My spouse and I moved to Canada for work and applied for Canadian permanent residency -- does the U.S.-Canada tax treaty, or our move itself, mean Virginia can no longer tax us?

Plain-English summary

The Department adjusted a husband-and-wife's 2020 Virginia part-year resident return to a full resident return, after they'd claimed part-year status for the year they moved to Canada, and issued an assessment. The couple appealed on two separate grounds.

Their first argument was that the U.S.-Canada income tax treaty (the "Convention") made them residents of Canada rather than Virginia. The Department rejected this outright: Article 2 of the Convention states it applies only to "the Federal income taxes imposed by the Internal Revenue Code" on the U.S. side -- it doesn't reach taxes imposed by state or local governments at all. So even if the treaty classified the couple as Canadian residents for federal purposes, that classification is irrelevant to whether they remained Virginia domiciliaries; Virginia's own domicile law controls that question independently, unaffected by the treaty.

Their second argument -- that they'd actually changed their domicile to Canada under ordinary Virginia law -- succeeded. The wife had accepted a job in Canada and the couple began living there in January 2020. Although the assignment was originally supposed to end in January 2022, they applied for Canadian permanent residency in October 2021 (later extending that application), obtained Canadian vehicle permits and driver's licenses, got Canadian healthcare, and paid Canadian income tax. They did keep two Virginia homes (leased out to third parties, not available for their own use) and their Virginia driver's licenses, and the wife had used her Virginia voter registration to vote in 2021. Ordinarily, retaining a Virginia driver's license is a strong indicator of an intent to keep Virginia domicile -- but here, the couple had also obtained Canadian licenses and had not renewed their Virginia licenses since moving. On voting, the Department noted that federal law lets U.S. citizens living abroad vote in federal elections using their last-domicile-state registration without that vote itself affecting their domicile for tax purposes. Weighing everything together -- with the strongest weight on the Canadian permanent-residency application -- the Department found the couple had adequately shown an intent to abandon Virginia and adopt Canada as their new domicile, and abated the assessment. It cautioned, though, that continuing Virginia ties (like the still-unrenewed driver's licenses) could prompt renewed scrutiny in future years if circumstances change.

What this means for you

Anyone citing a U.S. tax treaty to try to avoid state income tax

A federal income tax treaty (this one with Canada, but the same limitation applies broadly) generally only governs taxes imposed at the federal level. It does not, by its own terms, exempt you from a state's separate income tax -- you have to win the state domicile/residency question on its own facts, independent of any treaty argument.

People moving abroad for work who want to establish a new, non-Virginia domicile

No single factor decides a domicile change. Here, applying for permanent residency in the new country carried the most weight, and letting Virginia-specific ties (driver's license) lapse while replacing them with the new country's equivalents (license, vehicle registration, healthcare) reinforced the case -- even though the taxpayers still owned Virginia real estate and one had voted using an old Virginia registration. Owning Virginia property you've rented out to others, rather than keeping available for your own use, is a materially different fact than keeping a home you could return to.

Taxpayers relying on federal overseas-voting rules

Casting a federal ballot from abroad using your last state of domicile doesn't, by federal law, count against you in a state domicile analysis -- but state driver's license retention and renewal decisions are treated very differently and can cut against a domicile-change claim.

Common questions

Q: Does a U.S. tax treaty (like the one with Canada) protect me from state income tax?
A: No, not by itself. This treaty's own text limits its scope to federal income taxes; it says nothing about state or local taxes, so Virginia's separate domicile rules still control whether you owe Virginia tax.

Q: If I move abroad, does keeping my Virginia driver's license automatically defeat a domicile change?
A: Not automatically, but it's ordinarily strong evidence you intend to keep Virginia domicile. Here, the taxpayers overcame it because they'd also obtained the new country's driver's licenses and had stopped renewing their Virginia ones after the move.

Q: Does voting using my old state voter registration while living abroad hurt my domicile-change case?
A: Federal law says casting an overseas federal ballot with your last-domicile-state registration doesn't itself affect your domicile for tax purposes. It's a different situation than affirmatively registering to vote (or renewing a driver's license) in the old state after the move.

