# Non-resident status? Trying to figure out taxes due



## jman123 (Jan 28, 2015)

Hi,

I am trying to do my daughter's 2014 tax return. She moved to New Orleans to work in August 2013 on a TN visa. She has no idea how long she will be working in the US. Her position is renewed every year in August.

Her only Canadian income is $1183 in capital gains from a Canadian mutual fund in a non-RRSP account. She does have a Canadian chequing account with less than $1000 and no longer pays to Quebec Health insurance. No other connection to Canada (no residence, no driver's license, spouse, furniture, etc...). 

Am I correct that she is considered a non-resident and only needs to pay tax on that capital gain and not on her world-wide income? I did report her world-wide income on Schedule A. Even specified on that Schedule it looks like that $1183 capital gain caused her to have a balance due of $124.11 according to uFile (irregardless of the amount of foreign income on that schedule). Also, it looks uFile did not produce a Quebec return. Does all that seem right?

Am I missing something? Also, I was thinking maybe she should cash out that mutual fund and transfer all her monies to her US account. Maybe that would completely sever her ties to Canada and make it easier for the future (i.e not pay any taxes to Canada or do a return). 

What do you think?

Thank you,

Mike from Montreal


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## Eclectic12 (Oct 20, 2010)

Re: Am I missing something?

Yes ... you are missing a lot.


If CRA determines she is a non-resident, there are lots of implications to emigrating.

http://madanca.com/blog/becoming-a-non-resident-of-canada/
http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/lvng-eng.html

One such implication is that I am assuming the MF unit capital gains you are talking about are from a T3 or T5, which is the yearly amount.

Where she reports to CRA that she left Canada in August (I'm hoping the 2013 is an error and it's really 2014) so that she is no longer a resident, *she is deemed to have sold the MF units* (whether she did or not) at the date of departure based on FMV (usually referred to as the "departure tax"). At minimum, there's more taxes to consider than is listed.


The other question is whether it might be better to stay a tax resident of Canada ... as I understand it, the US charges tax on world wide income, where they don't recognise the TFSA as being tax free so if she has one, she will be taxed by the US on it's income.



> Resident aliens must follow the same tax laws as U.S. citizens. If you are a resident alien, you must report your worldwide income from all sources, that is, income from both within and outside the United States.


http://www.irs.gov/taxtopics/tc851.html


It might be better to be a non-resident alien as far as the IRS is concerned until one's affairs can be restructured.


Cheers


*PS*

Should she be determined to have emigrated in August, the way I read CRA's web site - she has to file a Canadian tax return covering Jan to August and then it's optional after that depending on whether filing will get something back.




> For the tax year that you leave Canada, use the general income tax and benefit package for the province or territory where you resided on the date you left Canada.
> 
> If you lived in Quebec before you left Canada and you want information on filing a Quebec tax return, visit Revenu Québec ...
> 
> ...


http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/lvng-eng.html


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## Guban (Jul 5, 2011)

It may be difficult for her to claim non resident in the US since she meets the substantial presence test, and does not appear to have significant residential ties to Canada.

As a US resident, she would be taxed on world wide income, and AFAIK capital gains are taxed in the country of residence, so she would only be paying taxes to the US. As eclectic pointed out, she should have filed an emigrant Canadian tax return and paid Canada the deemed capital gain on her mutual fund and any other non registered assets. Selling the Canadian mutual funds may be a good idea. Look up PFIC's and, unless the Canadian mutual fund company that she invests with supplies the IRS with the correct information and can be considered a QEF, your daughter faces unfair and costly reporting and tax obligations.


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## Eclectic12 (Oct 20, 2010)

^^^^

If she truly did move in 2013 ... then yes, she will met the subtantial presence test (over 183 days in 2014). 
http://www.irs.gov/Individuals/International-Taxpayers/Substantial-Presence-Test

I am suspecting a typo as I would have expected that having to file a US tax return for tax year 2013 by April 15th 2014 would have brought some of these issues to light already ... maybe not though.


If it really is Aug 2014, unless my math is wrong - Aug 1st to Dec 31st gives 153 days in the US.


Cheers


*PS*

If it really is Aug 2013 - there may be penalties/interest mounting up for the missed deemed disposition of the MF units in 2013 owed to CRA.


