Thinking of abandoning green card without a formal surrender? Think again!

In a recent court case, the taxpayer who argued that by living in Germany for many years and selling his US properties a long time back, he had relinquished his Lawful Permanent Residence (LPR) or a green card and hence should not be subject to US taxes on his income. However, IRS did not accept this and court agreed with IRS making the taxpayer liable for the tax.

IRS contended that the taxpayer was liable for income tax deficiencies for 2004 and 2006 – 2009 (almost all of which was attributable to the gain on his installment sale of stock). IRS argued that (1) because the taxpayer did not formally abandon his LPR status (obtained in ’77) until 2010, he remained an LPR during the years in issue, and (2) because he was not taxable by Germany as a German resident during those years, he was not a German resident under Article 4 of the Treaty. Therefore, he was not exempted from U.S. taxation by the Treaty.

The Tax Court reasoned that the taxpayer did not formally renounce or abandon that status until Nov. 10, 2010, when he filed a Form I-407 and surrendered his green card to the USCIS consistent with the requirements of Reg. § 301.7701(b)-1(b)(3).The Court rejected the taxpayer’s argument that he “informally” abandoned his LPR status. The Court held that for Federal income tax purposes, the taxpayer’s LPR status turns on Federal income tax law and was only indirectly determined by immigration law. The taxpayer’s reliance on an immigration case that recognized “informal” abandonment was misplaced. Unlike immigration law, the Code and regs were not silent on the point at which a taxpayer’s LPR status was considered to change. The requirements set out in Code Sec. 7701(b)(6)(B), Reg. § 301.7701(b)-1(b)(1), and Reg. § 301.7701(b)-1(b)(3) for abandoning LPR status

CRA provides relief from withholding for the compensation paid to Non-residents

Under the Canadian Income Tax Act, employers are required to withhold income tax at source from Canadian-source compensation paid to non-resident employees related to services rendered in Canada. The amount of withholding is determined in accordance with Section 102 of the Income Tax Regulations. Income tax treaty between Canada and the country of residence of the nonresident employee providing services in Canada may offer relief from paying tax in Canada. The Canadian employer, however, may only be relieved of the tax withholding obligation when a formal waiver is obtained from the Canada Revenue Agency (CRA).

CRA has provide Form that should be used for an employee who is a resident of United States and is expected to earn a maximum of CAN$10,000. If the non-resident employee is a resident of country other than U.S. and if Canada has entered into a tax treaty with such country, the compensation limit has been set at CAN$5,000. The employee must apply for Social Insurance Number or Income Tax Number in order to claim the waiver; the employer must provide T4 to such employee. There may also be issues relating to social security taxes for the U.S. employees; however, they can be mitigated by taking advantage of the Totalization agreement.

This can be a good news for U.S. employees travelling infrequently and earning income in Canada.