Q: Does owning a home in Virginia after I move away automatically mean I haven't abandoned my Virginia domicile?
A: Not necessarily -- the Department distinguished between a home kept available for the taxpayers' own use versus these taxpayers' two homes, which were under long-term leases to tenants and not available to them, which weighed in favor of a completed domicile change.

Citations and references

• Va. Code § 58.1-302 (domiciliary resident and actual resident defined)
• Va. Code § 46.2-323.1 (Virginia driver's license applicants must certify Virginia residency)
• 52 U.S.C. § 20309 and § 20310 (overseas federal voting using last-domicile-state registration doesn't affect domicile/residence for tax purposes)
• P.D. 96-228 (9/9/1996), P.D. 07-39 (4/20/2007), P.D. 13-232 (12/18/2013), P.D. 18-75 (5/2/2018), and P.D. 19-90 (8/15/2019) (the U.S.-Canada and similar tax treaties apply only to federal taxes, not state/local taxes)
• P.D. 00-151 (8/18/2000) (a taxpayer can establish a domicile outside Virginia even while retaining a Virginia driver's license)
• P.D. 02-149 (12/9/2002) (obtaining/renewing a Virginia driver's license is a strong indicator of intent to retain Virginia domicile)
• P.D. 10-203 (9/1/2010) (federal overseas-voting rules and their effect on domicile analysis)
• P.D. 94-280 and P.D. 22-16 (cited by the Department as related documents on domicile/residency)

Subject

Administration: Tax Treaty - Canada Residency: Domicile - Taxpayer established new domicile

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-126

Original ruling text

August 10, 2022

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to your clients, * and *** (the “Taxpayers”), for the taxable year ended December 31, 2020.

FACTS

The Taxpayers, a husband and wife, filed a Virginia part-year income tax return for the 2020 taxable year. The Department requested additional information from the Taxpayers in order to determine whether they properly filed as part-year residents. Based on the information provided, the Department adjusted the Taxpayers’ part-year return to a resident return and issued an assessment. The Taxpayers appeal, contending they became residents of *.

DETERMINATION

Treaty

The Taxpayers argue that under the * (the “Convention”), they were considered residents of *** and thus were no longer subject to Virginia taxation. Article 2 of the Convention states, in pertinent part, “The existing taxes to which this Convention shall apply are . . . in the case of the United States, the Federal income taxes imposed by the Internal Revenue Code . . . .” Pursuant to this article, the Convention applies only to certain taxes imposed at the federal level by the United States and the Canadian national governments. Taxes imposed by state and local governments, including Virginia, are unaffected by the Convention. See Public Document (P.D.) 96-228 (9/9/1996), P.D. 07-39 (4/20/2007), P.D. 13-232 (12/18/2013), P.D. 18-75 (5/2/2018), and P.D. 19-90 (8/15/2019).

Further, even if the Taxpayers were considered residents of * for purposes of applying the Convention’s provisions, Virginia law still governs the question whether they remained domiciliary residents of Virginia and were thus subject to Virginia taxation. As stated above, taxes imposed by state and local governments are not subject to the Convention, and thus state and local law continues to control.

For individual income tax purposes, Virginia conforms to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Chapter 3 of Title 58.1 of the Code of Virginia . Thus, if the Taxpayers were residents of Virginia, as defined under Virginia law, and had FAGI, they would have been subject to Virginia income tax to the extent provided by Virginia’s income tax statutes and regulations.

Domicile

Two classes of residents, a domiciliary resident and an actual resident, are set forth in Virginia Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of a taxpayer and the place to which he intends to return even though he may reside elsewhere. For a person to change domiciliary residency to another state or country, that person must intend to abandon his Virginia domicile with no intention of returning to Virginia. Concurrently, that person must acquire a new domicile where that person is physically present with the intention to remain there permanently or indefinitely. An actual resident of Virginia means a person who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia. A Virginia domiciliary resident, therefore, working in other parts of the country or in another country who has not abandoned his Virginia residency continues to be subject to Virginia taxation. Additionally, a person who is not a domiciliary resident of Virginia, but who stays in Virginia for an aggregate of more than 183 days is also subject to Virginia taxation.

