California Tax Filing with a Canadian Spouse

Our previous article discussed the concept of California domicile and the application of California community property rules to Canadians domiciled in the state. This article is the second installment in our series of articles dealing with how California community property laws can impact Canadians.

At Cardinal Point, we regularly deal with cross-border couples that maintain cross-border lifestyles due to career commitments or other obligations. In this article, we’ll expand on the application of California’s community property laws when one spouse is domiciled in California and the other spouse is domiciled in Canada.

Imagine a married couple where the wife lives in Toronto (and is domiciled in Ontario) and the husband lives in Los Angeles (and is domiciled in California). Further imagine that both spouses are dual American and Canadian citizens and they file a joint U.S. Form 1040 tax return. The husband, Drew, is a professional hockey player who plays for a California based NHL team. Drew’s wife, Amber, is a top fashion model based out of Toronto. The couple owns homes in both Toronto and Los Angeles. Since Amber is mainly working in Toronto, New York, London and Paris, she only spends two weeks out of the year in Los Angeles with her husband. Moreover, Amber does not earn any California sourced income.

One might assume that Amber does not need to file a California tax return and pay California tax given that she doesn’t earn any California income and isn’t domiciled in California.

As we stated in our previous article, California follows its own rules for determining tax residency. Unlike for federal tax purposes, an immigrant to California is normally a California resident from the date of arrival. There is no 183 physical presence test or green card requirement to determine California residency status. Moreover, since California is not a party to the Canada-U.S. tax treaty, the treaty is not applicable for purposes of determining California residency (similarly California does not allow a foreign tax credit or the federal foreign earned income exclusion).

Going back to Drew and Amber, because they are filing jointly on their federal return, California requires the same joint filing status on their California return and they would pay California tax on their worldwide income.

There is, however, a little-known exception that will allow our imaginary couple to file separately instead of jointly for California tax purposes. Two criteria must be met to qualify to file separately in California: (1) Amber is not a resident of California and (2) Amber does not have any California sourced income, including California wages and income from California real estate property.

With Amber filing separately under the exception, she would still need to file a California 540NR non-resident return to pay tax on 50% of her husband’s California income since Drew is domiciled in California. Moreover, she would need to disclose her non-California sourced income on the California return to determine her California tax rate.

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