Canadian in the US: nonresident of BOTH countries for tax purposes?

[MathCat]

I'm Canadian, and started my PhD at a school in California in Fall 2015. I'm working on preparing my taxes for both the US and Canada now (well, doing the US ones first, as required). Shortly after I moved, I asked CRA for a residency determination. They just replied with the response that I have not maintained sufficient residential ties to Canada, and am now deemed a non-resident for tax purposes effective the date I moved to the US. I'm quite surprised by this, and as it stands, I'm currently not a resident of any country for tax purposes! Now, the letter does say something about the effects of this for Canadian income: "As a non-resident, you may be subject to a non-resident withholding tax on interest, dividend, rental, and pension income received from a Canadian source. The Canadian payer is responsible for withholding 25% of the gross amount of these types of income. However, if the country where you live has an international tax agreement with Canada, the provisions of that agreement may reduce the rate of withholding tax." The only Canadian income I would have after I moved is any interest from my bank accounts. 

I'm not sure what effect this has on my taxes in each country. I was somewhat confused about my taxes before I got this letter, and now I'm even more uncertain. I'm pretty sure that I can't claim the US-Canada tax treaty on my US taxes (since I made more than $10,000 of taxable income). I don't know if I could claim anything from this agreement in Canada, given that all my income (barring a small amount from savings accounts) is from the US. My main concern is if my tax rate in Canada will have gone up by this determination. I expect to have to pay some taxes in Canada on my US income while I'm here, but I expected to have enough credits to not owe anything this year, as my income is only for 4 months and thus is not that large. Has anyone been in this situation, and could shed some light?

[Happington]

Just a brief note, unless you were super clear that you were only studying in the USA, you're likely still a resident of canada (http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rsdncy-eng.html), "Factual Residents" are almost the same as "Actual Residents" for tax purposes.

So, you're claiming your income tax as a resident of the province you were a resident of prior to going to school. (http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/tmprry-eng.html)

Remember to still file your US taxes to try to get the refund for the taxes you've paid while there.

Obviously I'm not a tax lawyer or a specialist in this, I'm applying to a CS PhD, not Tax Law or Economics =P.  I asked a friend to confirm this (who studies in the states) and they said this is what they do.

 

EDIT:  Ask the CRA for a re-evaluation of residency status, provide as much as you can from the residency requirements listed in that first link.  Remember, you're a student studying abroad, meaning you should keep your provincial health insurance, meaning at least in the view of your home province you're a resident.  Just make sure to appeal it.  If you're a non-resident, then bonus.  You have no real Canadian income.

Edited April 5, 2016 by Happington

[MathCat]

I did clearly state, multiple times (both by checking boxes for reason leaving Canada: studying or doing research and filling in optional text) that I was studying in the US for 5 years and would then return. I expected to be deemed a factual resident! It seems like a good thing, as far as taxes, but I'm concerned about the implications for health insurance if/when I return to Canada long term. I am consulting Canadian tax experts. 

[TakeruK]

Students don't generally meet the "ties" requirements** and honestly, I think it was a mistake to have asked for the residency determination. As Happington said, you should still be a factual resident because you are a student. The residency determination does not really ask for this nuance. I think you have two choices:

1) ignore the residency determination and file as a resident anyways and see what the CRA does. Note that this residency determination is not the final be-all and end-all. I believe it's just "advice" not a legal decision. 

2) ask for a residency re-evaluation

Actually, I think you must file as a resident anyways for the 2015 tax year because you still spent more than X days in Canada in the 2015 tax year. For the last 3 tax years, the CRA has had no problem with me filing as a resident. I always file a TL11A to claim educational credits as a way to show that I'm actually a student.

It is possible to be non-residents of both Canada and the US for tax purposes though. My spouse is currently in this category (not a student, working in the US).

And as Happington said, whether or not you are a resident for health insurance purposes is independent of your residency status for tax purposes. So don't worry about this until it's time to return to Canada, in my opinion. (And it's not like you lose it forever---the worse case scenario is that you have to go through the 90 day waiting period and you can just buy temporary insurance for those 90 days).

 

 

((** Clarification: What I meant was that the "residential ties" criteria aren't really set with students in mind. They are meant for more established people who may or may not be leaving Canada forever. So, without the information that you are in the US only for studies, we would all count as non-residents. It may be that they missed this information, or if it became a dispute, you might have to argue it. But my point of view is that you should just act with the best information you have (e.g. from the factual resident page of the CRA, you should reasonably conclude that you are a factual resident and proceed accordingly). ))

[MathCat]

1 hour ago, TakeruK said:

Students don't generally meet the "ties" requirements** and honestly, I think it was a mistake to have asked for the residency determination. As Happington said, you should still be a factual resident because you are a student. The residency determination does not really ask for this nuance.

It does actually ask why you are leaving. I checked a box saying I'm leaving to study, stated that I'm currently studying in the US, answered that I am living in a university owned apartment, have university health care, and am employed by the university. So I doubt they missed this information. 

