Wife moving to the US with GC while on maternity leave

[canamerica]

Hi - This is my first post on this forum, which has been a much appreciated source of information on all matters tax and immigration for many months - many thanks to all the usual posters.

I'm a Canadian citizen who moved to the US 3 years ago on a TN, which became a H1B, and then a GC this year. My wife also received her GC (moving from an H4) at the same time, however she still resides in Canada and works there full time. We have a daughter who was born in the US and has dual citizenship, and currently lives with her mother in Canada. We own a house in Canada, and both of us still have bank accounts and RRSPs in Canada.

My wife is pregnant again and she intends to take her maternity leave in a few months and move to the US in January. So far we have both declared our income taxes (self-prepared) in both the US and Canada, with my wife filing a form 2555 in the US to exclude her Canadian earned income, and with me deducing the US income taxes on my Canadian filing and paying a difference to the province of residence (which has higher taxes than the US).

Our understanding is that we can both continue to be considered Canadian residents for tax purposes throughout 2012 (during my wife's maternity leave), and file taxes as before, as she will receive all income (maternity benefits) from Canada. And that we thus have until the end of 2012 (when she will probably submit her resignation) to sell our house and dispose of RRSPs, without being subjected to departure tax. Is this assumption correct?

We'd much appreciate the input of anyone who's knowledgeable in this matter. We've seen posts on somewhat similar topics but each situation was different in some way, and there's a lot hanging in the balance for us. Thank you in advance.

[nelsona]

Just to clarify, she could be considered Cdn resident for 2012, but not because she recieves income solely from canada, this really has no bearing on residence.

You probably should have deslred yourself Cdn non-resident 3 years ago, since you live and work in US, but now that your wife will not be working, will be living with yoy in US, she become Cdn non-resident when she moves.

besides, since you both have GCs you BOTH must file a full 1040 for 2011 and 2012, there is little point keeping Cdn tax residency. Even with a house etc, you are US tax residence as soon as she moves.

Your house and RRSPs are not subject to departure tax. In fact, selling your rRSps before being non-resident is the exactly WRONG thing to do.

RRSPs sold after leaving Canada are only taxed 25%. Those sold before are added to your income and taxed at your marginal rate which would be much higher that 25%.

[canamerica]

Hi nelsona - many thanks for your prompt and detailed reply.

It was our understanding that I could not avoid being considered a Canadian "resident for tax purposes", since the house in Canada is in both my wife and my name. Hopefully that wasn't a blunder, as I paid quite a bit of money in tax difference to the province so far...

Even without the GC we have filed full 1040s (joint return) for both years to date, with my wife (who also has a US SSN) also filing form 2555 every year to exclude her Canadian income from US taxation.

We weren't sure about declaring ourselves (or at least my wife) Canadian non-residents upon her moving, as in theory she is still employed there and will have her job waiting for her when maternity leave is over? She wasn't planning to resign until close to the end of 2012, since we weren't sure how maternity benefits would be affected otherwise. She also sees it as a way keep a return to Canada (and to a stable job) as an option on the table in case things turn sour down south. Not sure if this is reasonable?

Very, very good point on the RRSPs - thank you. Both my wife and I still owe money to the government on those (we took an interest-free loan from our RRSPs to put money down when we bought our house). We assume all this debt needs to be paid before one becomes a non-resident?

Thanks again.

[CdnAmerican]

Hi cdnamerica - This is a little off topic, but we were in a similar spot. We lived in Canada for several years before my daughter was born in October 2001. We moved to the US in March 2002; it was a bit of a surprise to us that we were still able to collect maternity benefits (UI) even though we lived in the US. We were upfront and declared this to the UI officer, and we were told that it simply didn't matter - all that mattered is that you had the job and required weeks of paying into UI to be eligible. This was a very pleasant surprise to us. That was 10 years ago, so it's possible the rules have changed, of course.

Good luck!

[nelsona]

No, there are no restrictions on where one lives when collecting UI mat benefits.

