Brutal tax law for Canadians living abroad

[Ludwig von Dracula]

This is a combination rant/call for advice/warning.

It will probably not apply to the majority of readers, but tax laws are very punishing for Canadians studying abroad long-term who also own (and rent out) property in Canada. We're not real-estate speculators or anything like that, but my wife and I did want to keep our house (maintaining the delusion that I may be lucky enough to find a tenure-track position in our home town). So we found a tenant to rent it, and her payments are mostly covering our mortgage, insurance, property taxes, and the like. We're not making any money, but at least we were almost breaking even.

Until...discovering that we are now required to pay 25% of our gross "income" in taxes since we are classed as non-residents of Canada. You can claim some deductions, like the property taxes, but not the mortgage payments. End result will be a bill of almost $2500 a year. Just thinking about this right now gives me chills...it's hard enough to scrape by on a TA salary, and I don't know how we're going to manage it. It's also too late to easily transfer ownership of the house to a family member in Canada, which would have been more attainable while we were still classed as residents.

So, any ideas?

[TakeruK]

This fall, my wife and I will be Canadians living abroad (I'll be a student but not my wife). We don't have property to rent out but we were also wondering about our classification as "residents of Canada" for tax purposes. Although we don't have property, our TFSA contribution room only increases in years we are residents of Canada so we'll need to know whether we can contribute to our TFSA in 2013. We probably will not have Canadian income to worry about though!

But when I checked, it seems like we would still be classified as residents of Canada for tax purposes? I'm using the information here: http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rsdncy-eng.html -- Although it sounds like you have done these steps and ended up being classified as non-residents? I thought that students who study abroad would still count as Canadian residents (I'm going to set my "permanent/home address" to my parents' home and my "temporary address" to wherever I will be living).

From another post about taxes, it sounds like you entered the US in Fall 2011, so you would definitely still be a Canadian resident for the 2011 tax year (since you presumably resided in Canada until Fall 2011, which is more than 183 days/6 months). So at least you won't have to worry about this Canadian tax payment for another year or so. This could give you time to plan for this upcoming payment -- perhaps increase rent if you get a new tenant to help offset these costs?

Under US tax laws, F-1 and J-1 visa holders (and their dependents) are NOT classified as US residents for tax purposes for the first 5 years of their time in the US. After 5 years, the standard residency rule applies (which is similar to Canada's -- you have to reside in the US for ~183 days / year), so you probably will not be counted as a US resident for tax purposes until your 6th or 7th year in the US. So we might be "resident-less" for tax purposes (thus having no tax benefits) while we are doing graduate work then! =(

Thanks for the warning, hope something works out for you!!

[Ludwig von Dracula]

Yes, you've got it right. Non-residents for American tax purposes, but in our case, we were also judged as non-residents of Canada for whatever reason after we filled out the forms to help them determine our status. I think the fact that we owned a house, but were renting it to a non-family member, actually worked against us here. That's true about the tax year though, so perhaps we've only got 3 months to make up instead of 8--that's a bit of relief anyway. Honestly, we're considering sending my wife back for six months so we can sell the house to a family member. This bill is going to be insane...like the health insurance, tuition differential fees, blah blah blah aren't already a big enough burden on a pitiful TA salary. Good luck paying into your TFSA (No, seriously, it should be possible unless you get an unfortunate financial surprise like we did.)

Honestly, I don't know if it's in your best interest to fill out the residency forms or not. Some friends of ours ignored the whole thing and the Canadian government just kept treating them like residents for three years. They got sent their quarterly GST rebates and were even getting family allowance payments of $600 per month after they had a baby (sent to their American address)! On the other hand, if the government were to discover that now, they'd probably ask for all of that money back, which would be far worse than our situation...