Canada – U.S. Tie breaker rule

A taxpayer who is considered to be a resident for tax purposes of both the U.S. and Canada but have stronger ties with one of the countries can claim treaty benefit under the tie-breaker rule. The tie-breaker rule will allow the taxpayer to stay a resident of one country as opposed to two. 

If you are a dual-resident taxpayer because you have a U.S. green card but you determine under the tie-breaker rule that you are a resident of Canada, you may claim treaty benefits and file your U.S. income tax as a nonresident alien. You must file 1040NR by the due date (including extensions) and also attach a fully completed Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). The green card holders don’t choose to apply tie-breaker rule as that can have implications on their immigration. 

It is important to note that if a taxpayer is a U.S. citizen then they must be a resident in the U.S. and as such the treaty rules will need to look to determine if they can cease residency of Canada in question. In general, when a U.S. citizen is living in Canada then they have no other option but to file full year-resident tax returns for both Canada and the U.S. 

The tie-breaker rule is commonly used by Resident Aliens (because they meet the substantial presence test) and Canadian residents. 

Under the tax treaty, where an individual is a resident of both Contracting States, then his status shall be determined as follows:

• he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
• if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode (a place where he or she sleeps regularly);
• if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and
• if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.