Choosing deemed resident or non-resident

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agbc
Posts: 7
Joined: Sun Apr 23, 2017 7:38 pm

Choosing deemed resident or non-resident

Post by agbc »

Hi all,
I have spent a LOT of time trying to figure out the optimal tax return strategy. Between my wife and I, I've put together 12 possible federal, state, and CDN returns but I'm still not sure what the right approach is. We switched from J1/2 visas to TN/TD in Oct.2016. For the last two years in the US we've filed 1040NR's and Canadian 'deemed resident' returns. Now we have to decide if we want to file our 2016 US returns as residents (will be able to under first year choice). Doing so will allow us to file jointly and save us about $2,500 USD.

However, if we do this then I believe we would be considered non-residents in Canada for 2016 tax year. We used the Lifelong Learning Plan so we'd immediately have to pay back the $20k, and I'm not sure what the implications are for the departure tax (only have a small number of non-registered investments, would we also have to pay tax on things like my wife's wedding ring?).

Since this is at my discretion, I'm wondering if it makes sense to go ahead with the US resident / CDN non-resident approach for 2016? I'm worried there are additional negative implications to becoming a Canadian non-resident. Also, I was in school for the last few years and I'm wondering if I lose my tuition carryforward credits if/when we move back to canada?

A few more details:
-don't own any home
-Living in the US for 3 yrs
-No Canadian income (other than some small dividends / interest)
nelsona
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Location: Nowhere, man

Post by nelsona »

You kind of answered the question yourself. You became non-residents of Canada only the day you became TN/TD due to the restrictions on J1/J2, which had forced you to be deemed residents of Canada before that date. You file an emigrant (departure) return for your province, with the October departure date. It isn't really up to your discretion, since you are now US residents and do not have sufficient residential ties in Canada. At best you would be considered a DEEMED NON-RESIDENT (which is exactly the same treatment as non-resident) because you (now, since October) meet the treaty definitions as US residents..

Your ELECTION to file full year 1040 doesn't change that. Your CHOICE to file as full year 1040 isn't based on being a full-year resident of US, it is a choice offered those moving to US, since their system is not purely residency-based, like Canada.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
SM
Posts: 94
Joined: Fri Mar 20, 2015 3:43 pm

Post by SM »

I wouldn't worry about tax on the wedding ring, I doubt it has gone up in value? However, if it's worth more than $10K I suppose you should report it on form T1161. Unless you got it appraised, you really won't know what it's worth anyway.

Your unused tuition will stay on file with CRA indefinitely. It likely won't provide you any benefit as a non-resident. Even if you have Canadian source wage income or capital gains from real property as a non-resident, using the tuition to offset this income would be meaningless. You would still be taxed on this income in the US, so it really wouldn't help your OVERALL tax position. If you ever move back to Canada you can use it at that time.

Did you make any RRSP contributions before you departed? If so, they can be used to help offset some of the Lifelong Learning income you will be forced to pay back. You had until March 1, 2017 to make a contribution that you could use as a deduction on your 2016 departure return.

You should have also made a fund switch in your RRSP to "crystallize" the gains BEFORE your departure date. This would limit the tax you pay on the US side to future growth.

For any dividend income you earned AFTER your departure, you will pay a flat 15% Part III non-resident withholding tax, it should not be reported on your departure return. You likely did not notify your financial institution of your departure, and they did not withhold the tax for you or provide you with an NR4 slip. So you will have to voluntarily pay this amount to CRA.

The interest income you earn AFTER your departure will not be taxable in Canada, so don't include this on your departure return either.
SM
Posts: 94
Joined: Fri Mar 20, 2015 3:43 pm

Post by SM »

*Part XIII withholding
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Tuition credit: The problem is if he does have US sourced income on his Cdn return, either in departure year or in a returning year, he MUST first use this before using any foreign tax credit. The worst situation is for those with a large tuition credit who KEEP Cdn residency while working in US the first year, they effectively whittle away their tuition credit

Lifelong (or HBP) repayment. Sorry, but any repayment had to be made within 60 days of the departure date. One cannot use the regular contribution deadline to make one of these repayments (unless their departure date is very late in the year). any contribution made after that date will merely be considered RRSP contribution. The unpaid balance will be added to your income on your departure return.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
SM
Posts: 94
Joined: Fri Mar 20, 2015 3:43 pm

Post by SM »

Yes, I absolutely agree with you on the tuition credit if you ALSO have US source income. Very good point! This really hurts cross border commuters as well. I was simply commenting on the period of his non-residency.

