My daughter leaving Canada – tax implications?

My daughter leaving Canada – tax implications?

Question

Phil,

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

My daughter lived in Ontario for a few years and became a CA permanent resident. In February 2021, she 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, she worked entirely remotely from Toronto but then moved permanently to Los Angeles on October 28 and remained a California resident for the remainder of 2021, employed by the same company.

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

My question is about the income earned in November and December while residing in California. One thing I saw (I believe on the Canadian government site) said that you become a non-resident when you depart Canada, and from that point on, you would only owe CA tax on CA-source income. If that were correct, my daughter could exclude her W-2 income from her 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, you still owe provincial tax to the province where you resided before you left CA? It seems too good to be true that she would not owe the provincial tax, but because the bulk of her income was from the US, she had very little CA tax withheld and appears to owe a hefty tax in CA on her US-source income, especially after the Ontario surtax.

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

Sorry for the long email. Any thoughts?

Thanks,

XXXXXXXXX

Response

Hi XXXXX,

Thanks for the email. Let me try to give you some general thoughts on your situation below. That being said, this is not advice, and you should get proper cross-border tax advice from a competent CPA.

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

Yes, with respect to the Provincial tax, that would be “too 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 W-2 but rather the actual amount of tax paid on those US source wages when she was a resident of Canada. Additionally, if she 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 make sure to get independent advice on her particular situation.

Cheers,

Phil