Tax question for TN visa & payroll deduction

Hi, I'm planning to move to California Jan 2009 with a TN visa.
Meanwhile, I have purchased a house in Ottawa, Canada and it will be closing March 2009. I don't think I will be renting the house out, and most likely will just leave it there as it is.
Given my situation, I'm not sure if I have to file tax in both Canada and US.
Can anyone help me?

Also, I'm trying to do some calculation on what kind of deduction (and %) will appear on my paycheque other than federal and state tax. Any ideas?

Thanks a bunch.

Wini

Hi, I'm planning to move to California Jan 2009 with a TN visa.
Meanwhile, I have purchased a house in Ottawa, Canada and it will be closing March 2009. I don't think I will be renting the house out, and most likely will just leave it there as it is.
Given my situation, I'm not sure if I have to file tax in both Canada and US.
Can anyone help me?

Also, I'm trying to do some calculation on what kind of deduction (and %) will appear on my paycheque other than federal and state tax. Any ideas?

While there is no one single factor that determines tax residency, I would think that owning a house in Canada, especially one you don't rent out, coupled with being only in TN status in the US--would make you a Canadian resident for tax purposes. (But of course if there are other strong ties to the US that you have but aren't mentioning, that assessment would change). You will file 1040NR in the US and a regular resident return in Canada claiming a credit for the US taxes. I don't have a paystub in front of me but FICA/Medicare is the biggest non/income tax withholding usually.

The house only matters if you make a capital gain on the sale of it. Otherwise there is no tax.

You basically have two options if you are on TN-1, move your tax home to the US or keep it as Canada. My advice is always to leave it as Canada because the paperwork is much simpler, plus you must have "non-immigrant intent" as TN-1, plus you don't suddenly find yourself stuck in an awkward situation if you are ever denied entry.

However I have to say hardly anyone ever bothers to listen to me because you save a lot of money on taxes if you move your tax home to the US because their rates are lower.

IRS publication 519 explains it all in detail, and this CRA document: http://www.cra-arc.gc.ca/E/pub/tg/p151/README.html gives a basic overview of it.

If you file as a Canadian then the house is treated exactly the same as if you lived in Canada still, i.e. if it's your principal residence there is no tax, if it was a second home you pay Canadian capital gains tax on any gain.

If you file as a US resident tax payer then obviously it cannot be your principal residence so you pay Canadian CGT and tell the CRA you live in the US and you also pay US CGT and eventually you will get the Canadian bit back from the CRA.

Obviously if it's your principal residence and you've made a substantial gain on it, it's better to remain a Canadian resident tax payer until you've closed on it. You can file as dual-status, i.e. remain a Canadian tax payer until such and such a date then move your tax home to the US, but this does entail you filing at least three tax returns, i.e. a T1, a 1040NR for the portion of the year you were a Canadian tax payer and a 1040 for the portion of the year you were a US tax payer.

Publication 519 explains this at great length.

My advice though would be to remain a Canadian tax payer for 2009 given the US economy at the moment. If you get laid off all you have to do is file a 1040NR and an 8840 for the portion of the year you were in the US, that's it.

US employers sometimes don't like people filing as non-resident as they have to do withholding at a higher rate, but it's not terribly complex - read pages 22-26 of IRS publication 515.

HI Steven,
Thank you very much for your response and your information.

I actully do not plan to sell my house (immediately after closing, or at least for another 2-3 yrs after closing), so I assume I don't have to worry too much about the captial gain.

I read up a bit on the tax rate for Ontario and compare to California, and surprisingly found them to be almost equalivalent (for the tax bracket I'm in). Interstingly, it appears the maximum RRSP or 401k contribution is higher in Canada, meaning the total taxalable income will be lower if I file tax as Canadian resident. But there are two questions I have:
1. Will I still be able to buy RRSP since I work in the US (but file primary resident in Canada)?
2. If I contribute to 401k (in US) because my company do some matching, will I still be able to buy RRSP in Canada?
3. Is there anything else that I should be looking at other than the tax rate (federal and state/provinical) - since you meantioned ther are "save alot of money on taxes if [I] move [my] tax home to US"?

Thanks for you help Steven.

Winnie

1) if you remain resident in Canada for tax purposes, nothing changes as far as your RRSP goes;
2) You can contribute to 401(k) and IRAs but obviously if you intend on coming back to Canada it's better to stick with RRSPs for simplicity. The new 2008 tax treaty does make transferring IRAs back to Canada much easier, but you'd need to check with the CRA for details on how to do it as there is no guidance as of yet. Obviously as a Canada resident taxpayer you can contribute to RRSPs still.
3) Perhaps not if you're moving to California. My accountant is convinced most people are better off living in Alberta than in California tax-wise. California is a pretty high tax jurisdiction, however you will probably find your property taxes are lower in California, but that's obviously separate from income taxes.

Depends on what bracket you're in, in high income brackets then you will be better off paying the US rates, at lower income levels though you probably won't see that much of a difference.

Given that California has a State income tax, you'll want to check on how to claim that as a foreign tax credit, I think Ontario does have a foreign tax credit you can claim.