual is resident. Generally, the Treaty looks to where the individual has the closest ties.
Determining Date of Residency Change
Departure from Canada
The CRA has taken the position that the date of departure for Canadian tax purposes will be the later of three dates:
- 1) The date the individual physically leaves Canada;
- 2) The date the individual’s spouse or dependents leave Canada; or
- 3) The date the individual becomes a resident of the US.
Commencement of Residency in the US
For US purposes, residency commences on either the date the green card was received, or, if qualifying under the Substantial Presence Test, the first day the individual was present in the US in the calendar year.