So we’re on to Part 2 on this topic. Here, we’re talking about a Canadian citizen who owns a California home (let’s say in La Quinta for example), and the likelihood that person is deemed in a California resident for tax purposes. Again, in fairness, it’s going to be highly unlikely the FTB (the California Franchise Tax Board…basically the IRS for the State of California) deems a Canadian citizen a California resident in a given year, because most Canadians are here on a B-2 Visa (they may not even be aware of this fact), where they simply show the US officials at the border their passport and they’re permitted entry in the US. Under the standard B-2 tourist Visa, the Canadian citizen is only legally permitted to stay in the US up to 6 months in a calendar year. Unless the Canadian citizen is violating the terms of the B-2 Visa (not a good idea, it could be hard to get into the US the next time), or is in the US on a visa other than a B-2 where the Canadian is permitted to stay in the US more than 6 months (like a work related visa), or the Canadian is a dual Canadian-US citizen or has a US green card (permitting the Canadian citizen to stay the entire year in the US if he or she likes), it’s difficult for the Canadian (in California less than 6 months) to be deemed a California resident. But not impossible. We must re-review the checklist of items the FTB looks at from Part 1 of this topic (e.g., location of your spouse/RDP and children; location of your principal residence; where your vehicles are registered; where you maintain your professional licenses, etc.). The FTB may still deem the Canadian a California resident if they have enough checks in the wrong category, even though the Canadian does not spend more than 6 months a year in California.
Let’s review the FTB’s presumption on time spent in California. If you spend more than 9 months (in a calendar year) in California- you are presumed to be a California resident that year (but you can rebut it by going to the checklist).
What does it Mean For a Canadian to Be Deemed a Resident of California?
It’s significant. It means that California will tax the individual up to 9.3% of the income they earn anywhere in the world. And the key part is there will be no credit available in Canada on these taxes (unlike federal taxes imposed by the IRS). In addition, California does not allow a foreign tax credit or foreign earned income exclusion. There is no treaty or credit system between states and countries or states and provinces.
But it’s Unlikely a Canadian Will Be Deemed a California Resident, So What California Taxes are Canadians Much More Likely to Owe?
Instead of owing 9.3% on the income the Canadian earns anywhere, it is far more likely the Canadian will owe tax, as a nonresident of California, solely on their California source income. So what are we talking about here?
Gain From the Sale of California Real Property– A big one. You sell your California vacation house, you owe tax in California. Count on 9.3% of the gain on the property (i.e, buy for $300,000, sell for $500,000, its 9.3% x $200,000= $18,600 in tax to the state of California). You’re still going to owe tax to the IRS on top of this. By the way, upon the sale of your house, the buyer must withhold from you (the Canadian seller) either: 10% of the gross sales price ($50,000 in our example above); or 9.3% of the gain ($18,600), and send it in directly to the FTB. You, as the seller, can choose the withholding amount (you should choose the lower amount). The withholding amount isn’t the final tax you owe, it’s just the state of California’s insurance policy that you won’t shuffle back to Canada without paying the California tax. It’s a security deposit if you will.
We’ll talk about the tax on other sources of California income earned by the Canadian, like wages earned in California, business income earned in California, and California interest and dividends, in Part 3 of the series.