Updated: Jan 19
Many people want to be cross-border citizens—until they realize the tax implications. For US citizens in particular, tax residency rules can turn the excitement of global relocation into a financial nightmare.
And even if they are prepared to pay income taxes in their new country of residence and possibly also the US, fully comprehending and applying tax residency obligations can sometimes baffle even international tax experts.
But not to worry. Although understanding tax residency consequences on a global scale may not be conducive for most experts, parsing out tax residency rules for the most common countries of relocation is certainly doable. Below, we’ve cataloged the most important tax residency rules for global citizens relocating to Canada, Australia, or the UK. Information on US tax residency tests can be found here.
Anyone considering a cross-border relocation should familiarize themselves with the tax residency tests of the country they plan to move to. The most common tax residency tests may indeed be substantial presence tests (SPTs), but there are other types of tax residency tests, such as those based on legal immigration status, that may establish an individual as a tax resident in a country they have ties to.
What is Tax Residency?
Tax residency is a different type of residency than legal residency. To be determined a legal resident, an individual who has relocated to a foreign country needs to apply for a temporary visa, or their country’s version of the Permanent Resident Card (also known as a permanent visa). In the US, the Permanent Resident Card is also called a green card. Following the approval of permanent residency, the individual may commence the process of applying for citizenship and if successful, will become a ‘naturalized’ citizen of this foreign country.
Tax residency, on the other hand, can be applied to individuals who are physically present in a country regardless of their legal residency status (or immigration status). In most countries (except for the United States), physical presence is the main criterion for determining whether or not an individual is considered a tax resident. If an individual is considered a tax resident, they must pay that country’s income taxes on income deemed to be sourced from that country.
There is an interplay between one’s legal residency status and the length of time required to be considered a tax resident when one is in their home country. E.g. A citizen or legal permanent resident who returns from abroad to their home country and begins earning an income will, in almost all cases (with the exception of a treaty tie-breaker situation for dual-citizens as discussed briefly below), be deemed a tax resident of their home country immediately. Whereas a temporary resident, would need to be in the country and satisfy the country’s SPT before being deemed a tax resident.
A tax-payer can only be a primary tax-resident of one country at a time, and so determining one’s primary tax residency can have a significant impact on an individual’s tax assessment. This is especially the case for the earned income of an American abroad. The reason this is especially true for Americans who move abroad to work is that most other countries (with the exception of the UAE, Bermuda, Bahamas, and Hong Kong) have higher federal income taxes than the US. Foreign countries may also not have the same (or any) tax-filing statuses.
This situation can result in a double-whammy for an American abroad where the nominal tax rate is higher with the higher rate starting at a much lower income level given the lack of tax status. For these reasons and many more, it is therefore important to understand the factors that will trigger tax residency in a foreign country and what impact that is likely to have on one’s total tax assessment.
Despite the higher tax rates and lack of filing status overseas, the good news is that the US has some 68 income tax treaties that are designed precisely to avoid or minimize double-taxation. Double-taxation is where two countries claim taxation rights to the same income, and thus the individual pays taxes twice. Cross-border individuals and their financial advisors should first determine whether an income tax treaty exists between countries that may claim a right to tax a given asset or income source, and how the treaty works to avoid double taxation.
What Are Tax Residency Tests?
Each country has its own test to determine if a noncitizen/legal permanent resident is considered a tax resident, often due to their physical presence in the country, regardless of their legal status. For example, someone who meets a substantial presence test—even residing in the US illegally (i.e., they do not have a valid green card or visa)—may still be required to pay US taxes.
On the other hand, any individual who holds a US green card is considered a US tax resident regardless of whether they live in the US or not. As a permanent resident, that individual is subject to US taxes on their worldwide income even during years they live in their own country of citizenship.
Because physical presence, legal status and the location where income is earned have so much to do with one’s tax residency, it’s important for cross-border individuals to understand tax residency tests and the consequences of becoming a tax resident in a given country.
Canadian Tax Residency Tests
The Canada Revenue Agency (CRA) is the revenue service of the Government of Canada. The Canadian tax residency tests require any individual who is considered a factual resident or deemed resident of Canada to be assessed for Canadian income taxes on their worldwide income for any year they are considered a Canadian resident for tax purposes (see below for how income sourced outside of an individual’s primary tax residence may be taxed by both countries yet avoid double taxation).
