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When a Canadian citizen marries a US citizen they are entitled to apply for permanent residency (green card). The green card gives the Canadian resident provides most of the same rights as a US citizen for tax purposes. More importantly, it gives most of the same obligations! The article below details out the procedures to get a green card and taking steps towards permanent residency and the tax compliance that follows.
Obtaining a Marriage-Based Green Card:
The U.S. citizen spouse will file a form known as “Petition for Alien Relative” with the United States Citizenship and Immigration Services (“CIS”), petitioning for the Canadian spouse to become a U.S. permanent resident. As part of the petition, the U.S. citizen will also have to sign an affidavit of support, declaring that he/she will be financially able to support the Canadian citizen and that the Canadian will not become a public charge.
The Canadian citizen spouse may concurrently file a form known as an Application to Register Permanent Residence or Adjust Status, seeking to change the Canadian’s current immigration status to that of a permanent resident. Depending on the Canadian’s situation, he/she may also apply for a temporary work permit or a temporary travel permit. These are optional, and should only be sought if the Canadian citizen is not currently on a valid work visa or anticipates that the work visa will expire before the green card is approved. The Canadian citizen will also have to get fingerprinted and undergo a medical examination by a designated civil surgeon to ensure that he/she is healthy.
Upon approval of the adjustment of status, the Canadian citizen will be given what is known as “conditional residency.” This means that the Canadian citizen will be a U.S. resident and will get a green card – with a caveat. The caveat is that the both spouses must jointly apply to remove the condition within the three months prior to the second anniversary of receiving residency, thereby turning the “conditional residency” into “permanent residency.”
The rationale behind this process is to prevent non-U.S. citizens from entering into fraudulent marriages in order to obtain a green card. After all, many foreigners marry U.S. citizens simply to get a green card in order to stay and work in the country. The CIS requires married couples to show that their marriage is still intact two years later in order to curtail such abuse.
Once the application for removal of the condition is removed, the Canadian citizen becomes a full-fledged U.S. permanent resident. Be careful though, as the Canadian citizen risks losing his/her residency if the couple forgets to remove the condition within the appropriate timeframe.
Once you are living with your US spouse and become a resident or a green card holder then the Canadian citizen will need to file a tax return (Form 1040) with the US spouse and include their worldwide income. The best option is to file “Married Filing Jointly” as it gives you the best tax credits and usually the lowest tax. The Canadian resident will need to report on separate forms any registered (e.g. RRSPs which you have not cashed in) and non-registered accounts and any shares they own in a Canadian private corporation. (Planning Point: – removing funds from an RRSP AFTER you are living in the U.S. will reduce the income tax on removing funds to 25%)
Canadian Wedding Filings:
The Canadian citizen will likely need to file a ”Departure Return” in Canada if you have more than $25,000 of assets. The departure return will report your worldwide income up to the date that you leave the country and become a resident of the United States. In addition, on the departure return you will deem to have disposed of all your assets at Fair Market Value and reacquired for the same amount. This deemed disposition often triggers income tax payable on the departure return. This applies to most properties except Canadian real estate, business property, pension plans and RRSPs. The Canada-U.S. Treaty provides some protection against paying tax on the same gains again when you finally sell the assets while living in the U.S.
If you rent out your Canadian property and earn rental income while living in the U.S., you will have to report that income both in Canada and in the U.S. You will report the income to Canada on a Section 216 T1. You will claim any Canadian taxes paid on your U.S. return.
You can not contribute to your TFSA or RRSP while you are a non-resident and do not have earned income. If you have earned income in the year you leave you can make a RRSP contribution when you leave. However, even if you do not benefit from tax savings when making that contribution – you will still pay Canadian tax when you withdraw funds from the RRSP. If you receive certain types of income from Canada after you leave, the Canadian payer has to withhold non-resident tax on the income and send it to Canada Revenue Agency. The withholding tax will at most 25% but can be reduced if funds are taken out as an annuity after retirement.
If you keep your RRSP, you have to report the income earned within the RRSP on your U.S. return. You can make an election to defer that U.S. tax until you remove the funds from your RRSP – but have to make that election annually on your U.S. personal tax return (Form 1040).
If a person passes away while they are holding a green card or have become a citizen they will become subject to U.S. estate tax. The estate tax which starts at 18% and goes up to 40% with a taxable estate of $1,000,000 above the estate tax credit available. There is an estate tax credit available of $5,450,000.
The United States rules on income splitting and deferral of taxes between spouses that are U.S. citizens and resident aliens are not available. If such planning is done it could create adverse tax consequences for both parties.
Canada copied it’s “kiddie tax” on the U.S. version – but with significant differences. The “kiddie tax” is subject to the highest marginal rate in Canada and the parent’s marginal rate in the US. The kiddie tax in the U.S. is more inclusive of the income caught in the kiddie tax rules. The U.S. kiddie tax is on all income and the tax is up to age 14. The kiddie tax in Canada is on a defined income stream and taxable at the highest rate until 18 years old.
If you have any questions please contact Sloan Partners or call Robert McGaghran 416-665-7735 Ext 298
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