Part B – The Combined FATCA/CRS Letter

This letter is particularly worrisome for Canadian residents (whether Canadian citizens or not) who were either born in the United States or are (otherwise) U.S. citizens or U.S. permanent residents (AKA Green Card Holders). Could this mean that they would be required to apply for a U.S. Social Security number?

What follows is a sample of a letter …

Dear Valued Customer:

We appreciate our relationship with you and we are committed to informing you about matters that affect you. We are writing today to inform you that changes have been made to the Canadian Income Tax Act (Part XVIII and Part XXIX), requiring TD to provide information about customers who have a tax residence in other countries to the Canada Revenue Agency (CRA). The CRA may then share information with other countries through existing provisions and safeguards under the Tax Convention.

To comply with this legislation, we have reviewed our records (eg. address) in order to identify customers who may be residents of other countries for tax purposes.”

Part C – “Tax Residency 101”: It’s about where you should be paying your taxes

What is meant by “tax residence” or “tax residency”?

1. At the risk of oversimplification, your “tax residence” AKA country of “tax residency” is usually (with the exception of the United States which also imposes taxation based on citizenship) the country where you live or have another type of connection. It’s the country that has the right to impose taxation on your “worldwide income” BECAUSE you live in or have a sufficient other connection to the country. For example, if you live in Canada, sleep in Canada, work in Canada, raise your family in Canada, have a Canadian drivers license in Canada, etc. – you are a ““tax resident” of Canada“. For most people, “tax residency” is a “common sense” concept. It’s like this:

“I am subject to taxation on my “worldwide income”* in Canada because I live in Canada”.

or

“I am subject to taxation on my “worldwide income”* in ________ because I live in _______”

(*Most countries impose taxation on the “worldwide income” of their “tax residents”. A small number of countries impose “territorial taxation” on their “tax residents”. “Territorial taxation” is where a country imposes tax on ONLY the income sourced in the country of residence.)

1. Does this mean that ONLY my country of “tax residence” can impose taxation on me?
2. No. Every country has the primary right to impose taxation on income sourced in that country. Maybe you receive income which is “sourced” in another country. Maybe you own property in another country. In these cases you might be subject to tax in the countries where you own the property or receive the income. In general, if you are not a “tax resident”, you would be taxed in another country ONLY on the income sourced in that other country. On the other hand, your country of “tax residence” would impose taxation on ALL of your income wherever its source.

Q. Is it possible that I could actually meet the conditions to be a “tax resident” of more than one country?

1. Absolutely yes! Different countries have different rules for determining tax residency. There is no reason why a person could not meet the definition of “tax resident” in more than one country. In fact, it is very possible that one could be a “tax resident” of more than country. (This is the reason for the existence of “tax treaty tie breaker” provisions.)
2. If I meet the conditions to be a “tax resident” of more than one country, will I really be treated as a “tax resident” of more than one country?
3. Yes. Although it is possible to meet the definition of “tax resident” for more than one country, most countries have tax treaties that (1) identify those “instances” where an individual is a “tax resident” of more than country and (2) use the tax treaty to deem the individual to be a “tax resident” of only one country. It wouldn’t be fair for an individual to be treated as a “tax resident” of more than one country, would it? (U.S. citizens living outside the United States are always tax residents of the United States even if they are also “tax residents” of another country.)
4. What do you mean by “unless you are a U.S. citizen”? As a “U.S. citizen” am I a “tax resident of more than one country?
5. Well, if you are a “U.S. citizen” (or Green Card holder) you are ALWAYS a “tax resident” of the United States. It doesn’t matter whether you actually live there or not. As long as you are a U.S. citizen, you are subject to the full force of the Internal Revenue Code. This includes a variety of “Taxes, Forms and Penalties”. It includes a number of very specific reporting requirements including (but not limited to): FBAR, Form 8938, Form 3520 and Form 5471. For this reason, it is very difficult for a U.S. citizen to move from the United States, become a “tax resident” of that other country and engage in effective financial and retirement planning. See for example:

The biggest cost of being a “dual Canada/U.S. tax filer” is the “lost opportunity” available to pure Canadians

“How To Live Outside The United States In An FBAR And FATCA World”

1. I understand that as a “U.S. citizen” I am always a “tax resident” of the United States. But, if I move to Canada, does that mean that I am a “tax resident” of Canada too?
2. Absolutely YES!!! You are an American. “To whom much is given, much is expected.” U.S. citizens living in Canada (who meet the definitions of Canadian “tax residency”) are ALSO “tax residents” of Canada (or any other country where they may live). In other words, U.S. citizens living abroad are generally “tax residents” of at least two countries! How cool is that?

Part D – Different definitions of “tax residence” – Not all countries define “tax residence” in the same way

1. What is the criteria that different countries use to define who is a “tax resident” of the country?
2. The circumstances that constitute “tax residence” will differ from country to country. Generally speaking “tax residence” is based on definitions of (1) “residency” (deemed and actual), (2) “domicile” and (3) (in the case of the United States and Eritrea) “citizenship”. Note that different countries may define “tax residency” differently.
3. How can I learn the definition of “tax resident” for the OECD countries?
   
   1. In an earlier post about “OECD tax residency” I referenced the following chart which summarizes the definitions of “tax residency” in OECD countries. (I suggest that you use these definitions as a “start” to your research and not as the “last word”.)
   2. What is the significance of the “OECD” and why does “OECD tax residency” matter?
   3. About the “CRS”:“OECD” tax residency matters because the “OECD” has implemented what is called the “Common Reporting Standard” (“CRS”). The purpose of the “CRS” is to require members to exchange information about the existence of financial accounts, owned by individuals in countries where they do NOT have “tax residence”. For example, if a “tax resident” of Germany had a bank account in Canada, then the German Government would want to know about it! Ultimately this is to ensure that all “individuals” pay their “fair share” of taxes. (By the way, the salaries of OECD employees are generally tax exempt. See an interesting post by Dan Mitchell on the OECD. Seems pretty clear that if OECD employees do not pay tax, that they are not paying their “fair share”.)
   4. About FATCA: Tell me more about the requirements to be a “tax resident of the United States”.
   5. The United States has a system of “deemed tax residency”. In other words, the rules are very clear. At a minimum both U.S. citizens and “permanent residents” of the United States (“Green Card Holders”) are U.S. “tax residents” (Note that unless you are a U.S. citizen or “permanent resident” – a physical presence in the United States is necessary make one a U.S. “tax resident”. Here is a post I wrote describing what it means to be a “tax resident of the United States“.
   6. Tell me more about the requirements to be a “tax resident” of Canada.
   7. The definition of “tax resident” in Canada includes both “deemed tax residency” and “tax residency based on facts and circumstances”. Here is a post I wrote describing what it means to be a “tax resident of Canada“.
   8. What about South Africa? The way that South Africa imposes taxation on its expats has been in the news lately. Can you tell me about the definitions of “tax residency” for South Africa? Is it true that South Africa is considering “citizenship-based taxation” just like the United States has?
   9. No, South Africa has NOT considered “citizenship-based taxation”. But, it doesn’t require much to meet the test of “residence” for tax purposes in South Africa. To understand the “South Africa issue”, see:

   Part 1: South Africa is NOT attempting to compete with the USA by enacting “citizenship-based taxation”; and

   Part 2: The problem is NOT “worldwide taxation”. The problem is imposing “worldwide taxation” on people who don’t live in the South Africa or the USA and are “tax residents’ of other countries

   (Part 2 In 4 Part Series By John Richardson.)