cross posted from citizenshipsolutions
An introduction to “tax residency” …
Most people equate residency with physical presence. They assume that where you are physically presence determines where you live. They further assume that where you live is where you pay your taxes. Conclusion: The country where you live is the country where you must be “tax resident”. Not necessarily!
There is no necessary correlation between where one lives and where one is a “tax resident”. In fact, “residency for tax purposes” may be only minimally related to “residency for immigration (where you live) purposes”. It is possible for people to live in only one country and be a tax resident of multiple countries. The most obvious example is “U.S. citizens residing outside the United States”.
Nobody ever said determing #TaxResidency was easy. It's not the same as physical residency (which not be required) https://t.co/aDNvPiM0nj
— Citizenship Lawyer (@ExpatriationLaw) December 15, 2016
The concept of “tax residency” is fundamental to all systems of taxation. The fundamental question, at the root of all tax systems is:
“what kind of connection to a country is required to assume tax jurisdiction over an “individual”, over “property” or over an “entity”?”
Asserting tax jurisdiction generally…
Different countries use different tests to assert their tax jurisdiction. The “jurisdictional test” used by a country reflects a policy consideration of what facts, demonstrate a sufficient connection to a country, that justifies the imposition of taxation over “individuals”, over “property” and over “entities“. The answers to these questions are imperfect and vary widely. In an earlier post I explored explored the kind of connection to the United States that might (but not should) justify “citizenship taxation”.
In general we see patterns that include:
For property: If the property is located inside a country, that country will assert it’s tax jurisdiction over that property. (Both Canada and the United States impose withholding on the proceeds of sale of real estate if there was a foreign seller.)
For entities (corporations, trusts, etc.): a variety of tests that include: where the profits are earned, where the company is incorporated, where the management resides, who the shareholders are, etc. (U.S. corporations are currently subject to tax on their “world income”.)
For individuals: A country will assert tax jurisdiction based on “residence” (however that is defined), “domicile” (usually does not require “residence”), “citizenship” (only the United States and Eritrea). “Residence” is defined by different countries in different ways. For example in Canada, those spending more than 183 days per year in Canada is a sufficient condition for establishing tax residency. But, spending 183 days in Canada is NOT a necessary condition for establishing tax residency. The United States has a “substantial presence” test that deems individuals who spend too much time in the United States to be “tax residents”. S. 7701(b) of the Internal Revenue Code defines the facts and circumstances that will convert “physical presence” in the United States into “tax residency”.
Asserting tax jurisdiction over individuals …
Only the United States (okay and Eritra) equate “citizenship” with tax residency. All other countries assert tax jurisdiction over individuals based on either “residency” or the “legal right to reside” in the country (Permanent resident of Canada or Green Card in the United States for example).
What kind of residential connection is required for a person to become a “tax resident” of a country? How many days of presence are required? Is there a minimum? Is there a maximum? Is residency defined by statute? Is residency a test of “facts and circumstances”? Is there a “deeming provision”? The OECD has adopted the CRS (“Common Reporting Standard”). The CRS illuminates the fact that different countries have different rules for what constitutes “tax residency” in that country. Furthermore, “tax residency” can be determined by treaties between countries. For example, in certain circumstances, the “tie breaker” rules in the Canada U.S. tax treaty, result in Green Card holders NOT being residents of the United States for tax (and FATCA) purposes.
“Tax residency” vs. “legal physical presence” or the “legal right to reside” …
There is no necessary connection between “tax residency” in a country and “physical presence” (legal or illegal) in a country. One can be a “tax resident” (example U.S. citizens) and never have lived in the United States. One can be a Green Card holder who moved from the United States years ago, but still be considered a tax resident.
– Nonresident aliens (no legal right to reside in the U.S.) may or may not be NOT “tax residents” depending on the extent of their physical presence in the United States. Better be careful to NOT stay too long in the USA. You just might become a tax resident without knowing it!
