Canadians find many things in California to be foreign, like the sun, sand, surf and In-N-Out Burgers.
But when it comes to Canadians who have family in California or who spend considerable time in the Golden State, California’s community property laws make Canadians realize just how foreign California can be.
As we’ve discovered over the years, California tax laws and the concept of community property are foreign to Canadians and their Canadian tax preparers. While many Canadians are aware that California taxes its residents on worldwide income, few truly understand the complex interplay of California’s tax and community property laws on California tax filings. We’ve seen many Canadians and their Canadian tax advisers incorrectly prepare California tax returns by not taking into account Canadian sourced income on a California non-resident return or failing to apply California community property laws.
Since California’s community property laws are fairly complicated, this article will be the first in a series of articles that explains how these laws apply to Canadians moving to the state or who are living or working in California.
To start, California is one of only nine U.S. states that is a community property state. Texas, Arizona and Nevada are some other states that also follow community property rules.
In a nutshell, California defines community property as any asset acquired or income earned by a married person. As a result, California considers property and income derived during a marriage to be owned 50/50 between the spouses. Any property or income not considered community property is treated as separate property.
For Canadians who are considered domiciled in California, the application of California community property rules has a profound effect on their federal and California tax returns. This is especially true when spouses have different domiciles, such as where one spouse is domiciled in California while the other spouse is still domiciled in Canada.
Because community property laws only apply to taxpayers domiciled in California, this first article will discuss the concept of California domicile.
Domicile is a legal term of art. As such, there is no bright line test that defines when a person is domiciled in California. This is different to how the IRS uses an objective test to determine residency for federal tax purposes.
Instead, for California tax purposes, domicile is defined as the place where an individual has their true, fixed, permanent home and principal establishment, and to which they intend to return whenever absent. Another way to look at it is you are a resident of the place where you live and domiciled in the place to which you intend to return. Therefore, the question of domicile boils down to a taxpayer’s intention as demonstrated by the taxpayer’s actions.
Most people would think that where you reside is where you are domiciled. In most cases, this is absolutely true. For Canadians facing cross-border issues, however, “residence” and “domicile” do not necessarily mean the same thing. While a person can have several places of residence, such as Toronto and Los Angeles, they can only have one domicile.
When assisting Canadians with their California domicile determination, we apply the following factors to determine a taxpayer’s intention for maintaining a California domicile:
- Is the taxpayer on a temporary work assignment in California?
- Where is the taxpayer employed?
- Where is the taxpayers immediate family located?
- Where does the taxpayer vote?
- Where does the taxpayer own property?
- How long did the taxpayer live in California?
- Where does the taxpayer have their business and social ties?
California maintains a rebuttable presumption that someone living in the state for at least 9 months out of the year is presumed to be domiciled in the state. On the other hand, if someone is in California for less than 6 months in a calendar year, California presumes the person is a not domiciled in California. In cases where a Canadian is spending considerable time in California, such as working for Google on a TN visa, the community property rules would not apply if the Canadian still maintains a domicile in Canada.
Generally, a Canadian in California working on a temporary visa is probably domiciled in Canada. As such, income earned in California is not community property. Conversely, a Canadian who obtains a green card and moves to California is very likely to be subject to community property rules.
A little known exception, for federal tax purposes, to the application of the community property rules applies when a Canadian is filing a dual-status federal return. In this case, the community property rules do not apply during the period of residency in a dual-status year. Therefore, for federal tax purposes, income earned is treated as separate property. Unfortunately, California does not conform to this exception for California tax purposes.
A common situation we run into that illustrates the impact of California community property laws is where a Canadian spouse is working in Canada and the other spouse is working in California.
For example, George is a Canadian TV personality who exclusively works in Canada on a popular hockey program. George owns a home in Toronto where he lives while working in Canada. He’s married to an American and they own a house together in Venice Beach, CA. George files a Form 1040NR under the Canada-U.S. tax treaty and his wife files a Form 1040 with a married filing separate filing status. George’s wife only works in California. On a regular basis, George makes trips to Los Angeles to be with his wife and he spends the offseason in Los Angeles.
Although George lives and works in Toronto, he still maintains a home for his family in California and his regular trips to Los Angeles demonstrate that California is where he intends to return when able to do so. Therefore, George and his wife are considered domiciled in California and are subject to worldwide taxation as California residents. Consequently, George’s Canadian income is considered community property income and his wife would have to pay federal and California tax on her 50% share of George’s out-of state earnings.
As California’s only U.S.- Canada cross-border CPA firm, Gedeon Law & CPA is uniquely qualified to advise Canadians with their cross-border tax filings involving California tax matters. Contact us today to schedule a call to discuss our cross-border tax filing services or for cross-border tax advice.