California and Canadian tax residency issues

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Question

Phil,

Saw your website and thought I would run this by you. I actually have a bit of a  tax background but my son’s situation is new to me.

My son lived in Ontario for a few years and became a CA permanent resident. During February 2021, he began working for a US company headquartered in TX, but worked for a division of that company in California (when I use “CA”, it means Canada).  Due to the pandemic, he worked totally remotely from Toronto, but then moved permanently to Los Angeles on October 28 and remained a California resident for the balance of 2021, employed by the same company.

He seems clearly to be a CA tax resident for 2021, and would have to file a CA tax return reporting his CA source income from the first part of the year, as well as his US source income earned remotely while working and living in Toronto.

My question is about the income earned in Nov and Dec while residing in California. One thing I saw (I believe on the Canadian government site) said that you become a nonresident when you depart Canada, and from that point on, you would only owe CA tax on CA-source income.  If that were correct, my son could exclude his W-2 income from his CA return that is attributable to the last two months of 2021. Is that correct?

My other question is about the Ontario provincial tax, which appears to be extremely confiscatory with their heavy surtax.  All the CA rules clearly say you  owe provincial tax in the province where you resided on 12/31 of the tax year. Should I assume that if you left CA during the year, that you still owe provincial tax to the province where you resided before you left CA?  Seems too good to be true that he would not owe the provincial tax, but because the bulk of his income was from the US, he had very little CA tax withheld, and appears to owe a whopping tax in CA on his US-source income, especially after the Ontario surtax.

I expect that the FTC will get his a refund of the US withholding tax he paid (in past years, when his income was lower, he was able to wipe out his US tax with the FEIE) but right now I am focusing on getting his CA tax right.

Sorry for the long email. Any thoughts?

Thanks,
xxxx xxxxx

Answer

Hi XXXX

Thanks for the email. Let me try to give you have general thoughts on your situation below:

Yes, that is technically true. If you son did actually leave Canada and become a non-resident in November of 2021 he will not have to report income after that date. However whether or not he was in fact a non-resident of Canada after November will be based on his particular set of facts related to the move. If he left and never returned to Canada there’s a strong argument that he became a non-resident of Canada at that date. There is however some additional tax consequences to becoming a non-resident of Canada. To the extent that he had assets or investments with accrued gains when he left, these accrued gains would be “deemed to be disposed” as is he actually sold the assets. Note however that Canadian real estate is exempt from these Canadian “exit tax” rules. Also, because he was not a resident of Canada for move than 5 years any assets he owned when he entered Canada in 2021 would not be subject to the deemed disposition.

Yes, with respect to the Provincial tax that would be “to good to be true”. In the year of exit the taxpayer will be subject to Provincial tax in the province in which they last resided.

Also be careful with the calculation of the FTC for Canadian purposes. The amount of tax that can be claimed as a foreign tax credit should not be the tax withholdings on the W2 but rather the actual amount of tax paid on those US source wages when he was a resident of Canada. In addition If he was working in Canada for the US company those wages would likely be taxable in Canada first and not available as a foreign tax credit.

I hope the information above has been helpful and please let know if you have any further questions.

Cheers

Phil

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