Are you a Canadian that heads south for the winter once the cold and snow hit? It can be a great way to escape our harsh winters, but did you know that there could be US tax implications if you stay too long over the border?
You see, many Canadians 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.
To be deemed a US resident, you must either hold citizenship in the US, be a green card holder or meet the substantial presence test. The first two are straightforward but the third, meeting the substantial presence test, is less so.
The substantial presence test is 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 question is, do you meet the Substantial Presence Test?
The Substantial Presence Test
If you are a Canadian that travels to the US and meets the following two criteria, you have met the substantial presence test.
- you spent 183 days or more in the United States using the following formula
- You spent at least 31 days in the United States during the current year, and;
- 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
For the purpose of this formula, 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. 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.
Exceptions to the Substantial Presence Test
If you do meet the substantial presence test, there is still a chance that you will not be deemed a US resident for tax purposes.
These exceptions are the closer connection exception and the treaty exception.
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 US Tax Form 8840 by June 15 of the year following each year that you meet the substantial presence test.
The Treaty Exception
If you do not pass the closer connection exception, there is still hope. 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.