Btw, these mat benefits would not be considered earned income, for 2555 purposes. If non-resident they would be subject tp flat 15% Cdn NR tax, which is further reason for the original poster to be moving up non-residency.

[canamerica]

Great information, as usual - thanks nelsona and CdnAmerican. So I guess our plan looks like this:

- Declare ourselves as non-residents once my wife moves to the US. I don't know if there is a benefit to have this happen right on Jan 01, does it simplify the declaration for 2012 since we avoid being a mix of resident and non-resident status for the year?
- I understand that one doesn't declare him/herself as non-resident formally, and that filing a NR73 can be more trouble than it's worth. So I assume we don't need to do anything special until we file the 2012 tax declaration as NRs (in 2013).
- We have up to one year after becoming NRs to sell our house (primary residence) in Canada without being taxed on the profits of the sale in either Canada or the US, correct?
- We should pay off the RRSP debt before becoming NRs, and not withdraw any money from the RRSPs until after becoming NRs. At that point any money withdrawn will be taxed at 25% in Canada, and the US will not tax the "principal" (the money we put into the RRSP ourselves) but just the profit.
- My wife will be able to collect her CAN maternity benefits while living in the US and being a NR in Canada, and they will only be taxed at 15% in Canada, and not taxed at all in the US? If true, this was very helpful information.

Thanks again for the replies - even with all the wealth of information in these forums and in the Emigrant's guide, it is extraordinarily helpful and comforting to get input specific to one's particular situation. Thanks.

[nelsona]

he was Cdn resident all the time (assuming she lived in canada). You could have chosen , by treaty, to emigrate when you left for work. It would not have impacted your house in any way, other than perhaps some minor tax to pay when you sell (as opposed to all the extra tax you paid on your wages).

You are both US taxapayers regardless of where you live, so you will not have a dual-status return in US. You BOTH MUST continue to file 1040 for 2011 and beyond.

Your departure returns are as an "emigrants", not as "non-residents". Non-resident returns are filed in future years.

I would not "choose" a phoney departure date. You departure date is the day she left canada. As I said earlier, your departure date should have been years ago, but if you now choose the day she leaves, that is Fine.
I would be moving before year-end to get if you both off the books.

Her mat benefits ARE TAXABLE in US. I'm just saying that they are not excludable on 2555, so reducing the Cdn tax to 15% is benficial, since you will be able to use all the tax on form 1116.

You have a decision to make on your HBP, to either repay of incluse on your departure return. Remember too, taht your future RRSP tax in US will be based on the time when you became US taxpayers, not when you became Cdn non-residents.

[canamerica]

Thanks again nelsona, great information. We weren't planning on choosing a phony departure date, but we can move anytime once my wife is on maternity leave. I assume that we don't have to move with all the belongings at once, and since the house will remain in Canada we can keep some things there and move them later.

We might not put the house up for sale until spring, since the real estate market isn't that great in winter. Which brings one more - hopefully last - question: If we own another house in the US, which would become our primary residence once my wife moves, is it correct that if we sell the Canadian house (previous primary residence) within 12 months of departure, neither Canada nor the US will tax us on any proceeds or profit from that sale?

[nelsona]

Once your wife physically moves to US, you will both be Cdn non-residents on that day. I somehow doubt that will be exactly january 1, 2012.

That day, your Cdn homw will cease to be your primcipal residnce, regardless of what you do in Us. You do not need to have a house in US or anywhere else for this to happen. Cdn non-residents cannot have a principal residence in Canada.

By CRA rules, you can add one year of residence to a property that was not always a prinipal residence, in determining the portion of the gains that are taxable. Thus the one year you have to sell your home with no Cdn tax.

By US rules, you have 3 years to sell a home before it loses its tax exempt status. Rememebr that your US gains are calulated in USD based on time you became US taxpayer vs sale, and there is a 500K limit on tax exemption.

[canamerica]

Thanks again for your answer nelsona. I was hoping I wouldn't need to revive this thread, but we have two more questions, in case someone can answer.

