Right now, many Canadians are enjoying the warm weather that comes with living in Canada but as any Canadian knows, it isn’t something that lasts forever. Eventually the weather will turn cooler and it will be winter again.
To escape this cold, many of us will decide to head to warmer climates south of the border. In fact, as many as 500,000 Canadians will travel to the United States to get away from the frigid months. If you are one of these snowbirds (or spend a lot of time in the US regardless of the season), there is important information you must consider, one of which is the US tax implications of staying too long over the border.
Many snowbirds do not realize that by simply being present in the United States for a significant amount of time, they can be deemed a US resident and therefore exposed to US income tax and estate tax. The problem is, there is no specified length of time in which a snowbird must be in the US to be deemed a resident.
Instead, snowbirds must meet the substantial presence test after spending at least 31 days in the United States.
The substantial presence test is a formula used to determine whether those who spend a significant amount of time in the US, but are neither a citizen or green card holder, are liable for US income and estate tax. The formula is as follows.
- Total days in the US this year +
- 1/3 of the days in the US last year +
- 1/6 of the days spent in the US the year before that
If the total amount is 183 days or greater, then you may be deemed a US resident for tax purposes.
It is important to note that a day spent in the US generally includes any day in which you were physically present in the US for some part of that day, no matter how brief. There are, however, some basic exceptions to this rule:
- You were in transit through the United States and stayed for less than 24 hours (i.e. flying from Canada to the Dominican with a stopover in New Jersey).
- You were unable to leave the US due to a medical issue that developed while there.
- You commute to work in the US regularly from a residence in Canada.
- You are an exempt individual, more information can be found on the IRS website.
If you are starting to get worried that you will meet the substantial presence test and be obligated to pay tax in the US, there is some good news. There are two exceptions, the closer connection exception and the treaty exception, which may help you avoid being deemed a resident, even if you are in the US for more than 182 days.
Closer Connection Exception
If you demonstrate a closer connection to Canada than the United States and stayed less than 183 days in the United States in the current year, than you may not be deemed a US resident.
The following are some of the factors which are considered when determining whether a closer connection to Canada exists. You;
- are a tax resident of Canada
- have Social and economic ties to Canada
- have access to Canadian Healthcare coverage (i.e. OHIP)
- have a permanent residence in Canada
- have family in Canada
- own business(es) in Canada or your main place of employment is in Canada
- have banking relationships in Canada
If you believe that you meet the closer connection exception, you must file a US Tax Form 8840 by June 15 of the year following each year that you meet the substantial presence test.
The Treaty Exception
Another instance in which Canadians are not deemed US residents, even if they meet the substantial presence test, is the treaty exception.
The United States and Canada hold a tax treaty which includes a tie-breaker provision. Similar to the closer connection exception, the treaty exception looks at your connection to Canada.
Unlike the closer connection exception, however, the treaty exception requires greater, more detailed disclosure explaining why you should be deemed a resident of Canada.
To claim this exception, you must fill out Form 1040NR and Form 8833 by June 15.
It is important to note that even if, for tax purposes, this exception deems you a Canadian Resident, you may still be required to make disclosures to the IRS.
For more information on tax implications related to deemed US residency and the substantial presence test, contact us today.