In order to change from one legal domicile to another legal domicile, there must be (1) actual abandonment of the old domicile, coupled with an intent not to return to it, and (2) an acquisition of a new domicile at another place, which must be formed by personal presence and an intent to remain there permanently or indefinitely. The burden of proving that the domicile has been changed lies with the person alleging the change.

In determining domicile, consideration may be given to the individual’s expressed intent, conduct, and all attendant circumstances including, but not limited to, financial independence, profession or employment, income sources, residence of spouse, marital status, situs of real or tangible property, motor vehicle registration and licensing, and such other factors as may be reasonably deemed necessary to determine the person’s domicile. A person’s true intention must be determined with reference to all the facts and circumstances of the particular case. A simple declaration is not sufficient to establish residency.

The Department determines a taxpayer’s intent through the information provided. A taxpayer has the burden of proving that he or she has abandoned his or her Virginia domicile. If the information is inadequate to meet this burden, the Department must conclude that he or she intended to remain indefinitely in Virginia.

In this case, the Taxpayers have performed actions indicating an intent to establish domicile in Canada. The wife accepted employment in Canada and began residing there with her husband in January 2020. Although the employment assignment was initially set to end in January 2022, the Taxpayers applied for permanent residency in Canada in October 2021, and extended their permanent residency status to September 2022 while awaiting a decision. The Taxpayers obtained vehicle permits in Canada as well as Canadian driver’s licenses. They also obtained Canadian healthcare and paid income taxes to Canada.

The Taxpayers maintained several connections to Virginia. They continued to own two homes in Virginia but leased them to third parties. The Taxpayers also retained Virginia driver’s licenses. In addition, the wife used her Virginia voter registration to vote in 2021.

Virginia Code § 46.2-323.1 states, “No driver’s license... shall be issued to any person who is not a Virginia resident.” In fact, this section states that every person applying for a driver’s license must execute and furnish to the Commissioner of the Department of Motor Vehicles (DMV) a statement that certifies that the applicant is a Virginia resident. The Department has found that an individual may successfully establish a domicile outside Virginia even if he retains a Virginia driver’s license. See Public Document (P.D.) 00-151 (8/18/2000). However, obtaining or renewing a Virginia driver’s license is considered to be a strong indicator of intent to retain domiciliary residency in Virginia. See P.D. 02-149 (12/9/2002).

With regard to voting, the Department has observed that federal law generally allows United States citizens living abroad to vote in federal elections using a voter’s registration from the state of the individual’s last domicile. See 52 U.S.C. § 20310. See also P.D. 10-203 (9/1/2010). In addition, the exercise of such federal voting rights by an overseas citizen shall not affect the domicile or residence of such citizen for purposes of any federal, state, or local tax. See 52 U.S.C. § 20309.

In this case, the Taxpayers have established significant connections in *. In particular, the Taxpayers applied for permanent residency in , which evidences a strong intent to establish domicile in . In addition, although the Taxpayers maintained homes in Virginia, they were subject to long term leases and not available for the Taxpayers’ use. Further, although the Taxpayers retained Virginia driver’s licenses, they also had licenses as well, and the Taxpayers have not renewed their Virginia licenses since they began residing in **.

The Department acknowledges that a change of domicile occurs as part of a process in which no single factor is dispositive. After carefully considering all of the evidence presented, I find that the Taxpayers adequately established their intent to abandon Virginia and establish * as their domicile. Accordingly, the assessment will be abated.

The Taxpayers, however, should be aware that continuing connections with Virginia, such as retaining Virginia driver’s licenses, will likely result in future contacts by the Department with respect to the situs of the Taxpayers’ domicile. As in any determination, a change in the facts and circumstances could result in a change in the Department’s determination in subsequent taxable years.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4036.Y

Related Documents

94-280

96-228

00-151

02-149

07-39

10-203

13-232

18-75

19-90

22-16