Canadians find many things in California to be foreign, like the sun, 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 the state 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 by 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 explaining how the state’s laws apply to Canadians who are living or working there.
To start, California is one of only nine U.S. states that is a community-property state. Texas, Arizona and Nevada are among the others.
In a nutshell, California defines community property as any asset acquired by, 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.
California community-property rules have a profound effect on the federal and California tax returns for Canadians who are domiciled in the state. This is especially true when spouses have different domiciles—where, for example, one spouse is domiciled in California while the other is 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 from 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 after being absent. Another way to look at: You are a resident of the place where you live, and you are 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 taxpayer’s 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 (an assumption that something is true unless someone proves otherwise) that someone living in the state for at least nine 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 six months in a calendar year, California presumes the person is a not domiciled in the state. 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 to applying community property rules for federal tax purposes 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.
One situation we often run into illustrates the impact of California community property laws well. In this situation, a Canadian spouse is working in Canada and the other spouse is working in California.
For example, George is a Canadian television 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, Calif. George files a Form 1040NR under the Canada-U.S. tax treaty, and his wife files a Form 1040 with a married-filing-separately 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 to be 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.
Marc Gedeon is a CPA (U.S), CPA (Canada) and Tax Attorney at Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada. Marc specializes in providing Canada-U.S. cross-border financial, tax, transition, and estate planning services. This piece is for informational purposes only and should not be considered legal or tax advice. Online readers should not act upon this information without seeking professional counsel.