– Illegal immigrants who live in the United States who meet the “substantial presence test” are “tax residents” even though they have no right to live in the United States. Think of it: no right to live in the United States but the obligation to pay taxes!
– U.S. citizens are “tax residents” of the United States even though they may never visit the United States (and in some cases have never even been to the United States). What about all those “accidental Americans”? Many of them have no memory of ever having been in the United States.
– Green card holders, who have moved from the United States, may be “tax residents” of the United States. More on this later. If you are a Green Card holder, don’t think for a minute that just “moving home” will end your tax obligations to America.
– one can physically move from Canada and still be considered to be a “tax resident” of Canada. Very similar to what can happen in the United States.
– some states impose taxation based on the concept of domicile. One can move from one of those states, cease to be a resident, retain domicile and still be a tax resident of the state. Yes, there are some “stalker states” (see the reference to California below)- you can move here, you can “check out”, but you can never leave!
In summary: “Tax residency” is “residency” for the purposes of the jurisdiction to impose taxation. It may or may not be related to “actual residence” or the “legal right to reside” in a country. There is a difference between “residency” as defined by tax laws and “residency” as defined by immigration laws.
In a world of global mobility this concept should NEVER be forgotten!
Ending “tax residency” – easier said than done …
Moving” from a jurisdiction, without more, may or may not sever an individual’s “tax residency”. One can move from a country (or never have lived in a country in the case of U.S. citizens) and still be considered to be a “tax resident” of the country.
In some cases notice of emigrating from the country may be required. Often this is in the form of a final tax return. In some cases, a special “Departure Tax” may be imposed. Canada has reasonably clear and comprehensive requirements for a taxpayer’s obligations to the Canada Revenue Agency when one moves from Canada and ends “tax residency”.
in order for U.S. citizens to sever their “U.S. tax residence”, they are required to relinquish or renounce their U.S. citizenship. The United States imposes “Exit Taxes” on many U.S. citizens who relinquish (or renounce) their U.S. citizenship. They are required to file an final “Expatriation Statement” in the “form” (no pun intended) of “Form 8854”.
In a world of “Global Mobility” and “Citizenship Shopping” it is important to consider the following questions …
- What are the rules for how a country imposes “tax residency” on an individual?
- Are there any tax treaties that could affect a country’s definition of “tax residency”?
- What are the rules and procedures for how to sever your “tax residency” in a country?
- Does the country impose an “Exit Tax” or “Departure Tax” if you take steps to sever your “tax residency” with the country?
In a subsequent series of posts I will consider these four questions in the context of a man by the name of Topsnik. Mr. Topsnik was a German national who was issued a permanent residence I-552 visa (AKA a “Green Card”) to the United States. The “Topsnik Teachings” will help us better understand tax residency.
What Mr. Topsnik learned is the the United States is a bit like the “Hotel California”
“You can checkout any time you like, but you can never leave!”
"Taxation-based citizenship": "You can check out any time, but you can never leave! https://t.co/wH2iAUbRGn
— Citizenship Lawyer (@ExpatriationLaw) December 17, 2016
A Canadian judge, dealing with the meaning of the word “resident” said that you are “resident” in the place where you ordinarily sleep at night. This is an excellent and simple test. You do not ordinarily sleep at night in a town, province, country, you are not resident there. To allege that person who does not meet this test is “resident” is, simply put, fraud. And under Canadian law, obtaining money on the basis of fraud is a Criminal Code Offence. How about it? Like to see a U.S. Treasury Secretary and the Head of the IRS in the dock?
The US exercises Taxation-Based Citizenship when it requires a citizen relinquish his/her citizenship and pay an exit tax in order to relieve themselves of any further taxation.
Canadians subject themselves to a less punitive departure tax in lieu of ongoing taxation. Clearly the US wants the door to hit the backsides of everyone across the economic spectrum when even the poor are expected to cough up $2350US to buy their freedom. The vindictiveness of this country is beyond words.
‘A Canadian judge, dealing with the meaning of the word “resident” said that you are “resident” in the place where you ordinarily sleep at night. This is an excellent and simple test.’
