Also this statement from the OECD tax model can be used in support of my case.
"If a person who has a home in one state sets up a second in the other state while retaining the first, the fact that he retains the first in the environment where has has always lived, where he has worked, and where he has his family and possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interests in the first state"
Determine Canada (Deemed) Non-resident
Moderator: Mark T Serbinski CA CPA
Re: Determine Canada (Deemed) Non-resident
Thank you very much for sharing. It's always interesting to know how things will unfold in practice when two countries share a regular taxpayer's money in hope to benefit some crumbs from this dispute. This MAP will most probably cost more than the profit it will generate for either party.
Your most strong point for now is your roots. While being a dual citizen, your life has always been and is still in the US. Your situation will most certainly evolve and if you continue to spend much more time in Canada than in the US or even considerably more time, this may lead to the conclusion of a shift of your centre of vital interest. To support your current choice of a deemed non-resident status, we may also find citations like this one: " that consistently spending each weekend with one’s family in the same rented premises over the course of a year – approximately 100 days – is insufficient to establish an habitual abode."
After all, what are your risks of continuing to claim your current tax status?
On the Canadian side, if you are ever declared a Canadian tax resident, you'll be asked to pay Canadian taxes on your US employment income which is the difference between the US taxes already paid and the Canadian higher taxation habits. They will add interests for the amount owed by you as well. I won't elaborate here about any penalties as your situation is unusual and considering all the research you have done on the question, these are unlikely. Being a Canadian resident, you'll probably be able to get rid of these interests through special procedures of the CRA. The problem here is the CRA won't lose anything if they re-evaluate your situation in, let's say, several years but they won't be able to return you what the system owes to you, which is free health benefits. During all these years, while you were in Canada as a deemed non-resident, you didn't have access to the only benefit which may explain higher Canadian taxation and at the same time you paid for your health on the US side.
Your spouse will be able to get CCB (Canadian Child benefits) if she declares your non-resident income through some special form for non-resident spouses. These numbers will only be used to determine the right amount of CCB. They won't create any other intention for you to become a Canadian resident. On the other hand, you will give the CRA the numbers and I don't know if it's a good thing to give any information if not asked. If you're ever declared a Canadian tax resident, you'll be able to return back for 12 months only, I believe, for your CCB. By adding your two incomes, you'll see how much you lose, if any, for not claiming CCB.
Canadian tax residents have to declare if they have anything more than 100 k outside Canada. If they fail to declare, there are some penalties attached to the non-submission of this information at the right moment. I don't know how this all will play out if the determination of the residency is retroactive.
It would be useful to ask your tax attorney to develop the scenario of "what if" on the Canadian side and on the US side.
I have also noticed that CPA and attorneys have a different view of the situation. A CPA will privilege an absolutely 100% way of success to avoid any possible audit while an attorney will give you a probable outcome where there may be risks to take into consideration. The position of a CPA is understandable but he is not the one who pays your taxes. If your only financial risk is to pay the amounts you owe and not more, why would anyone pay these amounts voluntarily disclosing all the cards without even being asked? We may also criticize a too generous position of an attorney because he is not the one who will pay for the failure of his position.
I wonder what the risks are on the US side if you're ever determined as a non-resident of the US. I mean there may be some important forms to submit during your year of departure or even the way your employer manages your wages. I'll appreciate it if somebody weighs in on this question.
Your most strong point for now is your roots. While being a dual citizen, your life has always been and is still in the US. Your situation will most certainly evolve and if you continue to spend much more time in Canada than in the US or even considerably more time, this may lead to the conclusion of a shift of your centre of vital interest. To support your current choice of a deemed non-resident status, we may also find citations like this one: " that consistently spending each weekend with one’s family in the same rented premises over the course of a year – approximately 100 days – is insufficient to establish an habitual abode."
After all, what are your risks of continuing to claim your current tax status?
On the Canadian side, if you are ever declared a Canadian tax resident, you'll be asked to pay Canadian taxes on your US employment income which is the difference between the US taxes already paid and the Canadian higher taxation habits. They will add interests for the amount owed by you as well. I won't elaborate here about any penalties as your situation is unusual and considering all the research you have done on the question, these are unlikely. Being a Canadian resident, you'll probably be able to get rid of these interests through special procedures of the CRA. The problem here is the CRA won't lose anything if they re-evaluate your situation in, let's say, several years but they won't be able to return you what the system owes to you, which is free health benefits. During all these years, while you were in Canada as a deemed non-resident, you didn't have access to the only benefit which may explain higher Canadian taxation and at the same time you paid for your health on the US side.