He will almost certainly have US source income BEFORE departing Canada. In which case, to your point, he will be FORCED to use his tuition instead of the foreign tax credits (because of CRA’s ordering rules). So what I said, is only applicable to anything left over afterwards.

I doubt that he would have any US source income to report when he returns to Canada because it would have to be earned AFTER his return to Canada, but of course it’s possible and yes, he would encounter the same issue.

I hear what you are saying about the LLP repayment, as the rule states the following:

This must be paid back by the EARLIEST of the following dates:

â–  before the time you file your tax return for the year that you become a non-resident (so May 1, 2017); or
■ 60 days after you become a non-resident (60 days after October 2016 – December 2016)

Which means he had to pay it back before December of 2016.

HOWEVER, in practice its six of one and a half dozen of the other. Let’s say the LLP amount is $20K and you have contributed $10K to your RRSP before March 1, 2017 but ALL AFTER December 2016. CRA will force you to take $20K into income for the LLP and you would get a normal deduction of $10K for your RRSP contribution in the year of your departure. Your net result is tax owing on an additional $10K of income.

Now let’s change the scenario and assume you made the $10K contribution in November 2016. Now you can use the $10K to pay back half of your LLP and are forced to take the other $10K into income. The NET result is the exact same. You would owe tax on an additional $10K of income. I’ve done this for many client’s and CRA has never had a problem with it.

I suppose one could argue that the normal RRSP deduction is being permitted against OTHER sources of income and this is why CRA allows it. It would be interesting to see if CRA would allow it if your only source of income was the LLP forced to be taken into income.
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Post by nelsona »

Most people have US income after returning to Canada, as it is not always possible to leave only after everything has settled.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
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Post by nelsona »

They would take the contribution. However, it is only six of one, if it is less that one's contribution room. And if it was HBP that you were trying to pay back, it might FAR exceed your contribution room.

Besides, if one left early in the year, there is may actually be no good reason to repay the HBP/LLP, since adding it to one's income will be lower taxed than taking it out ,even as a non-resident. (particularly in the case of having tuition credits).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
SM
Posts: 94
Joined: Fri Mar 20, 2015 3:43 pm

Post by SM »

Yeah true, I suppose it's fairly common that it's not always a "clean break" and there is some overlapping US source income upon returning to Canada. Admittedly, most of my experience has been departing people from Canada.

Yes very good point if they left early in the year with a bunch of tuition credits. I likely wouldn't advise them to make any extra RRSP contributions to repay the HBP/LLP in this case either.

In fact, when beneficial, I have advised some people to withdraw money from their RRSP's BEFORE departure to "absorb" some of their tuition credits and essentially get some money out of their RRSP tax free; especially for those that don't have any plans of returning to Canada.

Fair point about needing enough RRSP room, this wouldn't work for someone that had less RRSP room than the required repayment amount. It's just something I have advised doing in certain situations when beneficial.

The biggest problem is most people come see me after it's too late and they have already departed. It limits some of the planning that can be done in advance. So this is one such area, where at times it's not too late to take advantage of, even after they have left.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Yes.
You will note that iwill spend much more time on a thread that starts: "I am moving in the spring..." that one that starts:"I moved two years ago and am not sure how I should file...."
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
agbc
Posts: 7
Joined: Sun Apr 23, 2017 7:38 pm

Post by agbc »

SM / Nelsona, thank you both for your thorough replies. Looks like I misunderstood the definition of deemed resident vs. non-resident, and now I'm kicking myself trying to figure out how to minimize the damage. I'll be reaching out to an accountant in the morning, but a few more questions for my own curiosity:

1) I had unused contributions of ~10k, can I designate them as repayment under LLB? It would actually be better if I could designate them as repayment for my wife (my tax liability can be reduced to zero with the tuition credits)? Also, how does the CRA know the amounts I have to add to claim as income are in reference to the LLP withdrawal?

