Moving back to Canada for 2 years-Tax form T1135 question

HI,
I am a dual US/Canadian Citizen living in the US for 10 years now. My US husband (US Citizen only) and I want to move to Canada for 2 years starting in 2010.

I was just reading up on tax info on the CRA site and came across the "Form T1135, Foreign income verification statement".
We plan on leaving most of our investments and cash in the US which would be over the $100K cdn stated in the T1135 form. Does this just mean we will be taxed on any interest from deposits in US banks that are over this amount? My guess is yes but wouldn't this just be reported on line 121 "Foreign interest and dividends"? I guess I'm just confused as to what the purpose of form T1135 is. Is it just an attachment?
We're trying to get all this figured out way before the move.

thanks!

Depends on whether you move your tax home back to Canada, if you leave your tax home in the US (i.e. maintain residential ties there) then you're only subject to Canadian taxes on Canadian-source income, if you move your tax home to Canada then you're subject to taxes on all of your income, regardless where in the world it comes from, regardless of whether you're subject to filing a T1135.

The only exemptions would be for tax shelters recognized under the tax treaty, which is essentially IRAs and 401(k)s.

There is a big snag with US tax law as well you need to be aware of, which is that the US requires US citizens to file a 1040 regardless of whether they move their tax home out of the country, and there is a new law brought in for 2006 and later tax years which puts a cap on the foreign income exclusion limit of $87,600 - i.e. you can only exclude that amount from US taxes, so if you earn over that amount you have to pay US income tax on it.

Which is another good reason to keep your tax home in the US if you can.

I see. So it sounds like if we are not earning any Canadian income and keep our tax home in the US, we only pay US taxes. We would not pay any taxes to Canada? I imagine if you want to keep your tax home in the US, then one would not be eligible to apply for health benefits, correct? Can't see how Canada would allow one to have health insurance if they are not paying taxes.

This also begs the question: how does one declare where their tax home is?

There's a test in Article IV of the tax treaty that is used to calculate where your tax home is. You can declare where your tax home is, but there are other things that determine where it is, for example where your principal residence is, what residential ties you have, how long you spend in the country etc. Have a read of form NR-73.

Essentially if you had a home in Canada and spent more than six months a year in Canada, it would be very hard to say Canada is not your tax home. You could maybe pull it off if you kept a home in the US, had ties there such as your DL, sources of income and so on. Basically if you have anything only a resident could have, such as a DL, healthcare coverage, etc. then that is your tax home. If you have residential ties to both countries then that's usually when the "substantial presence" test is used. There are various ways around it, the most common one I'm aware of is to have your spouse spend more than six months outside of the country, because your spouse is a residential tie for tax purposes.

Hence all the extremely wealthy people who have their wives sat in Monte Carlo so they can claim it as their tax home. There is a stack of caselaw on it.

There are disadvantages to doing it that way as well though, if you said your home in Canada was not your principal residence, it would be subject to capital gains tax if you ever sold it. Although it would be US capital gains tax which is pretty generous (at the moment).

The real catch for most average people on the US side is the foreign tax exclusion cap of $87,600, which means if you earn significantly over that amount it doesn't make sense to move out of the US (unless you renounce citizenship, and even then you could be subject to the expat tax).

On the Canadian side the departure tax is usually the problem for moving your tax home out of Canada.