USA Deemed-Resident vs. Non-Resident House Sale - Expert Income Tax help on cross Border tax and immigration and divorce & R

My_question_is: Applicable-to-other-jurisdiction

question: Dear David

I have lived in the UK for 10 years, mostly as a graduate student, and recently (2009) gained residency. My wife is a dual Canadian/UK citizen and has filed taxes as a UK resident since 2006. I own a house in Toronto, which I have rented since moving here. I have paid taxes on the income (and all other investment income) as a Canadian resident. I have noted filed an NR6. For 2009 I am filing (late) as a "deemed-resident" rather than as a "non-resident", on the advice of my accountant. I am currently in the process of selling the house, but I am concerned about my residency  status. I have the following questions:

1) Does filing as a "deemed resident" pose problems, especially for selling a house?
2) Will I be penalized for not filing an NR6?
3) If I return to Canada before the sale, and take up occupancy in the house, does that re-establish my principle residence status?

Thanks


3) If I filed income in the UK,



david ingram replies:

You need more detailed advice than this response is likely to give you.

And the answer i am giving is good if you were in the United State, UK, Australia or another 100 tax treaty countries.

Graduate students are usually paid where they are studying / working.

If you were being paid in the UK,  then your UK wages had to be put on the Canadian  return.  They were not necessarily taxable in Canada, because you could claim a Foreign tax credit  for the taxes paid to the UK on Canadian forms 2209 and 2036.

Students are usually allowed to remain tax residents of their home country for up to five years.  If that is / was the case, you would have become a tax resident of the UK in 2005 or 2006 and had to give up any Provincial Hospitalization or medical plan and your Canadian Provincial driver's licence.
 
At the same time, under Article IV of the UK Canada Tax Treaty  there is little doubt that you have been a tax resident of the UK since 2006 or earlier.  you have not had a home available to you in Canada since you rented out the house ten years ago..david ingram replies:

You need more detailed advice than this response is likely to give you.
And the answer i am giving is good if you were in the United State, UK, Australia or another 100 tax treaty countries.

Graduate students are usually paid where they are studying / working.

If you were being paid in the UK,  then your UK wages had to be put on the Canadian  return.  They were not necessarily taxable in Canada, because you could claim a Foreign tax credit  for the taxes paid to the UK on Canadian forms 2209 and 2036.

Students are usually allowed to remain tax residents of their home country for up to five years.  If that is / was the case, you would have become a tax resident of the UK in 2005 or 2006 and had to give up any Provincial Hospitalization or medical plan and your Canadian Provincial driver's licence.
 
At the same time, under Article IV of the UK Canada Tax Treaty  there is little doubt that you have been a tax resident of the UK since 2006 or earlier.  you have not had a home available to you in Canada since you rented out the house ten years ago..

 

Article 4

Fiscal Domicile

1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that Contracting State in respect only of income from sources therein.

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 Contracting States, 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, or if he has not a permanent home available to him in either Contracting State, 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 Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;

(d) if he is a national of both Contracting 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 person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and to determine the mode of application of the Convention to such person.

The house in Canada became taxable for Capital Gains tax on one of two dates.

1.     The date you left he Country if you are deemed a non-resident

or

2.    The date you rented it out for the first time UNLESS you filed an election under section 45(2) to keep it as your principal residence even though you did not live there.  For this to be valid, the election had to be filed with the first rental return and is only good for 4 years although the necessary form that needs to be filed actually gives you 5 years tax free.

In that case and only "IF" you filed the election and if you were a valid student out of the country, you can claim the house gain tax free for 5 out of the 10 years but again there is a big "IF"

If you claimed depreciation on the property even once in ten years, you can NOT claim it tax free from the day you rented it out.  In that case, you will owe capital gains tax on any profit from the day you left.
  
If you return to Canada and move in to the previously rented house, you have a deemed disposal and owe tax on the increased value immediately although you can defer the tax until actual sale under section 45(3) of the tax act IF and I say IF you did not claim any depreciation or CCA (Capital Cost Allowance) during any of the ten years it was rented.  this is of absolutely NO advantage if you have the house for sale already.