2) As it relates to RRSPs/TFSA, how should I approach the situation given that I'm already a non-resident. I currently have an advisor at RBC managing my portfolio (mostly stocks/etfs, no mutual funds), I'll reach out to him this week as well, but how do most people continue to manage these from abroad?

3) Any other threads on this forum you could point me to that outline the key steps/forms/checklist that need to be completed? I'm studying up on things like deemed disposition and FBAR, but I know there are things I'm missing and I'm sure it's been addressed before.

Thanks again. Wish I had asked this question 6 months ago...
SM
Posts: 94
Joined: Fri Mar 20, 2015 3:43 pm

Post by SM »

1) As mentioned above, you have 60 days from the date of departure to make a repayment to your LLP. So, in your case, this sounds like it will be at some point in December. When were the contributions made? As long as they were made within 60 days after you left, you can use them as a repayment. If you made any contributions in the 1st 60 days of 2017 for example, you technically would not be eligible to use them for repayment. But even if you can’t designate them as a repayment, let the software force the entire LLP into income (which it will do automatically as soon as you enter a departure date), then claim your RRSP deduction as a normal contribution and it will offset some of LLP income (so it essentially accomplishes the same thing).

But by the sounds of it, you might have enough tuition to use to eliminate all the tax on the LLP anyway. Which is good, because as Nelsona mentioned, you are going to be forced to use your tuition to offset your US source income instead of being able to use the foreign tax credits. If that’s the case, I would NOT deduct the RRSP contribution at all. I would carry it forward to the potentially use in the future. It will stay on file with CRA indefinitely after you depart and you will be able to use it when you return to Canada.

Unfortunately, there is no way to transfer these RRSP contributions to your spouse to use. She would have needed to make the RRSP contributions herself.

CRA knows they are in reference to the LLP because you have to entire the LLP info on your tax return and then take it into income. If you don’t take it into income, they will do it for you when you submit your return (which has to be mailed in btw, it can’t be e-filed).

2) I would close your TFSA right away. The US does not recognize this as a tax shelter and will tax you on the annual growth. They also consider it a foreign trust and you will have to complete some onerous forms for it every year (3520).

You should be fine keeping your RRSP, most institutions will permit this. However, you should sell your non-registered account that produced the interest and dividends. Most intuitions will not allow you to keep the account open as a non-resident.
SM
Posts: 94
Joined: Fri Mar 20, 2015 3:43 pm

Post by SM »

Just to further clarify, my wording was pretty poor regarding when the contributions to the RRSP have to be made to be eligible as designated repayment of the LLP.

Let's say your departure date is October 15th, this means all contributions made between January 1st and December 15th (60 days after your departure ) are eligible as a designated repayment.
SM
Posts: 94
Joined: Fri Mar 20, 2015 3:43 pm

Post by SM »

If the unused RRSP contributions you are referring to were carried forward from previous years, you should be able to use all of them as a designated repayment. by definition, these were contributed before you departed and should qualify.
agbc
Posts: 7
Joined: Sun Apr 23, 2017 7:38 pm

Post by agbc »

SM - thanks for your additional responses. Okay, I just reached out to an accountant - tbd on whether they'll be able to handle my return in time. In case they can't, here's the approach I'm thinking, please let me know if you think there are any gaps:

CDN Return:
1-File Canadian returns (mine + wife) as emigrants with a departure date of October 1.
2-Add $10k to each of our Canadian incomes to account for the LLB that we won't be repaying (saving my unused contributions for our return to canada since my tax liability is already offset by the tuition credits). Do we still need to complete Schedule 7?
3-Attach Form 1243 for deemed disposition. Don't think we have anything valued at over >$10k, but we still need to file the form regardless
4- Close TFSA / close non-registered account / too late to crystallize RRSPs (whatever that means)
Q - Since we're filing jointly in the US, how do we recognize foreign taxes paid on our individual canadian returns? Should it just be proportional to the percentage of income we earned?
Q2 - How do I go about voluntarily paying the Part XIII withholding tax, since I doubt it was withheld? Complete NR4?

US Return (Filed for a 6month extension)
-Married filing jointly
-Complete form 3520
-Complete FBAR

Am I missing anything obvious here? To be clear, for 2017 onwards, by staying in the US I will have no future filing requirements in Canada?

Thanks so much, your advice has been invaluable.
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