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## indexxx (Oct 31, 2011)

Sorry, but she does not qualify. You must be out of the country for two years before claiming non-residency. You can come back for visits, but you must prove that you do not maintain an address in Canada among other criteria. I was an ex-pat for six years.


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## Guban (Jul 5, 2011)

^ not sure where the two years comes from. Do you have a reference for this? 

Also, how does one prove a negative? Prove that you *don't* have a residence in Canada?


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## Eclectic12 (Oct 20, 2010)

Guban said:


> indexxx said:
> 
> 
> > Sorry, but she does not qualify. You must be out of the country for two years before claiming non-residency.
> ...


I would be interested as well as I have yet to see a reference.

I have seen posts that it is much easier to get a CRA ruling of being a non-resident for countries that have a tax treaty with Canada such as the US. 

The person asking was thinking about going to Dubai where the response was that this was a lot more difficult to establish. Easy or hard, the thread also made no mention of a two year period.


If true and regular Canadian tax returns have been filled out ... this may work to the OP's benefit as the departure tax on the MF will not have been triggered. Plus there may be time to figure out what actions should be taken before emigrating to the US and what actions to take after the departure date.




indexxx said:


> You can come back for visits, but you must prove that you do not maintain an address in Canada among other criteria. I was an ex-pat for six years.


CRA says the threshold is 183 days in Canada (similar to the US's 183 days). 

Canada seems to care about the current year only where the US has moved to a formula across three years (current plus last two) with pro-rated amounts for the previous years. The result is the US's 183 says is misleading as for a snowbird going back year after year, on the third year at something like 121 days one would qualify to be taxable by the US (unless the closer connection is claimed by filing the appropriate paperwork).


Cheers


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## jman123 (Jan 28, 2015)

Hi,

Thank you for your responses. I just want to clarify a few things. First, my daughter did leave in August 2013, over a year and a half ago. Last year I had her taxes done by an accountant who did 4 returns for her (Canada Federal, Quebec, US Federal and Louisiana). No problems. 
She has already done her own 2014 US and Louisiana tax returns. I am not sure she reported the Canadian capital gain as I think she mentioned that there was some minimum to report and her capital gain was too low to count(?) 
She wanted me to do her Canada and Quebec returns as she had no income from Canada/Quebec in 2014. I have read the CRA website and it appears that she has "secondary residential ties" as she does have a Canadian bank account however when I called the CRA and spoke to a rep he did think that with little she has (a bank account and a mutual fund in a non-RRSP account) with no other ties to Canada she would be considered a non-resident. He said I should report only the Canadian income (the capital gain amount on the T3 from the MF) on her 2014 Canadian Federal return. I don't know what should be done about this mutual fund for the future. As we both have the same financial adviser I think I need to call him to see what he can suggest. He may had other clients in a similar situation. Also, I am not sure if I should have her do this NR73 form. Maybe it would be good idea to make 100% sure? 

Regards,
Mike


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## indexxx (Oct 31, 2011)

Hmmm- unless the rules have changed since I was away, it was two years absence to qualify. I left in 2001 and returned in 2007. My accountant had also been an ex-pat and knew all the rules so that's where I knew it from. I'd also looked it up on the CRA website at the time. Best to ask your accountant as things may have changed.


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## Eclectic12 (Oct 20, 2010)

jman123 said:


> ... I just want to clarify a few things. First, my daughter did leave in August 2013, over a year and a half ago. Last year I had her taxes done by an accountant who did 4 returns for her (Canada Federal, Quebec, US Federal and Louisiana). No problems.


Then IMO some key questions for the accountant are whether a departure date in 2013 was listed on the Canadian return and whether the departure tax was paid for the MF. If the answers are yes ... then proceed with the non-resident return. 




jman123 said:


> ... She has already done her own 2014 US and Louisiana tax returns. I am not sure she reported the Canadian capital gain as I think she mentioned that there was some minimum to report and her capital gain was too low to count(?)


I'm not familiar with the American thresholds or paperwork ... perhaps someone else with more experience can comment. 

I will say that my co-worker whose wife is American and her bank account is over the threshold for reporting foreign (i.e. non-US) accounts said the reporting was painful. The trick is the IRS wants the highest balance in the month reported, not the end of the month balance. She didn't like having to scan through each month's statement to pick off the highest balance.




jman123 said:


> ... I have read the CRA website and it appears that she has "secondary residential ties" as she does have a Canadian bank account however when I called the CRA and spoke to a rep he did think that with little she has (a bank account and a mutual fund in a non-RRSP account) with no other ties to Canada she would be considered a non-resident. He said I should report only the Canadian income (the capital gain amount on the T3 from the MF) on her 2014 Canadian Federal return.