You likely need a new accountant.  It does not sound to me that your present help understands out of country returns.Article 4

Fiscal Domicile

1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that Contracting State in respect only of income from sources therein.

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 Contracting States, 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, or if he has not a permanent home available to him in either Contracting State, 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 Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;

(d) if he is a national of both Contracting 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 person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and to determine the mode of application of the Convention to such person.

The house in Canada became taxable for Capital Gains tax on one of two dates.

1.     The date you left he Country if you are deemed a non-resident

or

2.    The date you rented it out for the first time UNLESS you filed an election under section 45(2) to keep it as your principal residence even though you did not live there.  For this to be valid, the election had to be filed with the first rental return and is only good for 4 years although the necessary form that needs to be filed actually gives you 5 years tax free.

In that case and only "IF" you filed the election and if you were a valid student out of the country, you can claim the house gain tax free for 5 out of the 10 years but again there is a big "IF"

If you claimed depreciation on the property even once in ten years, you can NOT claim it tax free from the day you rented it out.  In that case, you will owe capital gains tax on any profit from the day you left.
  
If you return to Canada and move in to the previously rented house, you have a deemed disposal and owe tax on the increased value immediately although you can defer the tax until actual sale under section 45(3) of the tax act IF and I say IF you did not claim any depreciation or CCA (Capital Cost Allowance) during any of the ten years it was rented.  this is of absolutely NO advantage if you have the house for sale already.

You likely need a new accountant.  It does not sound to me that your present help understands out of country returns.

 

Today,  I realized I have some 500 unanswered questions.  I do not know how they get to be that many.  I had them down to a very few at the end of December but have been swamped  since and have hardly answered any even though my intention is to answer two free strange questions a day..

 
If your question was not answered fully or you wish to go further, I am available for individual consultations by phone or email or in person for $450 per professional hour. 

 

If you 'really' only have a single question requiring a 'couple' of minutes, you can try phoning me for free as part of the following.

For a quick free question

You might try calling me on  Fred Snyder's radio program "ITS YOUR MONEY" for an answer. 

Fred Snyder's  "IT'S YOUR MONEY" radio show. on CISL,  650 AM on the dial in Vancouver from 9 to 11:00 AM every Sunday  (604) 280-0650 or (877) 280-0650 - You can listen live from anywhere in the world at www.am650radio.com from anywhere in the world. click on the button in the top left hand corner.

This is a live interactive program dealing mostly with Investment vehicles but we welcome tax questions and even a bit of immigration.  We try and limit our calls to three or four minutes however, so make your question succinct and get that answer.  If there is a follow up question, please call back.

The following was my April 27, 2008 version of a "too many questions email" when i gave up on ever getting to about 1,000 emails.    The problem is that I keep on putting things aside that I want to answer but just do not get to.  I have, by the way, answered over 600 unsolicited emails during this time.

david
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david ingram replies:

This email has NOT been read because of the sheer number received each day.  Two unidentified emails are picked to be answered each day.   The rest receive this email.  Contact information is provided further on.  As I am amending / updating this automatic reply, there are over 400 today.   I have cleaned out over 45,000 messages from my spam box and over 14,000 that I actually looked at and deleted. Sometimes, you will receive this a loooonnnnggg time laterThis is because I put it aside to answer and finally gave up at ever getting at two or three hundred of them.

In general, I pick out two or three or four random questions to answer a day.  Unfortunately, I am sorry that I cannot reply to your question at the moment because you do not show as a  client. If I am incorrect and you are a client with a new email address, etc., please resend your question or inquiry with YOUR NAME (i.e. John Smith) and the words "PAYING CUSTOMER" in the subject matter.  Please indicate when you saw me or consulted me in the last six months and what name the bill would have been under.  I am also going to limit my free follow up questions to two from now on.

