Am I a California tax resident? Do I need to pay taxes in California?
At Gedeon Law & CPA, we are frequently asked these questions by Canadians who spend time in California for work or play or both. As the only firm licensed in California and Ontario, Canada, we regularly deal with Canadians whose enjoyment of the abundant sunshine that the Golden State has to offer creates a California tax residency dilemma.
Unfortunately, or fortunately depending on how you look at it, there is no real bright line test on determining California tax residency. Unlike the federal tax residency laws we discussed in our previous article, California law does not have a per se substantial presence test used to determine tax residency. Instead, it generally comes down to a matter of facts and circumstances and presumptions, which are very similar to how residency is determined for Canadian tax purposes.
Before delving too deep into the nuances of California tax residency regulations, let’s first look at how California law defines tax residency.
A California resident is any individual who meets any of the following:
- Present in California for other than a temporary or transitory purpose; or
- Domiciled in California, but located outside California for a temporary or transitory purpose.
A nonresident is any individual who is not a California resident.
Needless to say, the definition of a California resident essentially comes down to terms of art.
Let’s start with the term domicile.
California regulations define domicile for tax purposes as the place where you voluntarily establish yourself and family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed, permanent home and principal establishment. It is the place where, whenever you are absent, you intend to return.
Although domicile and residence are commonly used interchangeably, they are not always the same place. Hence, someone could theoretically find themselves considered a Canadian tax resident and also domiciled in California for tax purposes. Keep in mind, with no tax treaty between Canada and California there is no residency tie breaker to rely on either.
The other term of art used in the California regulations is temporary or transitory purpose. Deciding whether or not the purpose of an individual’s stay in California is considered temporary or transitory in nature depends upon the facts and circumstances of each taxpayer.
Luckily, California has provided some examples of situations where it presumes one is not in the state for a temporary or transitory purpose.
In the following cases, California regulations consider an individual is present in the state for other than temporary or transitory purposes when that individual is:
(a) afflicted by illness of such a character as to require a relatively long or indefinite period to recuperate,
(b) present in California for business purposes which will require a long or indefinite period to accomplish,
(c) employed in a position that may last permanently or indefinitely, or
(d) retired and moved to California with no definite intention of leaving shortly thereafter,
Yes, that’s right. Even our retired Canadian snowbird in Palm Springs could be considered a California resident. More commonly, however, are the TN or H1-B visa workers whose employment with a California employer inherently leaves them caught up in the California residency net.
Since determining California residency is fact driven, there is no easy rule of thumb for determining precisely when an individual is a resident of the state. Merely having a nice tan is not dispositive of ones California residency.
As part of its residency audits, the California Franchise Tax Board looks to the following list of factors to evaluate an individual’s place of residence:
- the location of all of the individual’s residential real property, and the approximate sizes and values of each of the residences;
- the location wherein the individual’s spouse and children reside;
- the location wherein the individual’s children attend school;
- the location wherein the individual claims the homeowner’s property tax exemption on a residence;
- the individual’s telephone records (i.e., the origination point of individual’s telephone calls);
- the number of days the individual spends in California versus the number of days the individual spends outside California, and the general purpose of such days (i.e. vacation, business, etc.);
- the location where the individual files his tax returns and the state of residence claimed by the individual on such returns;
- the location of the individual’s bank and savings accounts;
- the origination point of the individual’s checking account transactions and credit card transactions;
- the location wherein the individual maintains memberships in social, religious, and professional organizations;
- the location wherein the individual registers his/her automobiles;
- the location wherein the individual maintains a driver’s license;
- the location wherein the individual maintains voter registration, and the individual’s voting participation history;
- the location wherein the individual obtains professional services, such as doctors, dentists, and attorneys;
- the location wherein the individual is employed;
- the location wherein the individual maintains or owns business interests;
- the location wherein the individual holds a professional license or licenses;
- the location wherein the individual owns investment real property; and
- the indications in affidavits from various individuals discussing the individual’s residency.
Remember how we mentioned presumptions earlier in this article. Let’s take a closer look at the presumptions California law applies to its residency tests.
First, in addition to the above enumerated factors, there is a rebuttable presumption that an individual is a California resident when such individual spends, in the aggregate, more than nine months of the taxable year in California.
Second, there is a presumption that an individual is not a California resident when such individual (a) spends, in the aggregate, less than six months in California, (b) is domiciled outside California, and (c) maintains a permanent abode in another state of domicile.
Based on these presumptions, one could conclude that spending less than six months in California while maintaining a home and domicile in Canada likely means an individual is not a California tax resident. Spending over six months in California, however, is where you should consult with an expert to review your situation.
If you are in California for more than six months, then contact our office today to book a consultation.