Simple, yes. Excellent, no.
For those of us who aren’t lawyers or judges, it’s no problem to assume the judge also meant that a person who works night shift is resident in the place where she/he ordinarily sleeps during the day. Though judges would harp on that if they find it convenient, I won’t.
Now, is a person really resident in the place where he/she ordinarily sleeps? One time a tourist legally entered Canada but ran out of money and was sleeping on the streets. Some government official, unfortunately I don’t recall what position she/he held, said that you can’t be destitute in Canada unless you’re a resident. Did the tourist become a resident due to the judge’s ruling, and therefore legally permitted to be destitute instead of deported?
If a Canadian flight attendant or sailor sleeps outside of Canada more frequently than inside, do they become a non-resident of Canada even while not having any other residence? That could have been me too if, back in the days when I could afford it, if I had spent a year travelling the world instead of six months.
“The US exercises Taxation-Based Citizenship when it requires a citizen relinquish his/her citizenship and pay an exit tax in order to relieve themselves of any further taxation.”
I think you need to say form filing and in some cases penalties. Sorry to repeat, but the legal amount of my US income tax was zero most of the years that I was a US citizen. The “relief” after becoming a non-resident alien is that the legal amount of my US income tax is now several hundred dollars per year, withheld from interest and dividends, no longer refundable, but for subsequent tax years no longer coercing perjury and no longer penalizing honesty. (This needed careful wording because the US continues to coerce perjury on filings related to tax years when I was a citizen.)
Some hopeful news about FATCA:
Washington post reports Mark Meadows, head of House Freedom Caucaus gave a list of regulations he wants Trump to repeal by executive action (see list link below). Bingo! #203 is FATCA. Let’s pray Trump does something with this list
Until the abolition of Citizenship Taxation is on the table, Socrates, no expat is “home free”. I wouldn’t be celebrating about #203 just yet.
Here is a horrid example of how residence /vs residence for tax purposes plays out. And why didn’t CRA catch it in the re-assessments? God knows they’ll cut off your Trillium benefit the minute the family income goes above the line….what happened here?
One thing to remember that John didn’t mention is the so called “deemed non resident” rules where if another country that has a tax treaty with Canada considers you a resident of that other country. This is important to keep in mind as Canada has LOTS of tax treaties compared to the United States. I think almost 100 the last time I looked.
Then there is also the “deemed resident” rules which even if you are a resident of a country but that other country doesn’t have a tax treaty with Canada you can be considered a Canadian resident on a strict 183 day physical presence determination.
My sense is the people in the article once they became Chinese Tax Residents should have notified CRA as such and expatriated from the Canadian Tax System.
“My sense is the people in the article once they became Chinese Tax Residents should have notified CRA as such and expatriated from the Canadian Tax System.”
That’s my sense too, but it doesn’t change the point of the article, that a person who is a deemed resident but not actual resident is only deemed a deemed resident for the purpose of disadvantaging the person and not deemed an actual resident for the purpose of advantaging the person.
(Tangent: a person can be deemed an actual resident without actually being an actual resident, if the person doesn’t enter Canada at all during the year but is a former [*] resident and still has a spouse who is a [**] resident.
[* I don’t know if this is supposed to be actual, deemed, deemed actual, deemed deemed, or what. I don’t know if it’s the same as **.]
[* I don’t know if this is supposed to be actual, deemed, deemed actual, deemed deemed, or what. I don’t know if it’s the same as *.]
I doubt John has omitted anything; this is part of a series of posts…
Sorry but I think the onus here is on the CRA. Most mere mortals do not know anything about tax residency and would trust that informing the tax agency of their circumstances would be sufficient; CRA would be expected to either confirm or advise.
Is one really expected to consult the Income Tax Act and understand? I think the author is somewhat arrogant in expecting everyday folks to make that distinction when the CRA did not. After all, they continued sending the payments……….
Part Two is here
Determining Tax Residency in Canada: Deemed resident vs. factual resident