Canada, a top-20 country in FY2019 for EB-5 visas issued, has taxation implications for departing EB-5 investors that should be considered in advance to mitigate the impact. Afterwards, the taxation of Canadian non-residents is limited and often does not require the payment of Canadian taxes. Immigration lawyer R. Oliver Branch advises that to determine non-residency for a Canadian EB-5 investor, one must follow the tests of the U.S.-Canada Income Tax Treaty. First, when departing Canada, an EB-5 investor will be subject to certain taxation consequences: the taxable deemed disposition of most assets at fair-market value. Canadian real property is an exemption to this rule, however, and will be taxed at the time of actual disposition, even if the owner is a non-resident at that time.
After departing, taxation for Canadians is determined largely by residency, which is usually governed by the Canadian Income Tax Act (the Act). Taxation for non-residents is usually limited to income earned from Canadian employment or business, and proceeds from the disposition of Canadian taxable property. However, the U.S.-Canada Income Tax Treaty rules supersedes the rules of the Act. The treaty applies when a taxpayer is a resident of both Canada and the U.S. and is subject to U.S. taxation because of domicile, residence or citizenship. For a Canadian who is a resident alien in the U.S. with a Green Card, the treaty should apply. The treaty has a series of tests that will determine the issue of residency — again, a key factor in determining Canadian taxation.
US.-Canada Income Tax Treaty tests
- A person is a resident of the country in which they have a permanent home. In practical terms, this would entail an EB-5 investor leasing or purchasing a home in the U.S. and selling or leasing his or her Canadian home.
- If that person has either a permanent home in both countries, or neither country, they will be a resident of the country in which they have the deepest personal and economic ties. Such ties include family, social, vocational, and political connections. A deep tie would include a spouse or children in one country.
- If the previous concept of depth of ties cannot determine residency, the person in question is a resident where they have a “habitual abode.” To qualify, the elements of frequency, length, and regularity of stays are considered. In simple terms, it’s where one lives.
- If the person has either a habitual abode in both countries, or neither, they are a resident of the country in which they are a citizen.
- If the person is a citizen of both countries, or neither, the matter is determined by authorities of both countries. Lawyer Branch advises this process is lengthy and costly; but one has to assume that the test of residency rarely gets this far.
Read immigration lawyer R. Oliver Branch’s and tax professional Elan Harper’s article “EB-5 Immigrant Investor Program and Canadian tax considerations for investors”