Your spouse will be able to get CCB (Canadian Child benefits) if she declares your non-resident income through some special form for non-resident spouses. These numbers will only be used to determine the right amount of CCB. They won't create any other intention for you to become a Canadian resident. On the other hand, you will give the CRA the numbers and I don't know if it's a good thing to give any information if not asked. If you're ever declared a Canadian tax resident, you'll be able to return back for 12 months only, I believe, for your CCB. By adding your two incomes, you'll see how much you lose, if any, for not claiming CCB.
Canadian tax residents have to declare if they have anything more than 100 k outside Canada. If they fail to declare, there are some penalties attached to the non-submission of this information at the right moment. I don't know how this all will play out if the determination of the residency is retroactive.
It would be useful to ask your tax attorney to develop the scenario of "what if" on the Canadian side and on the US side.
I have also noticed that CPA and attorneys have a different view of the situation. A CPA will privilege an absolutely 100% way of success to avoid any possible audit while an attorney will give you a probable outcome where there may be risks to take into consideration. The position of a CPA is understandable but he is not the one who pays your taxes. If your only financial risk is to pay the amounts you owe and not more, why would anyone pay these amounts voluntarily disclosing all the cards without even being asked? We may also criticize a too generous position of an attorney because he is not the one who will pay for the failure of his position.
I wonder what the risks are on the US side if you're ever determined as a non-resident of the US. I mean there may be some important forms to submit during your year of departure or even the way your employer manages your wages. I'll appreciate it if somebody weighs in on this question.
Re: Determine Canada (Deemed) Non-resident
Anna
Thank you for your well thought out insight. Few points, I am considered a high income individual, thus it is not a small amount to the tax difference to CRA if I am a dual resident. There are ways I can increase my tax liability in the US (married filing seperately) and exclude my wife's income, thus minimizing CRA's share of the pie, but is still enough difference to care and either way less of my money I can keep. There is no difference from the US side due to the saving clause which prevents a citizen of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income. Essentially even if I am not a resident of US, the IRS will still tax me as if I am a resident because I am a US citizen. The canadian childcare benefit and healthcare in Canada are very small and inconsequential factors at this time for me.
In summary, my consultation with the tax attorney is reassuring, but as with tax laws is not definitive and subjective. The lawyer did not recommend me to file a VDP to CRA as he does not believe I am wrong. He was quite confident that if I get audited, that I have solid ground to stand on, and would defend me (of course for a fee), and the IRS will have their say in this and almost certainly would support me on this. In his experience, CRA generally would not go after somebody that is clearly a primary tax resident of treaty country AND all income is from that country. There is still a concern as you have mentioned what if. I do not know. I will start keeping tabs of my hours in either country moving forward that can help see the whole picture if I am ever audited. If you count anytime in US and Canada as 1 day in the country, it will end up going something like 275 days in Canada, and around 250 in US as many days I am in both countries back and forth with maybe by the hour 60% in Canada, 40% in US.
Thank you for your well thought out insight. Few points, I am considered a high income individual, thus it is not a small amount to the tax difference to CRA if I am a dual resident. There are ways I can increase my tax liability in the US (married filing seperately) and exclude my wife's income, thus minimizing CRA's share of the pie, but is still enough difference to care and either way less of my money I can keep. There is no difference from the US side due to the saving clause which prevents a citizen of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income. Essentially even if I am not a resident of US, the IRS will still tax me as if I am a resident because I am a US citizen. The canadian childcare benefit and healthcare in Canada are very small and inconsequential factors at this time for me.
In summary, my consultation with the tax attorney is reassuring, but as with tax laws is not definitive and subjective. The lawyer did not recommend me to file a VDP to CRA as he does not believe I am wrong. He was quite confident that if I get audited, that I have solid ground to stand on, and would defend me (of course for a fee), and the IRS will have their say in this and almost certainly would support me on this. In his experience, CRA generally would not go after somebody that is clearly a primary tax resident of treaty country AND all income is from that country. There is still a concern as you have mentioned what if. I do not know. I will start keeping tabs of my hours in either country moving forward that can help see the whole picture if I am ever audited. If you count anytime in US and Canada as 1 day in the country, it will end up going something like 275 days in Canada, and around 250 in US as many days I am in both countries back and forth with maybe by the hour 60% in Canada, 40% in US.