USA: Double taxation. Canada

Tax Trap for US Green Card Holders “Resident” in Canada with US Investment Income

Jeffrey Brown • November 19, 2018
Jeffrey Brown

The United States considers US Green Card holders to be US residents for tax purposes. Green card holders file tax returns and pay US tax on their worldwide income as do US citizens, even if they live in Canada. Canada generally considers those who permanently reside in Canada to be Canadian residents for Canadian tax purposes. They file and pay Canadian tax on their worldwide income. A taxpayer who is a tax resident of both Canada and the US looks to the US-Canada Income Tax Treaty (“Treaty”) residency tie-breaker rules. The Treaty attributes tax residency to the country to which the taxpayer has the stronger ties (e.g. permanent home, family, job, time spent, etc). Taxpayers who earn their income where they reside aren’t necessarily affected by this outcome. But those who have income from non-resident sources can have problems. Here’s how.

A Green Card holder who treaty tie-breaks to Canada for tax residency would seemingly file a non-resident US tax return. But in doing so, he or she risks losing his or her Green Card. The US Citizenship and Immigration Services considers a Green Card holder who files a non-resident US tax return to have declared his or her non-immigrant status in the US, i.e., an act of abandonment of the taxpayer’s US permanent resident status. (The US immigration law considerations related to a US Green Card holder permanently residing outside of the United States are beyond the scope of this note).

But a Green Card holder who files a US resident tax return and is a permanent resident of Canada relinquishes Treaty benefits by filing a return that is inconsistent with the residency tie-breaker rules. Again, this doesn’t necessarily affect all taxpayers who earn their income where they live. But a Green Card holder living in Canada who has US sourced capital gains for example may pay tax to both Canada and the US. This is because the Treaty sources certain income, such as most capital gains, to the country of residency. Without Treaty benefits, a US Green Card resident in Canada who files a resident return in the US and Canada will source that income to the US and to Canada resulting in double tax since no foreign tax credit would be available.

You may wonder why a US citizen in Canada doesn’t have the same issue. That’s fairly straight forward. The Treaty includes a ‘savings clause’ under which the US taxes US Citizens to the extent of domestic US tax law. However, the Treaty re-sources certain types of income, such as most capital gains, to the place of residency. This operates so US citizens in residing Canada pay tax on those gains in Canada first but a foreign tax credit for Canadian taxes paid against their US tax and thus minimize or eliminate the potentiality for double taxation. Since US Green Card holders are not US citizens, the savings clause does not apply. A Green Card holder who is resident in Canada and does not want to file a US non-resident return will pay tax to Canada on US sourced capital gains as a resident of Canada and then to the US as a US resident not entitled to Treaty benefits not entitled to US foreign tax credits for taxes paid to Canada.