Also, could you explain why this was a mistake? It is my understanding that this determination means that I am not going to be taxed on any income that does not come from a Canadian source. Since this is essentially all of my income, barring a very small amount of interest on my Canadian savings accounts, this could save me a significant amount of money in future years! The main drawback I can think of is that I won't be able to claim my educational tax credits. I'm really, really unclear on how much of a benefit those would be - I'm not sure how much of my tuition costs would count, etc.. I do have a tuition waiver from the university, and it's my understanding that how this affects the TL11A can vary by precisely how the university handles such things. However, I have quite a generous stipend, and given the low Canadian dollar, if I convert my income to CAD, I am not in the lowest tax bracket anymore. So I think it may be that the amount I would save by simply not being taxed in Canada would outweigh the tuition credits. Again, I am not sure about this!

I should also clarify that they only deemed me a non-resident effective the date I moved. 

I'm actually not sure if the tax residency page suggests that I should be a factual resident. On this page, it states "If you are working temporarily outside Canada, vacationing outside Canada, commuting (going back and forth daily or weekly) from Canada to your place of work in the United States, or teaching or attending school in another country, and you maintain residential ties with Canada, you may be considered a factual resident of Canada." However, I haven't really maintained any residential ties, unless you consider my family being in Canada and my intending to return to be residential ties. That was included on my residency determination form, and apparently CRA doesn't think that's good enough (they explicitly stated this: "In our opinion, you have not maintained significant residential ties to Canada.")

Edited April 6, 2016 by MathCat

[Happington]

I'd just file Canadian taxes as a resident, but, if you'd rather double check then just submit an NR73 (http://www.cra-arc.gc.ca/E/pbg/tf/nr73/nr73-12e.pdf) and find out from them for sure.

Page 3 of that form has a ton of boxes you'll be checking (You maintain your provincial health coverage, you maintain a Canadian passport, you (might) maintain a Canadian drivers licence), bank accounts (assuming you didn't totally close them all), special savings accounts (RRSP if you've dropped anything in there, TFSA if you've at least opened one), if you've left any personal items in Canada, other ties (read: Family).

 That form IS the sure-fire way of determining residency, but from that page alone most students would check off a ton of boxes.  Usually what seals it is the fact that you are NOT an immigrant to the country you're living in, and your stay there has a set expiry date (when your I-20 expires).

[TakeruK]

Maybe "mistake" was the wrong word. What I meant was that if you wanted to be considered a factual resident, then it would be better to not ask for a determination and go with the page describing what a factual resident is (http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/tmprry-eng.html). 

If you want more details, note that on the page you linked to, it says "The information above is general in nature. For more information on your residential ties, see Income Tax Folio S5-F1-C1, Determining an Individual's Residence Status." And when you go to this reference, under Paragraph 1.10, it says "While the residence status of an individual can only be determined on a case by case basis after taking into consideration all of the relevant facts, generally, unless an individual severs all significant residential ties with Canada upon leaving Canada, the individual will continue to be a factual resident of Canada and subject to Canadian tax on his or her worldwide income." (emphasis added). There are a few other paragraphs in that section that expands on this too, but maybe you have read it already?

So, to me, this means that if you want to be considered a resident, then by default, the CRA will treat you as such unless you take action to be a non-resident. 

However, it seems like I misunderstood your original post. I didn't realise you wanted to be considered non-resident for tax purposes. In that case, then I don't think it's a mistake and it is good that you went through the process you did and got a CRA opinion deciding that. Whether this is better or worse for a person depends on their circumstances. If it helps you, here is how my numbers look:

Stipend is around $30,000 per year. Some of it is from Canada as an NSERC (but 2015 will be the last year this is true) and the rest is from the US. This income is not taxable in Canada because it is non-employment work that supports graduate study (i.e. a fellowship). As you may know, fellowships for graduate students are not taxable income in Canada. 

Tuition credits: I get about $45,000 per year. Tuition at my school is around $40,000, plus you get the $400/month credit + $80/month credit. This carries over but if you need to use it, the "rate" you get credit for is about the lowest tax bracket. It does change from year to year though---I've noticed that the number is around 15% to 16%. 

But you are right that it does seem to depend on how each school treats this form. You can (and must) request the school fill out this form for you and when you do so, you can see how much credit you could claim. There is also variance on how the CRA treats these forms too, apparently. So far, I have only had to verify enrollment in one single tax year and they have accepted my TL11A since the first year.

---

Okay so it seems like you are concerned whether or not your tax rate has gone up by this non-resident status. Sorry that I missed that in the first post. Unfortunately, I've never filed this way before (my spouse is a non-resident but does not file because they do not have any income taxable in Canada). However, to me, it also sounds like you do not have any income taxable in Canada (other than your savings accounts). Since you are a non-resident, you do not need to pay Canadian taxes on worldwide income?? The sentence from the CRA you quote in the first paragraph does not apply to your US income, I think, since that sentence says "...income received from a Canadian source"

[MathCat]

7 minutes ago, Happington said:

I'd just file Canadian taxes as a resident, but, if you'd rather double check then just submit an NR73 (http://www.cra-arc.gc.ca/E/pbg/tf/nr73/nr73-12e.pdf) and find out from them for sure.