Hmmm ... the CRA link for non-residents says:


> Part XIII tax is deducted from the types of income listed below. To make sure the correct amount is deducted, it's important to tell Canadian payers:
> - that you're a non-resident of Canada for tax purposes; and
> - your country of residence.


Has this happened yet?

I'm also puzzled as to why the T3 capital gain would be taxable as once the departure tax is paid on the MF, I thought that all capital gains after that would be reported on the US tax return. For example, a Canadian tax resident buying a US stock will have the US take 15% off of the dividends paid but will report the capital gains on their Canadian tax return. Similarly, a US tax resident buying a Canadian stock will have Canada take 15% off the dividends but will report the capital gains on their US tax return.

I've never had to deal with it though ... :biggrin:


[ Sidebar: Interesting to see that the US dividend withholding is 30% but the Canada-US tax treaty reduces it to 15% whereas Canada's is 25% where the same treaty reduces it to 15%.]




jman123 said:


> ... I don't know what should be done about this mutual fund for the future.
> 
> As we both have the same financial adviser I think I need to call him to see what he can suggest. He may had other clients in a similar situation. Also, I am not sure if I should have her do this NR73 form. Maybe it would be good idea to make 100% sure?


I think there are several things to confirm with the advisor.

If there is room for doubt, it may be worth getting an official ruling form CRA. 

From what I am reading about the US's attempts to catch tax cheats, I suspect it is better to sell the MF to keep one's life simple.

http://canadianmoneyforum.com/showthread.php/34418-Working-in-US-tax-resident-of-Canada
http://canadianmoneyforum.com/showthread.php/37665-I-love-Canadian-taxes
http://canadianmoneyforum.com/showthread.php/20754-FATCA-new-US-tax-law

On the subject of PFIC and Canadian MFs ...
http://www.ica.bc.ca/kb.php3?pageid=4770


Cheers


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## jman123 (Jan 28, 2015)

Checking my daughter's 2013 tax returns her address indicates that on December 31,2013 her residence is still in Quebec . I can't remember exactly why it was specified that way.
We indicated to the accountant that her TN visa and employment was only for 1 year and may be renewed and at the time she had no idea if she would stay longer than a year. Either he assumed it was short-term or maybe he made an error on the returns? 

It's only this month that I went on the Canada and Quebec sites and changed her address to the States. I believe I indicated to the CRA that she moved in April 2014 (it wouldn't allow me to go further than 1 year back) and to Quebec I believe it didn't ask me when the move took place.

I don't know the consequences of this change of address now with regards to what the Canada and Quebec will handle her 2013/2014 tax returns?

I'm a little confused on this departure tax. Her mutual fund is worth about $8K. How is this departure tax done? Can I do this for her 2014 return? 

My financial advisor was not much help. He suggested I speak to my accountant. Unfortunately my daughter did not want to pay for his services. She figured all she had was a W2 from her employer and all her co-workers did their own so she did her US and Louisiana returns. She figured dear old Dad would do her Canada/Quebec return for free as he did all her other ones except for 2013. 

Thanks


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## james4beach (Nov 15, 2012)

You might want to see this thread
http://canadianmoneyforum.com/showthread.php/34418-Working-in-US-tax-resident-of-Canada

I am also in the US, working on a TN visa (which is a *temporary, non-immigration status*, by the way) and I think it's advantageous to remain a tax resident of Canada.

No matter what you do, you're going to have a conflict here when trying to deal with both countries. There is no easy way out of this. Some notes to consider

- There is a big grey area here. Even tax professionals and lawyers generally aren't sure what to do, because the US regulations change extremely often... notes and updates on US rules are released several times a year. A significant note that overhauled my tax filings was released by the US govt the day before I filed my taxes, for instance. No human can keep up with these complex rules, and it's very difficult (I'd say impossible) to be fully compliant with the US tax code. It's a **** show down south.

- The US by default calls you a resident when you pass the substantial presence test. Problem is Canada may still consider you a resident for tax purposes. You can be a resident in two jurisdictions at once.

- Even though you may pass the substantial presence test, we have a Tax Treaty which overrides definitions of tax resident. See other thread. So you can be a US nonresident for tax purposes even if you pass the substantial presence test.

