Part E – Oh My God! I think I might be a “tax resident” of two countries – What is a “tax treaty tie breaker”? How does a “tax treaty” tie breaker work?

1. I am a U.S. citizen and a “tax resident” of Canada who actually lives in Canada and not the United States. Can I use the “tax treaty” to become a “tax resident” of only Canada?
2. Absolutely, positively NOT. U.S. citizens CANNOT use a tax treaty to break “tax residence” with the United States.The reason is that almost all U.S. tax treaties includes what is called a “savings clause“. The purpose of the “savings clause” is two-fold:

First, to ensure that U.S. citizens can never (without relinquishment or renunciation) cease to be U.S. tax residents; and

Second, to force other countries to agree that the U.S. can impose U.S. taxation (according to U.S. tax rules) on people who are actual residents of those other countries (because those residents are deemed to be U.S. citizens). To understand how this impacts the lives of U.S. citizens living outside the United States see: “How to live outside the United Staes in an FBAR and FATCA world“.

1. I am a U.S. “permanent resident” (Green Card Holder) and a “tax resident” of Canada who actually lives in Canada and not the United States. Can I use the “tax treaty” to become a “tax resident” of only Canada?
2. Yes, the “savings clause” does NOT apply to Green Card holders. A “Green Card holder” is a “tax resident” of the United States. Therefore, a “Green Card” holder who actually lives in Canada and is a “tax resident” of Canada, may use a “tax treaty tie breaker” to cease to be a U.S. tax resident. But, this decision must be made VERY CAREFULLY because the use of the “tax treaty tie breaker” by a Green Card Holder “may” have the following NEGATIVE implications:

• it may (depending on whether the individual is a “long term resident”) subject the person to the Sec. 877A Expatriation Tax rules (this can be a significant asset confiscation)
• it may “jeopardize” your status as a “lawful permanent resident” of the United States
• it may interfere with your eligibility for U.S. citizenship

On the other hand, there are many reasons why a Green Card Holder might want to use a “tax treaty tie breaker” to cease to be a “tax resident” of the United States. These reasons include (but are not limited to):

• you may be relieved from the requirement to file Form 8938
• you may be relieved from the requirement to file Form 8621
• you may be relieved from PFIC and Subpart F income in general
• you may be relieved from the new Sec. 965 U.S. transition tax and S. 951 GILTI
• you will be required to declare ONLY your U.S. source income on your 1040NR

Note: If you are a Green Card holder, the decision to use a “tax treaty tie breaker” should be made only after consultation with an appropriate advisor! I am not kidding! The fallout from making this election can be enormous!

1. I am a “tax resident” of Canada. I am not a U.S. citizen. I am a pure Canadian! Can I use a “tax treaty tie breaker” to break “tax residence” with another country!
2. Thankfully (as long as you are a “Tax resident” of both Canada and that other country), the answer is YES! Canada (apparently) has more than 90 tax treaties that include a “tax treaty” tie breaker provision. Here is a post that describes how the “tax treaty tax tie breaker” can be used to break “tax residence” with another country.

   (Part 3 Of 4 Part Series By John Richardson, Click To Part 2)