Chapter 1: Dual Residency and Tax Treaties Flashcards
How does Canada assess income tax in comparison to some countries like the United States?
Canada assesses income tax based on residence, while a small number of countries, like the United States, assess income tax based on citizenship.
What would happen to U.S. citizens residing in Canada without mitigating legislation regarding income tax?
U.S. citizens residing in Canada would be taxed twice on most types of income—once by Canada based on residence and once by the U.S. based on citizenship—even though they are factually resident in Canada.
How does the Canada/U.S. income tax treaty resolve the issue of double taxation for U.S. citizens residing in Canada?
The Canada/U.S. income tax treaty allows U.S. citizens to claim an exemption from U.S. tax on income that Canada is allowed to tax.
For other types of income, individuals can credit Canadian income tax paid against their U.S. income tax.
Why does Canadian income tax often eliminate U.S. income tax liability for U.S. citizens residing in Canada?
Canadian income tax rates are generally higher than U.S. rates, so crediting Canadian income tax on a given amount of income usually eliminates U.S. income tax liability.
What must U.S. citizens who are Canadian residents do to meet their U.S. tax obligations?
U.S. citizens residing in Canada must file a U.S. income tax return each year, even if the income tax balance owing to the U.S. is usually nil.
What could happen if a U.S. citizen residing in Canada fails to file a U.S. income tax return?
Failing to file a U.S. income tax return could lead to significant difficulties with U.S. tax authorities.
An option to avoid U.S. tax filing requirements is to renounce U.S. citizenship, which requires careful consideration.
What is the first step in determining the residency of an individual for Canadian tax purposes?
The first step is to determine if the individual is either a factual or deemed resident of Canada.
What is the second step in determining residency when dealing with dual residency?
The second step is to determine if the individual is also a resident of another country and therefore liable for income tax in that other country.
What happens if an individual is a resident of both Canada and another country?
If the individual is a resident of both Canada and another country, the third step is to determine if the other country has an income tax treaty with Canada.
What is applied if Canada has an income tax treaty with the other country of dual residency?
The fourth step is to apply the treaty tie-breaker rules to determine which country the individual will be considered a resident of.
What happens if the tie-breaker rules deem an individual a resident of the other country?
If the tie-breaker rules result in residency of the other country, the fifth step deems the individual a non-resident of Canada by ITA 250(5); otherwise, the individual will be considered a resident of Canada only.