- There are many meanings of "residency" and they're different things. (A) resident in the casual sense of the word means you live somewhere or have some residential tie. (B) resident by 'substantial presence test' aka 'US person' means you meet a certain US test for residency, (C) 'tax resident' means resident for tax purposes according to laws and Tax Treaties, and can be wildly different from any of the preceeding. (D) 'permanent resident' means a US green card holder and is a special phrase with a distinct meaning for immigration purposes

- Thus you can be a resident in the casual sense of the word, but NOT a 'tax resident'. Or vice versa. And _do not_ confuse it with 'permanent resident' because if you accidentally claim to be one of those, when you're not, you may get kicked out of the USA or have the IRS open up a can of whoop-*** on you.

- Doing a tax departure from Canada has many ugly side effects. And TN is a status (not visa) for _temporary employment_. What if you have to reverse and become a Canadian tax resident again, one or two years later? Wouldn't that be foolish.

- Keep in mind that the IRS is far more aggressive than the CRA. As with many other things between our countries, the US often "wins" by being a bigger and badder guy. This happens in the tax world too. Basically the US fights harder than Canada for the right to tax all your worldwide income. The IRS has big penalties (we're talking 10 grand a pop) for not being compliant with some really crazy rules they have. You have to see an international tax expert.

These are (some of) the hidden costs and pains of working in the US. I spent around $2,000 on tax advice fees in my first year of working in the US. Friends of mine who also came to the US encountered the same things. Again I will reiterate, the IRS has turned extremely aggressive on issues of foreign tax issues in the last 3 or so years... by aggressive I mean that you face really big penalties -- more than you have ever seen in all your years of Canadian tax filings.

P.S. if you factor in tax accounting fees/headaches and the potential for massive IRS penalties, I can't imagine it's worth working in the US unless you're getting at least 10k more income than you'd get in Canada. Factor in the health care differences and one might require more like 15k to 20k income premium to make it worthwhile being in the US


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## james4beach (Nov 15, 2012)

And yes, get rid of all mutual funds, all ETFs (except perhaps keep them in the RRSP). Get rid of the TFSA.

Owning any kind of non-registered mutual fund or ETF, or having a TFSA, will cost you so much in tax preparation burden that it will eliminate any gains you get from the investment.

Kiss it all goodbye. From now on, your daughter should only hold money in cash, GICs, or individual stocks -- provided you're sure the stock does not qualify as a PFIC. *Do not* hold any PFICs.


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## AltaRed (Jun 8, 2009)

james4beach said:


> And yes, get rid of all mutual funds, all ETFs (except perhaps keep them in the RRSP). Get rid of the TFSA.
> 
> Owning any kind of non-registered mutual fund or ETF, or having a TFSA, will cost you so much in tax preparation burden that it will eliminate any gains you get from the investment.
> 
> Kiss it all goodbye. From now on, your daughter should only hold money in cash, GICs, or individual stocks -- provided you're sure the stock does not qualify as a PFIC. *Do not* hold any PFICs.


+1 

Generally speaking a PFIC would likely be any asset on which a T3 (trust) is issued in Canada. Get rid of them (along with the TFSA). Perhaps any Cdn partnerships as well, e.g. flow-throughs.


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## james4beach (Nov 15, 2012)

And beware that other "stocks" can be PFICs too even without T3. I held CEF.A (Central Fund of Canada, gold/silver holding company) non-registered. Though there wasn't a T3, it is apparently also a PFIC. Luckily I was able to sell it off from non-registered at a depressed price, and I repurchased it inside my RRSP later.

I wish I had taken my accountant's advice to get rid of my TFSA. The advice from these people really is worth something.


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## Guban (Jul 5, 2011)

There are a few Canadian PFICs that could be ok to hold. Some have apparently taken on the compliance nightmare and have jumped through the IRS hoops to be labelled as QEFs. As such, the tax penalty is much reduced. Holding US PFICs can be ok too of they might have gone through the same steps, as US people don't want the unfair tax consequences of being labelled nonQEF PFICs.

I found this reference, but thought that I had previously seen at least one other Canadian MF company advertising. Of course, you'd have to ask yourself if you really want the higher MERs associated with these funds too.

http://www.fidelity.ca/cs/Satellite/en/public/products/regulatory_documents/pfic


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