That does NOT mean I am going to charge automatically for the question.  A simple yes or no question is never charged for.  However, it does identify your question as being a priority and should stop it from being spammed out or automatically sent this rejection letter. 

At the moment, I am limiting my free replies to two to four per day (I get up to 50 questions) from non-clients. I am just too busy to answer many questions and am limiting myself to 2 a day except for my regular paying customers whom I do my damnedest to answer the same day.  And, if I have already answered one of yours free in the last six months, it is unlikely that the system will let you through with another free one now. And, if i have not answered a client's question within 48 hours, it is unlikely that it survived the filters and you should resend it or phone (604) 980-0321 to point out that you are a client and that this is one of your two follow-up questions. 

If you are not an existing client and decide to retain me to answer your question(s), please be advised that I have a minimum charge of $450 Canadian (plus GST if in Canada - as shown in the suggested price guidelines in RED below.  Please call Gillian Bryan or Peter Ingram at (604) 980-0321 to set up a phone consultation time. 

They will ask you to email your question again (likely with more detail since you are paying for it) to myself taxman@centa.com and either Peter at peter@centa.com or Gillian at gillian@centa.com and they will set up a phone consultation time for us to talk.

I am, however, adding your name to our Q & A list and another question may answer yours. AND, I have answered over 8,000 questions at http://www2.jurock.com/askexpert/expert.asp?aid=121&cid=63 or www.centa.com  (see the archives) and you should be / might be able to find your answer by going there or  more specifically, to http://www.centa.com/search.htm
(To be removed from that list, reply to taxman@centa.com with 'Please Remove' in the Subject)

However, if you can not find your answer at the site, answers to this and other similar  questions can be obtained 'FREE' on Air on that First Sunday of every month on CISL as above or most Sunday Evenings and always on the first Sunday Evening of each month
 
And as I said, on the FIRST Sunday of each month, I will guest with Fred Snyder from 9 AM to 11:00 AM on CISLE  650 on the AM Dial.  This is also a live phone in show and we take calls.
 
Callers to the Shows can also come out on Thursdays at noon or 7PM at night to one of our Fred's free seminars at his office at 1764 West 7th in Vancouver.. Each one of the 2 1/2 hour seminars devotes at least 20 minutes to mortgaging and making all interest deductible

Every Thursday noon and evening, Fred Snyder of Dundee Wealth Management conducts one of 23 different financial seminars at his office

Time:    7:00 to 9:30 PM
Date:    Every Thursday evening
Place    1764 West Seventh
             Vancouver (corner of Burrard)

Phone (604) 731-8900 to register and there is usually a Noon hour seminar as well.   At the noon hour seminar, Fred even provides Sandwiches and coffee.

No cost - no obligation

Topics always cover mortgage interest as a deduction

other topics - getting the mortgage, estate planning, critical care insurance, income taxation (3 nights), differences between stocks and bonds, and usually the most innovative HELOC mortgage offered in Canada from Manulife Bank as presented by Stuart Rodger  of Manulife (604) 351-6133,
 
Those on Vancouver Island can attend Ralph Hahmann's Tuesday Evening Seminars on McKenzie Avenue in Victoria. (250) 472-0700.Ralph is also with Dundee Wealth Management and is a specialist in Pension Payouts and the co-author of the best selling book, "the Pension Paradigm:.


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SUGGESTED PRICE GUIDLELINES - April 26, 2008

david ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
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My Home office is at:
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office) expert  US Canada Canadian American  Mexican Income Tax  service help.
pert  US Canada Canadian American  Mexican Income Tax  service and help.
David Ingram gives expert income tax service & immigration help to non-resident Americans & Canadians from New York to California to Mexico  family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
 
Phone consultations are $450 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada. ($472.50 with GST if in Canada) expert  US Canada Canadian American  Mexican Income Tax  service and help.
This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,200 would be the same with one rental
 
$1,300 would be the same with one business no rental
 
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$3,000 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
 
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
 
A Business for $400 - Rental and business likely $550 to $700
 
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 
This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.

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