Tax Implications of moving back to Canada?

[Steven]

Depends on a large number of factors as determined by the tax treaty and the CRA and IRS.

Residency for tax purposes is a very complex issue, but essentially if you have residential ties to a country, you are resident there. If you have residential ties to both countries, there is a complex formula. However basically if you spend more than six months in a country and have residential ties to it, then you are resident there unless you can prove that you have closer ties to the other country.

However if you're a citizen of that country, proving that you are not resident there when you live there is next to impossible after six months (the only way I know of getting out of that one is if your spouse lives in another country and you establish no residential ties). So as a Canadian citizen, if you live in Canada for more than six months you're basically resident in Canada for tax purposes. If you get a DL in Canada, apply for healthcare, get a job, etc. then it could be less than six months.

Both the CRA and the IRS become aware of your residency status by what you file. If you have been filing 1040s in the US there is a whole truckload of paperwork you have to file with the IRS to move your tax home back to Canada.

Among them - dual-status 1040, 1040-C, dual-status 1040NR, Form 8854, W-8BEN (with the bank) and much more besides but those are the main ones. You can avoid some of it by moving your tax home on January 1st.

The CRA will be aware because you file your T1 and there are questions relating to residency status on the T1. Also they will know because your employer will file T4 and the bank will file T5. They can also ask you to fill in an NR-73 to determine your status.

Your property in the US is subject to capital gains tax as soon as it ceases to be your principal residence, it matters not whether you live in the US or Canada, or what it's used for, the only difference is where you pay capital gains tax. Second homes in the US are subject to CGT just as they are in Canada.

However given the current market there is unlikely to be a capital gain in the near future, so it probably isn't a big deal to leave it for awhile.

If you're going to leave it until there is a capital gain, then by definition there would be capital gains tax.

I can't see the US housing market starting to recover in a significant way until the back end of 2010 at this point. Depends on where it is though.

[dkpatel]

Steven, thank-you !
Much to think about. Unfortunately, we will have a significant cap-gain on sale of the our home (we bought right, at right time). I read something, for US tax, that as long as we lived in home for 2 of 5 years prior to sale date then even of we rent it out for the other 3, we aren't subject to CGT. Thoughts?
If I show that I have ties to US (my pay will be from a US S-corp), then in effect I am not yet resident in Canada, even though my wife would be?
I almost think I need to hire a relo/tax accountant!

[Steven]

You're in a sticky position if you have an S-corp, as all the shareholders must be US resident. The fact you have an S-corp doesn't stop you from becoming a resident of Canada for tax purposes using the substantial presence test, so basically you need to dissolve the S-corp otherwise you will be subject to dual taxation.

If you live in Canada, your wife is a residential tie and as you are both Canadian citizens basically you are resident for tax purposes. Can't see how a court could possibly rule that you aren't. Basically you and your spouse are always considered residents of the same country, you cannot be residents of different countries for tax purposes (otherwise everyone would make their wife resident in Monaco for tax purposes and put everything in their wife's name).

The CGT exemption in the US is irrelevant as you are resident in Canada for tax purposes, so you pay Canadian CGT on the sale of the home and there is no exemption like there is in the US. You certainly couldn't maintain US resident tax status for any length of time. From the sounds of it your home in the US ceased to be your principal residence on the date you moved to Canada, so you would pay CGT on the capital gain from that date. (Which will probably be zero given the current market).

What you originally paid for it isn't relevant as the time you used it as your principal residence is exempt from the calculation as CGT is not applied in that case (unless you're over the US limit, I forget what it is, $250,000 or something like that?)

Given that it's nearly the end of the year, you can save yourself a lot of paperwork by moving your tax home on January 1st, then you don't have to file dual-status and you can file a 1040 for a complete year and not pro-rate your personal exemptions. Then you tell them you've left using 1040-C and dissolve the S-corporation on December 31st as well. Then for 2009 you simply file a T1 for the whole year.

IRS publication 519 explains dual-status returns, which are best avoided if at all possible. The CRA and the IRS also have various publications explaining how CGT works.