Canadian Resident moving to US on TN, spouse in Canada

[jimmydalock]

I've done some research on this subject, but to date have not gotten a complete picture of the taxation story. So here goes my story; any advice is appreciated!

Both my wife and I currently live in Canada (Canadian citizens/residents). She has currently been offered a position with a US employer under TN status. During the course of the contract (beginning in early 2011) she will be living there, while I will be living in Canada finishing up my graduate studies. We own our residence, and will be maintaining it at least until I finish (end of 2011).

I will be considered a resident of Canada during 2011 no questions. She will be living in the US for the majority of 2011. I have not been able to get a detailed answer from either the CRA or IRS on how her tax residency would be determined. On to my questions:

1) For the sake of residency, what would my wife/I be considered for 2011
2) In both cases (residency/non-residency), what needs to be done in terms of tax remittance/credit claims/filing status (married/single/etc) in either or both countries.
3) Any detailed comments on how the Tax Treaties work, etc would be appreciated (it's difficult to get specifics out of both organizations).

Thank you in advance!

[nelsona]

Neither the CRA not IRS regs would determine her residency. the treaty would.

If she were to leave canada, establish a full-fledged domicile in US, and not make frequent trips to canada, she would be establishing her treaty-defined residence in US. She would be considered a deemed non-resident (DNR), which by definition is someone who meets cdn residncy (due, in this case, to a spouse living in canada, but who ALSO meets US tax residncy, (by satisfying SPT) AND can demonstrate that her center of viatal interests ins in US (that would be her primary home, her job). That is why -- if such status is desired -- she would not make visits to canada.

The mechanics of how this is reported to CRA/IRS is unimportant at this point, since at the earliest this would be done in the spring of 2012 when she would file her returns. However, she would want to notify any Cdn payors (bank, RRS, etc) that she is a US resident as soon as she leaves. DNRs are treated exactly like non-residents in this case. She should be looking at the Emigrants guide from CRA for guidance on what she needs/should do during her departure year.

Now, what you need to determine is if Cdn non-residency is desirable or not. That would be typically only because of tax reasons. Since you are a student, with presumably low income, it is quite possible that her taxrate in canada 9using all your examptions) would be as low or lower than her US taxrate (even if she were considered a US non-resident).

If there is no tax advantage to declaring non-residency, she could simply visit you in canada, file a treaty position return in US as a non-resident (regardless of how much time was spent in US), and file a non-residnt return in US, reporting only her wages, and a full return in canada. This would entiltle her to GST, etc like any Cdn tax resident.

[jimmydalock]

Nelsona,

Thanks for all those pieces of advice. In a nut shell, particularly in 2011 (to be filed in Spring 2012 year) she would have the option of being a resident in either country. In the interest of maintaining residency in Canada; would you be able to refer me to any information about how US non-residency tax (or treaty return) would be at least computed. In both our cases (I have credits, as does she carried over from past years).

From what I understand the US employer would withhold taxes, and in filing year, she would file in US for non-residency, in Canada for residency (reporting worldwide income) with taxes claimed as a foreign tax credit? If so are foreign tax credits refundable (if not would it make sense to do this since education tax credits wouldnt be applied). If so that would certainly make sense to maintain residency in Canada (if possible).

[nelsona]

If she spends more than 183 days in US in any year, but wishes to claim CDn residency, then she would have to file a 1040NR, and an 8833 on which she would describe exactly how she is still Cdn resident by treaty. You would not be filing anything in US for 2011, unless she elected to file a full-fledged 1040 joint with you.

Whatever she chooses, she will pay US tax on her US income. There is no getting around that.

But, if she reports her US income in canada, by claiming Cdn residency, keep in mind that she will HAVE TO use her credits FIRST, and then apply foreign tax credits, which will probably mean she will be throwing away her credits.

It would likely be better to declare Cdn non-residency, have little or no income to report in Canada on her departure return, and keep her credits for future years when she returns to canada, or else use them on her 2010 return. You will be looking to use yours up in 2011.

Unusable school credits can be carried forward forever as long as one has no other Cdn income, but foreign tax credits MUST be used in the year they are incurred only or they are lost.

We have seen this a couple of times on this board, that having those school credits are pretty useless unless you continue to live and work in canada after school. They are worthless if you leave for US, say, six months after graduation.

Another strategy -- if her Cdn credits are such that she would have a relly low Cdn tax rate, would be to reduce her US tax by filing a joint return with you, or evan a traty article XXV return. paradoxically, a Cdn who is non-resident of US, is allowed to file a 1040, even if not resident, if this results in lower US taxes.

[jimmydalock]

Well most probably then it would be best to claim residency in US during that year (if possible), we do plan to return to canada eventually.

So based on this info, I've actually got some more questions (this might be better suited for another thread). Our jointly owned home in Canada will hopefully be sold when I choose to move to the US (end of 2011). What implications will this have either a) when it is sold in 2011 (her a resident of US, me a resident of Canada) or b) if it was sold later in say 2012 (both residents of US). Obviously selling a principle residence from CRA's perspective is non-taxable in terms of capital gains; however in her case she wouldn't be living here during that time in both cases, in my case, I would not be here for point b). Would there be capital gains tax on sale of this property in either or both cases?

[nelsona]

As long as you sell within a year of her departure there would be absolutely no tax in US or canada. More than a year after there *might* be minimal tax on her portion, depending on how long she lived in that house before leaving. Non-resisnts have a special form to file before they sell Cdn rwal estate, but it is not a big deal.