To be considered a Canadian tax resident, an individual’s whole situation must be considered by the CRA. The first step is to determine whether an individual has residential ties to Canada. This can include ties such as:
Owning residential property or renting a home in Canada
Having a spouse or common-law partner in Canada
Having dependents in Canada
Owning personal property in Canada (e.g., vehicles, furniture)
Maintaining memberships to social or religious organizations in Canada
Having open Canadian bank accounts or credit cards
Holding a Canadian driver’s license or passport
The second step is to determine an individual’s physical presence in Canada. The Canadian substantial presence test considers anyone who has physically resided in Canada for 183 days or more in a given tax year to be a Canadian resident for tax purposes. The 183 days must include all full and partial days spent in Canada for any purpose.
Australian Tax Residency Tests
The Australian Tax Office (ATO) is the government agency responsible for revenue services in Australia. The ATO has four residency tests to determine if an Australian noncitizen is considered a resident for tax purposes. If an individual meets any of the four tests, they must declare all worldwide income to the ATO. The four tests include:
The resides test
The domicile test
The 183 day test (the substantial presence test)
The Commonwealth superannuation test
The resides test is the primary test of tax residency in Australia. If an individual resides in Australia, as evidenced by factors such as their physical presence in Australia, their intention and purpose to remain in Australia, their family members who live in Australia, their business or employment status in Australia, their Australian living arrangements, or the assets they hold in Australia, they are considered a resident for tax purposes.
If the resides test is not met, the other statutory residence tests are considered. The domicile test is the first and applies if an individual is considered a domiciliary of Australia. Whether by birth or by choice, if an individual currently or eventually plans to reside in Australia permanently (as opposed to temporarily), they are considered a domicile of Australia.
The 183 days test applies to individuals who are traveling or emigrating to Australia. If any individual resides in Australia for 183 days or more during a calendar year for any reason, they will be considered an Australian resident for tax purposes.
Finally, the Commonwealth superannuation test only applies to Australian Government employees who are working overseas at Australian posts and who are members of the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS). For individuals who are considered Australian tax residents under this test, their spouse and dependent children would also be considered Australian tax residents.
UK Tax Residency Tests
The UK substantial presence test is called the Statutory Residence Test. As with the US, Canadian, and Australian substantial presence tests, any individual who resides in the UK for 183 days (consecutive or nonconsecutive) or more is considered a UK resident for tax purposes.
If the 183 days test is not met a second and third automatic UK test may apply. The second test considers homeownership in the UK. An individual is considered a UK resident for tax purposes if they own or owned a home in the UK and is in the UK for:
At least one period of 91 consecutive days when the UK home was owned
At least 30 of those 91 days fall in the tax year in which the UK home was owned and the individual was present in the home for at least 30 days at any time during the year
No overseas homes were owned or, if an overseas home was owned, the individual was present in that home for fewer than 30 days in that tax year
The third automatic UK test is met if an individual:
Works full time in the UK for any period of 365 days, which falls in the relevant tax year
More than 75% of the total number of days in the 365 day period when an individual does more than 3 hours of work are days when they do more than 3 hours of work in the UK
at least one day which has to be both in the 365 day period and the tax year is a day on which an individual does more than 3 hours of work in the UK
Considerations for Tax Residency Tests
Some individuals may find that they meet multiple countries’ tax residency tests. If this is the case, tie-breaker provisions apply to individuals with ties to countries that share a tax treaty to mitigate an individual’s tax obligations to both countries (also known as double taxation). An individual can only be a primary tax resident of one country at a time, which means that only one country has primary taxation rights to that individual’s income at a certain time.
Additionally, it’s important that individuals understand that tax year definitions are different between different countries. For example, the US tax year begins on January 1 and ends on December 31, whereas the Australian tax year begins July 1 and ends on June 30. Likewise, the UK tax year begins on April 6 and ends on April 5.
The difference between tax years could mean individuals are simultaneously a resident of multiple countries in a given tax year, complicating their understanding of tax residency tests and subsequent tax obligations. Both cross-border citizens and their financial services professionals must be able to keep it all straight to engage in the most optimal tax planning.
Learn More at the Global Financial Planning Institute
High net worth cross-border citizens have much to consider in terms of the tax consequences when they decide to move overseas. These tax consequences can be downright baffling to their financial advisors at first glance.
At the Global Financial Planning Institute, we support fiduciary financial advisors who serve expatriates and repatriates all over the globe. We educate financial advisors on the tax implications for their clients’ relocation decisions, as well as how to optimize tax mitigation strategies for clients who need them.
You have a unique opportunity to provide financial advice to globally mobile individuals and families who need you, and it’s never too late to build your expertise in this area. To learn more about the GFP Institute and how we can support your practice, visit www.gfp.institute or simply click here to create your free membership account.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.