Wife works/lives in US; Husband works/lives in Canada.

[JJDD]

Hi,
I would greatly appreciate your expert insight into our situation described below:
- Wife moves to US in April 2012 and start working there under L1 visa. Her residential ties with Canada are severed by April 2012 (no house, her Canadian bank accounts will be closed, etc), except that husband will remain in Canada and continue to work for approx 12 months while he seeks employment in the US. Husband will visit US occasionally throughout 2012, but less than 183 days.
- Wife will file her 2012 Canadian tax return as her last return next Spring (with Canada departure date of March 2012); she will then file US tax return as US resident for period after March 2012. For 2012 husband will file Canadian tax return next Spring.

-Here are the questions that we would appreciate information on:
-1) How will wife 2012 US tax return deal with husband and his 2012 Canadian income ? Wife would file US tax forms as ‘married’ or as ‘head of household’ ? Will the US tax his Canadian income ?
-2) How will husband 2012 Canadian return deal with wife and her 2012 US income ? Husband would file Canadian tax as ‘married’? Will Canada tax her income ?
-3) Any risk that wife will be considered a Canadian resident for tax purposes after March 2012? What can be done to prevent this?
-4) Any risk that husband will be considered US resident for tax purposes after March 2012 ? What can be done to prevent this ?


many Thanks

JJDD

[nelsona]

I would suggest that your wife file a FULL year 1040 married filing jointly. This is permitted by the treaty.

Both your Cdn incomes would be included, but both your wages would then be exempted using form 2555. any other Cdn income would also be reported, and you would use foreign tax credit (Forms 1116) to reduce the US tax to zero on your income. This would result in no additaionl US tax for your Cdn income, and would allow for a much better US taxrate for her US income in 2012. This would also be the way to proced in 2013

Her departure return in 2012will be simple. She needs however to make sure that she has topped up her RRSP, and crystalized any gains in it before moving. You wil lneed to do the same before you leave. And you will need to finsa broker that will deal with you in her state of resicne in US. The regualr bank RRSP will not, nor will individual fund companies. TD waterhouse is about the only discount broker that will deal with US residents.

Your Cdn return will simply include her income on Page 1, so that you do not get any spousal benefits, but her income will not be taxed in canada

She will be considered a demmed non-resident form march on. She needs to make sure that she has advised her bank, RRSP, etc, and is not accepting any GST CCTB payments after march.

[JJDD]

Thank you veru much Nelsona.

There is one point I would appreciate your help to understand: when wife files full year 1040, should I assume that all income earned in Canada prior to March 2012 would not be taxed by the US (includes canadian salaries, investment income , dividends from winding down a CCPC) ? And this income would then be reported in the last Canadian tax return filed in Spring 2012 ?

Also, to be considered a "deemed not resident' of Canada. is there an action we need to take wth CRA for this ? Or does this happen automatically because of the situation.

Thanks again.

JJDD

[nelsona]

All income for 2012 would be reported on 1040, including pre-arrival. You would apply foreign tax credits to draw down the US tax based on the Cdn tax you pay (wages would be reported and then exempted as a I described above). This may or may not result in a *little* more tax in US, depending on how much Cdn income we are talking about, but the point is to reduce the US tax on your spouse's US income, which will be substantiial, if she files "dual status" married filing separately.

The Cdn income would be reported on the Cdn return too, of course.

[nelsona]

Your wife would declare herself deemed non-resident on her 2012 departure return, simply by puttinga adeparture date on the tax return, and abiding by all the instructions set out in the Emigrants guide. She would though need to act like a departed person with all her payes as soon as march 2012, as described in the guide.
I already outlined what she needs to do (CST, CCTB, RRSP, etc).

She shoukld also be collapsing her TFSA, since it is not tax-free in US, and is a reporting nughtmare for IRS.

[JJDD]

Thank you for the clarification Nelsona.

Would her filing a partial year US return for 2012 (from march onwards) have an impact on the benefits you described based on a full year US return ? What would change with filing a partial year return versus full year US return ?

[nelsona]

Higher tax rate, inability to use standard deduction, some other restrictions.

Also, most software packages, and regular CPAs are not comfortable with dual-status returns, so the likelihood of error is great.

Even if she wasn't amrried, I would suggect someone moving to US in march of the year simply file full-year 1040, since, the rules are such that even time spent in US before march could move her arrival in uS date earlier, thuis making her Cdn income reportable anyways.

Same for you next year (assuming you don't find US job in 2012)

[JJDD]

Thanks again Nelsona.
In one year from now (in 2013) when husband moves to the US to live/work, he would then file a last Canadian return for the part of 2013 he was a resident of Canada. But for the US part, he would have been filing jointly with wife already, so there would be nothing different to do when filing his US tax. is this correct ?
JJDD

[nelsona]

Exactly, might as well get used to filing in US.

[JJDD]

Hi Nelsona, I would appreciate one more clarification.
In the scenario above,since the husband obtains his L2 visa at the same time as wife obtains L1 visa (in April 2012), but he continues to live/work in canada for 12 months while seeking employment, the husband does not need to close his canadian bank accounts, deal with his rrsp, etc until 2013 when he moves to US and ceases to be a canadian resident. Is this correct even if he holds an L2 ?
Thanks again.
JJDD

[nelsona]

correct. An L2 status doesn't matter, it is living in US that causes problems for RRSP.
Even one intending to be a US resident is not required to close any bank accounts,; these would not impact residency, and are permitted for non-residents.

Only trading non-sheltered brokerage accounts are not permitted for US residents, and RRSP must be held at a Cdn brokerage that is allowed to trade in your state of residence (that is an issue you should take care of now at your liesure, and spuse NEEDS to do this -- currecny TDW is the only discounter that works, that I know of).
TFSA is allowed for US residents, its just that the income is not sheltered in US AND there is costly and uncertain reporting requirements that make TFSA pointless once you are US tax person living in US.

[JJDD]

Thanks Nelsona.
fyi, I just called both TDW and RBC and they both told me that they are able to manage RRSPs and do transactions (only phone transactions, not on line) for canadians who are US residents.

[nelsona]

Hey thanks for the Tip about RBC. By RBC I presume you mean "RBC Direct Investing". Any other arm of RBC in canada is not permitted.

TDW has been the only player for a long time, so this is good news.

Just make sure that either firm you pick will work with you in the particular state you will be working in.

The other thing to check is if they take NEW clients after they have moved, or only new clients BEFORE you move to US. TDW does, I don't know about RBC.