I have a strange scenerio, and I'd love some feedback on my proposed approach. Here are the facts:
1) John is US citizen
2) Jane is Canadian citizen
3) John and Jane lived in Canada for the past 15 years
4) John and Jane intend to relocate to the US
5) In September, John rented a home in the US and began a business there (self employed, based in the US)
6) Jane is still in Canada and intends to move to the US after immigration papers are finalized (ETA the following August, 11 months after John moved to US).
7) Home is available in both countries (owned in Canada, rented in US)
My opinion is that John and Jane are resident in Canada (John is deemed to be a resident under tie-breaker provisions of the treaty, since he has a home in both countries, but the centre of vital interest ... most notably his spouse ... is in Canada). John's business (self employed) is based in the US (he works out of his home in the US) but will be taxed in both countries (FTC claimed in Canada, since sourced in the US). John will be subject to SE tax on business profits, and will claim exemption in Canada to avoid paying CPP (similar to filing CPT56 for business located in Canada). John will claim FTC on his US return for Canadian tax paid on Canadian income throughout the year. Full world-wide income will be reported on both returns.
For next year, John and Jane will be part year residents of Canada, and will only be subject to Canadian taxation on worldwide income up to residency termination (ie. when they pack up home and Jane moves to US).
Here are some questions in my mind:
1) Is centre of vital interests *really* in Canada. Perhaps Jane is a US resident for tax purposes, since her spouse is in US.
2) Is business really subject to SE tax? Assuming he's still resident in Canada, perhaps the business is really "based" out of his home here
Although I'm not asking a direct question, per se, I'd love some feedback on the above situation and the position that I'm taking. Rarely black and white.
US Citizen, US business and Canadian spouse ...
Moderator: Mark T Serbinski CA CPA
There is no doubt that Jane is a Cdn tax resident, since the fully lives in Canada. IRS regs have no provision for determining her as a US tax resident based on spouse's loacation, so she doedn;'t even enter into the treaty tie-breaker rules.
John however could be deemed a resident of the US if he doesn't visit Canada on a regular basis, especially if she visits him more often than not. THAT is what defines centre of viatl intereat, not merely have a spouse in Canada (THAT only makes him considered resident in Canada, which could then be overridden by the treaty). If she doesn't visit him, then his center is in the US, or at best ambiguous, which would then fall to his US citizenship.
SE tax is is based solely on residency. So SE tax exemption would be based solely on whether John would file a Cdn residential tax return or not.
FTC (if remaining a CDn resident) would be based on whether he meets the 183 day per 365 day period test in Article V.9(a), thus establishing a PE. If yes, FTC would be granted on the CDb return, if not FTC would need to be granted on the US return by a re-sourced 1116.
John however could be deemed a resident of the US if he doesn't visit Canada on a regular basis, especially if she visits him more often than not. THAT is what defines centre of viatl intereat, not merely have a spouse in Canada (THAT only makes him considered resident in Canada, which could then be overridden by the treaty). If she doesn't visit him, then his center is in the US, or at best ambiguous, which would then fall to his US citizenship.
SE tax is is based solely on residency. So SE tax exemption would be based solely on whether John would file a Cdn residential tax return or not.
FTC (if remaining a CDn resident) would be based on whether he meets the 183 day per 365 day period test in Article V.9(a), thus establishing a PE. If yes, FTC would be granted on the CDb return, if not FTC would need to be granted on the US return by a re-sourced 1116.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
As always, thanks for valuable insight, nelsona.
She has visited him a couple of times, and after a lengthy discussion with him last night, we determined that he has significant ties here. In fact, it's likely that he's going to move back to Canada and continue to work (mostly remotely) in various places in the US and Canada - mostly Florida and Ontario. Needless to say, I have a couple of finer point issues to investigate, but we are now leaning towards full year residents of Canada (John as well) and having his self employment income based here in Canada, providing services to US client. I've since learned that shortly in the new year, the contract was terminated and he took a (probably temporary) position as an employee in the US, while he continues to try to develop into a self employed business situation.
Thanks for the reference to Article 9, XX/365 day rule, and the possibility of resourcing the income. This has not been an issue for my clients previously, so I'm definitely going to be deepening my understanding of those areas.
Thanks,
mackayr
She has visited him a couple of times, and after a lengthy discussion with him last night, we determined that he has significant ties here. In fact, it's likely that he's going to move back to Canada and continue to work (mostly remotely) in various places in the US and Canada - mostly Florida and Ontario. Needless to say, I have a couple of finer point issues to investigate, but we are now leaning towards full year residents of Canada (John as well) and having his self employment income based here in Canada, providing services to US client. I've since learned that shortly in the new year, the contract was terminated and he took a (probably temporary) position as an employee in the US, while he continues to try to develop into a self employed business situation.
Thanks for the reference to Article 9, XX/365 day rule, and the possibility of resourcing the income. This has not been an issue for my clients previously, so I'm definitely going to be deepening my understanding of those areas.
Thanks,
mackayr