1) Sale of the house - "by US rules, you have 3 years to sell a home before it loses its tax exempt status". If my wife and I are both joint owners and I moved to the US almost 3 years ago but my wife still lives in the house as her primary residence in Canada, how are the 3 years calculated? We both filed regular 1040s in the US since I moved, with my wife exempting her Canadian income on form 2555 as a de-facto resident of Canada. And I continued to pay some portion of taxes to the province, after paying US taxes.

2) My wife's employer told her it would be unwise to quit her job in December, as she's eligible for a huge bonus if she remains employed with them through May 2012, even if she's on maternity leave at that time (strange but ...). She plans to move to the US in December nevertheless as she doesn't want to spend the winter alone and she plans to give birth in the US, same as for the previous baby. Given all this, could she still claim that she is a Canadian resident through say June 2012, due to her being still employed there? We understand the drawbacks of doing this, but the bonus is significant. If this is possible, would we need to file a I-131 so she doesn't 'lose' her GC due to claiming NR status in the US?

Thanks again in advance - the answers on this forum have already helped us a lot. We're trying to take advantage of tax breaks as we can in our planning, while hopefully not over-complicating our already complex situation.

[nelsona]

1) where have you been living in the meantime? In general, the rule allows you to have two houses. Since you did not rent out the house, you were still 'living' in it, much like a cottage. You will be wanting to sell it before buying 2 homes in US.

2) She does not have to quit her job for her to be non-resident. My wife left canada 6 months before official quit date, and was non-resident from day she left..

I'll elaborate later.

[nelsona]

Really, the problem you are more likely to face is with Cdn tax on your hosue, sicne as a non-resident you cannot have a principle residence in canada. But for US you can have 2 'homes'. Your wife living in one of them likelyt extends the exemption until 3 years after she leaves the hosue.

Not so in Canada.

Now, back to your other issue. There is no reason for her to quite her job or stay in Canada. She can collect maternity anywhere, and she can take unpaid mat leave for as long as her company allows, all the while living in US.

her bonus would not make her Cdn resident, nor would remaining an employee, snce she lives would be living with her spouse in US on GC.

[canamerica]

Nelsona, thanks again for your replies - much appreciated. To your questions:

1) I have been living in the US in a house we purchased here about a year ago. So the Canadian house, we've owned that for close to 10 years now, and it has been my wife and my daughter's principal residence to date, as well as my residence for a week or so every month when I'm in Canada. Our goal with me continuing to pay a tax difference to the province for 3 years (I never had to pay a difference to Canada since the federal tax rate is similar in both countries and there was no difference) was precisely to avoid the tax on the sale of our house in Canada. The thought was that as long as my wife is still a Canadian resident and I am considered "Canadian resident for tax purposes" that would delay the start of the 1 year period to sell the house tax-free until my wife finally left as well and we both declared ourselves non-residents. Is that assumption wrong?

2) Thanks for the details on the residency status. From reading the Emigrant's guide, it seemed as if Canada will continue to consider my wife a resident (at least for tax purposes) if she has at least a significant tie there, and she'd have at least two after departure - the employment and the house. Also, is it correct to assume that my wife is still a US non-resident at this time, despite her having entered the US twice this year on the GC (for less than a week each time, for vacation)? She didn't really have an option of entering otherwise, as the border agents specifically asked for the GC since that's what came up in their system when she presented the Canadian passport. And thus assume that she will only become a US resident when she moves there "for good" in December.

Thanks again.

[nelsona]

You did not say that you were still tax resident of canada (from what you described it sounded like you weren't).

Obviously if you were still resident, your clock starts now.

2. Forget the tax guide. The treaty decides your residence, and s I said, living with spouse in US makes both of your US tax residents.
Her immigration status is not the key. She must file a US tax return anyways sicne she has GC. She will be living in US. Period.

[nelsona]

I will say to have paid extra tax just to avoid some tax on house was prooably not the wisest, but no point changing at this point.