Page 3 of that form has a ton of boxes you'll be checking (You maintain your provincial health coverage, you maintain a Canadian passport, you (might) maintain a Canadian drivers licence), bank accounts (assuming you didn't totally close them all), special savings accounts (RRSP if you've dropped anything in there, TFSA if you've at least opened one), if you've left any personal items in Canada, other ties (read: Family).

 That form IS the sure-fire way of determining residency, but from that page alone most students would check off a ton of boxes.  Usually what seals it is the fact that you are NOT an immigrant to the country you're living in, and your stay there has a set expiry date (when your I-20 expires).

That's the form I filled out. There were actually not that many boxes on the 3rd page for me, mostly just those related to banking, having a passport, keeping provincial health insurance, having a mailing address, and I described my family ties to Canada along with the fact that I will return after my PhD. So if my family ties are not sufficient, I can agree with their determination that I don't have significant residential ties.

By the way, I called CRA. If I want a second opinion on this, it will take 37 weeks to hear back.

Edited April 6, 2016 by MathCat

[Happington]

The wonderful nature of our tax system.  I had a 128 week wait for something once.  Over two years to challenge a $200 penalty.

 

Well, best of luck then.  I'm going to likely just file as a resident if I end up in the states, I can't imagine them getting a bunch of money for auditing PhD students based on residency status.

[MathCat]

At this point, I'm not even clear on whether being considered a resident or a non-resident would be better for me!

[MathCat]

@TakeruK Oh, due to posting times, I only just noticed your response. Thanks for clarifying. I have no clue if it is better for me to be a resident or non-resident for tax purposes. My naive impression is that being deemed a non-resident is beneficial, since my income is all from the US anyway. If I lose the ability to build up some tuition credits for when I return to Canada, that's a bummer though! I'll have to investigate this further.

I actually filled out the residency determination because I was asked to by a bank (won't get into that) so it wasn't really a "strategic" move in any way. I fully expected to be deemed a factual resident, and it seems strange to me that I was not. I agree that the CRA webpage generally suggests that I should be, but their statements are always vague and contain caveats: one would be that I didn't maintain sufficient residential ties! 

[TakeruK]

25 minutes ago, MathCat said:

@TakeruK Oh, due to posting times, I only just noticed your response. Thanks for clarifying. I have no clue if it is better for me to be a resident or non-resident for tax purposes. My naive impression is that being deemed a non-resident is beneficial, since my income is all from the US anyway. If I lose the ability to build up some tuition credits for when I return to Canada, that's a bummer though! I'll have to investigate this further.

Because tuition credits are applied before foreign paid tax credit is applied, if you don't return to Canada right away, you will likely use up all of your tuition credits anyways on post-PhD income abroad **assuming you would still maintain resident status after graduation, I'm not quite sure what happens. So, all of this might be moot anyways. 

Maybe a good thing to do would be to fill out a tax return as a non-resident, then do it again as a resident (without sending anything in). See what scenario is better and then try to advocate for that determination of your status. If it turns out to be all the same, then you would know it's not worth your time/effort to get it changed. Or, consult with tax experts (e.g. H&R block or some company) but the first way could be a free way to determine if this is even worth worrying about.

[PoliticalOrder]

In my (totally unqualified) opinion, it is always beneficial to remain a 'resident' in Canada. I haven't lived in Canada for about 4 years now but I have always just listed my parents address as my residency and filed my taxes (no income) as if I was living there. Mainly for two reasons: one, it makes the whole health insurance thing much less complicated  >  you don't lose your health care and when you go back there are no complications regarding this; and two, if you have no income you still qualify for GST refunds, which in the grand scheme of things is not much but still something like ~$500 a year for free. 

The actual monitoring of this is quite weak.

[MathCat]

Well, if I file as a resident, I have to declare my US income, so I wouldn't qualify for the GST refunds.

I have to look into the implications for health coverage for when I return.

[TakeruK]

1 hour ago, MathCat said:

Well, if I file as a resident, I have to declare my US income, so I wouldn't qualify for the GST refunds.

I have to look into the implications for health coverage for when I return.

I think I mentioned it above, but most grad student income is not taxable by the Canadian government, so this won't count as income against GST refunds. When I was at grad school in Canada, my total stipend was about the same and I still received the maximum or close to the max of GST refunds. You may have some employment related income in the US that is taxable but I can't imagine this portion being so high that you no longer qualify for GST refunds! With the limit of 20 hours working per week as per F-1/J-1 status, you would have be paid $40/hr and work all year in order to have such a high income. And usually those with high stipends receive them by way of fellowship, which is not taxable in Canada!