After another harsh winter, many Canadians dream of joining the large number of Snowbirds who make their way to the dry warmth of California, Arizona and Florida each winter season. If you are contemplating, or already are, becoming a Snowbird and whiling away the winter months in warmer climes south of the border it is important to understand how the new U.S. Tax laws apply under these circumstances. The last thing you would want is to find that the Internal Revenue Service considers you a US resident making you liable for U.S. income tax or subject to U.S. penalties or both.
There are many Canadians who have the long held belief that as long as they spend less than 183 days in the US there is no problem. This is no longer the case as the IRS has introduced a complicated formula as part of their Substantial Presence Test under which you will be considered to be a U.S. resident if:
• The weighted total of the number of days you have spent in the U.S. over the last three years (as determined by the formula shown below) equals or exceeds 183 days, and:
• You have been in the U.S. for more than 30 days in the current year.
The Substantial Presence Test uses the following formula in determining U.S. Residency:
• Number of days in the U.S. this year,
• 1/3 of the number of days in the U.S. last year,
• 1/6 of the number of days in the U.S. the previous year.
If this formula returns the answer of 183 days or more, then you will be considered to be a resident of the United States making you subject to U.S. tax and filing requirements. Under the calculations above, if you were to regularly spend 4 months a year in the U.S. you would be considered to be a U.S. resident.
It is also important to consider what the IRS considers to be a “day”. Any portion of a day spent in the U.S. (for example, leaving in the early morning on a flight home) is considered a full day. There are some exceptions to this, such as an inability to leave due to a medical condition that developed while in the U.S. or days in transit while en route to another country.
Should you be considered a U.S. resident there are two courses of action. The first of these is to claim thecloser connection exception allowed under the Internal Revenue Code. To claim the closer connection exception and show that you have closer connections to Canada than the U.S. you must file IRS Form 8840 no later than June 15th of the following year. Some factors which indicate a closer connection with Canada include:
• Having a permanent residence in Canada;
• Having family in Canada;
• Banking in Canada;
• Carrying on a business in Canada;
• Having a Canadian driver’s licence;
• Voting in Canadian elections;
• Having personal belongings in Canada.
You are prevented from claiming this exception if you have spent more than 183 days in the U.S. in the current year or if you have or applied for a U.S. green card. Also your request will be denied if you do not meet the June 15th filing deadline.
The second course of action is to claim a treaty exemption. This applies in situations where a Canadian cannot claim the closer connection exception and now is considered to be a dual resident of both Canada and the U.S. In this event there are “tie-breaker rules” under the U.S. – Canada Tax Treaty which would alleviate the requirement to pay income tax in the U.S. but would still require you to comply with filing requirements.
In those situations where the closer connection exception is being claimed, and even in the rarer situation where the tie breaker rules indicate a U.S. and not a Canadian residency, professional advice should be sought as the rules become more complicated.
Since many of us aspire to spend extended periods of time in the sun during our winter months, it is a good idea to be well acquainted with the U.S. rules governing residency when that day comes.
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