Becoming a legal resident of Canada

xxxx wrote:
Dear Mr. Ingram,

I'm a citizen of the U.S. & Canada with a house in Michigan and one in Ontario. My legal residence is currently Michigan, but I will be changing it to Ontario when I retire, while keeping the Michigan house. My sources of income when I become a legal resident of Canada will be Social Security and my taxable investments (all in U.S.), currently bringing in about $30,000 U.S. per year in interest & dividends. (I also have an IRA, but I'm not withdrawing from it yet.) I need this interest income to live on, so I hope that I won't be hit too hard by bringing it within the sphere of the Canadian tax system. My questions are:

1. I assume that once I start living in Ontario the majority of the time (over 180 days), I would file as a Canadian resident first and report my world income, including investment income. I would then claim a credit on what I pay the U.S & Michigan, if anything. I would then file a U.S. return and claim a credit for tax paid to Canada. Is this correct?

2. As a part time resident of Michigan, legal resident of Ontario, do I need to file a Michigan return at all, if I have no income there? If I do need to file, is it as a resident or non-resident?

3. Is there any requirement that I change my address from U.S. to Canada for such things as bank accounts, Social Security, etc? In other words, does it matter to the U.S. or Canada that my U.S. sources of income will think I'm in the U.S. (which I will be part time), so long as I report the income to both countries?

Sincerely,

John Lacombe



david ingram replies:

Having just attempted to wake my 15 year old daughter up to go to school on the first day of spring break, I am not sure if I am capable of answering this question

I am also interested in anyone else's comment on this because it is a good question. If you were a dual citizen and lived in Ontario and bought a hunting cabin in Michigan and stayed there 3 months of the year, you would not be a part-time or resident of Michigan. However, if you are now a resident of Michigan and are going to spend more time in Ontario, it seems to me quite clear that Michigan will want to consider you to be a part-time resident when you are keeping and staying in the same house, etc. You should take a look at Michigan form 1040 and the NR schedule.

So then the next point likely involves the time in both places. I do not think you are moving for seasonal benefits. Parts of Ontario are south of the Northern part of Michigan. I assume you are moving to take adavatage of Canadian medical or to be closer to children or grandchildren.

So if you are going to spend 2 months in Michigan, I would say you are not a part year resident and have no Michigan tax liability other than your property taxes. 'However', you mention 180 days. If your intention is to spend 190 days in Ontario and 175 days in Michigan, I have no doubt that you are a part year resident and taxable in Michigan on the percentage of your income that you receive while in Michigan. This could even change on a year by year basis.

As to your US / Canada taxes, you have to look at Article IV of the US / Canada Income Tax Convention (Treaty) - Article IV reads as follows: (you are concerned mostly with 2(s) (b)(c) and (d))


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.

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What the treaty says is that you are only taxable in one country on your world income but you are taxable in the source country on any income from that source.

With your large interest and pension income, you will also be concerned with Articles X, XI, XVIII, XXIV (4) and (5)

You can read the whole treaty at http://www.fin.gc.ca/treaties/USA_e.html
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I am very interested if anyone (Andrew, Gary, George) has a contrary opinion about my Michigan residencey comment.

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