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Presumptions Of Tax Residency In A FATCA World



John Richardson

Introduction – All The World Is A Multiple Choice Test

Q.1 – A tax resident of the United States is taxable on his worldwide income. According to the Internal Revenue Code of the United States, which one of the following is NOT a tax resident of the United States of America?

(A) A Congresswoman “Born In The USA”, head of her household, who does not and has never had a U.S. Passport
(B) An unmarried Green Card Holder who has never filed an FBAR who lives in El Paso Texas
(C) A fifty year old U.S. citizen who is divorced has never set foot in the United States, doesn’t have a U.S. Social Security Number and lives in and pays full taxes in Germany
(D) A citizen of only Canada who lives four months a year in Florida with his U.S. citizen wife, in a house he owns where he parks a car he owns with Florida license plates
(E) A citizen of Grenada who lives full time in the USA with an E1 visa operating a fast food franchise

For help in finding the answer see …

https://www.law.cornell.edu/uscode/text/26/1

https://www.law.cornell.edu/uscode/text/26/2

Q. 2 – A tax resident of Canada is taxable on his worldwide income. According to the Income Tax Act Of Canada, which one of the following is a tax resident of Canada?

(A) A Canadian citizen who lives in the United States but has no business, family, social or residential ties to Canada
(B) An individual with a house and family living in Toronto who works and lives in the banking industry in the Middle East
(C) A Massachusetts resident with a summer home in Ontario, Canada in which he visits 180 days every year
(D) An individual who is a legal permanent resident of Canada but actually lives in Hong Kong
(E) A rich Canadian who buys permanent residency in Portugal and uses a tax treaty tie breaker provision to deem himself to be a tax resident of Portugal

For help in finding the answer see …

https://laws-lois.justice.gc.ca/eng/acts/i-3.3/page-1.html#h-279733

which is

DIVISION A
Liability for Tax
Marginal note:Tax payable by persons resident in Canada

2 (1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.

Marginal note:Taxable income

(2) The taxable income of a taxpayer for a taxation year is the taxpayer’s income for the year plus the additions and minus the deductions permitted by Division C.

Marginal note:Tax payable by non-resident persons

(3) Where a person who is not taxable under subsection 2(1) for a taxation year

(a) was employed in Canada,

(b) carried on a business in Canada, or

(c) disposed of a taxable Canadian property,

at any time in the year or a previous year, an income tax shall be paid, as required by this Act, on the person’s taxable income earned in Canada for the year determined in accordance with Division D.

In the 21st Century, The Most Interesting Thing About A Person Is His Tax Residency

Answer to Q. 1 = (D)

Answer to Q. 2 = (B)

Presumptions Of Tax Residency

The two multiple choice questions above are designed to test your understanding of the rules governing tax residency in the United States and in Canada. In some cases the rules governing tax residency in the United States and Canada overlap (actual residency). In other cases they are different. For example Green Card holders (permanent residents) are tax residents of the United States without regard to whether they actually live in the United States. In Canada it is possible to be a permanent resident of Canada and NOT be a tax resident. In other words, Canada and the United States specify different factual conditions which are determinative of tax residency.

That said, there is a second difference in how the United States and Canada define tax residency. These differences are reflected in the format of the two multiple choice questions.

You will notice that Q. 1 (referencing the United States) is phrased in the language: which one of the following is NOT a tax resident of the United States of America? In other words, the question presumes that the individual is a tax resident of the United States unless a condition is met that means the person is NOT a tax resident of the United States. The question carries a presumption of U.S. tax residency.

You will notice that Q. 2 (referencing Canada) is phrased in the language: which one of the following is a tax resident of Canada? This question does NOT carry a presumption of tax residency in Canada. Rather a condition must be met for a person to be a tax resident of Canada.

The bottom line is this:

United States Tax Residency:

Every individual on the planet is deemed to be a tax resident of the United States unless he/she is a nonresident alien. The burden of proving that a person is NOT a U.S. tax resident is on the individual. The United States does NOT specifically define U.S. citizens as tax residents of the United States. Rather it deems all individuals except nonresident aliens to be U.S. tax residents. It is incumbent on the individual to prove they are a nonresident alien (which is why people are renouncing U.S. citizenship).

Think of it! Everybody in the world is presumptively subject to U.S. Worldwide taxation. The presumption can be rebutted ONLY by proving nonresident alien status.

Canada Tax Residency:

No individual on the planet is presumed to be a tax resident of Canada unless he/she meets the criteria for tax residency. The burden of proving tax residency in Canada is on the Government of Canada.

Why FATCA and the FATCA IGAs are not consistent with the Internal Revenue Code

FATCA and the FATCA IGAs provide the framework for a “worldwide hunt” for U.S. citizens and residents – the goal being to subject them to U.S. worldwide taxation. But, the Internal Revenue Code clearly says: Every individual, except nonresident aliens are subject to U.S. worldwide taxation. Wouldn’t it make more sense for FATCA and the FATCA IGAs to operate on the presumption that every individual on the planet is subject to worldwide taxation? Why not hunt for nonresident aliens (to exclude them from the U.S. tax net) rather than U.S. citizens? Doesn’t this make more sense? Why not have people prove that they are nonresident aliens rather than prove they are not U.S. citizens?

Two Possible Kinds Of Proof Of Nonresident Alien Status:

1. A Certificate of Loss of Nationality (for those born or naturalized in the United States) – currently available for a fee of $2350 USD

2. A certificate of nonresident aliens status for the rest of the world – perhaps either the State Department of Treasury could/should sell a certificate of nonresident alien status to prove an individual is not subject to U.S. taxation on his worldwide income.

I have heard it said that the CLN is now the number 1 passport in the world! Maybe so.

Your comments are welcome.  Contact John Richardson

 

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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