Every year, thousands of Canadians (mostly retirees) escape our winter by traveling south, usually to the U.S., for periods lasting up to even the entirety of winter. And while the value of the Canadian dollar relative to the U.S. dollar changes on a daily basis, the two currencies have been close to par now (or the Canadian dollar above par) for the last few years, making the cost of such a vacation easier to manage.
Leaving the Canadian winter behind for a few weeks or months, however, doesn’t mean leaving behind the Canadian tax system. No one gives a lot of thought to the tax implications of taking an extended vacation, but the reach of our tax system is long, and there are tax consequences and costs which can result from spending an extended period of time outside of the country.
For most Canadians who go south for a few weeks or even a few months during the winter, there aren’t typically many of such tax consequences. Such vacationers usually remain, to use tax parlance, as “factual residents of Canada”. In practical terms, the income of such taxpayers is treated, for Canadian tax purposes, as though they had never left Canada. Factual residence is determined by the Canada Revenue Agency (CRA) on the basis of whether a taxpayer has maintained “residential ties” to Canada. Such residential ties could include continuing to own a home in Canada, having a spouse or dependant(s) who remain in Canada while the snowbird is out of the country, having personal property (like a car) in Canada, and continuing to hold a Canadian driver’s licence and medical insurance.
The vast majority of snowbirds who winter down south do maintain sufficient residential ties to Canada to be considered factual residents. Consequently, when they file their tax returns for the year, they follow all the same rules as year-round Canadian residents. They report all income received during the year from both inside and outside Canada and claim all available deductions and credits. Income tax is paid to the federal government and to the province with which their residential ties are kept. Finally, snowbirds who remain factual residents of Canada remain eligible for the goods and services tax credit, which may be paid to recipients outside of Canada.
Health care coverage
One of the biggest concerns of many snowbirds is maintaining health care insurance coverage while out of the country. In all cases, the availability and degree of coverage will depend on the health care plan in effect for the province or territory of which the snowbird is a resident, and it’s necessary to confirm in advance the coverage which will be made available for out-of-Canada medical expenses. Most snowbirds end up obtaining supplementary health-care coverage, and the premiums paid for such coverage can usually be claimed as a medical expense on the Canada tax return. As well, any out-of-pocket costs incurred for eligible medical expenses while out of Canada (whether for the individual or his or her spouse) can be claimed as a medical expense on that year’s tax return.
Old Age Security and Canada Pension Plan payments
Both Old Age Security (OAS) and Canada Pension Plan (CPP) benefits can be paid to benefit recipients who are living outside Canada, and there is no change in the amount of the benefits. As well, such payments can be made by direct deposit as well as in US dollars.
Both OAS and CPP benefits received will, of course, be subject to Canadian income tax, and OAS payments will be subject to the OAS “recovery tax” (clawback), if the recipient’s income for the 2013 tax year is more than $70,954 ($71,592 for 2014).
Application of U.S. tax laws.
The application of U.S. tax laws to snowbirds can, unfortunately, be a good deal more complex than the equivalent Canadian laws. Generally speaking, snowbirds that spend only a few weeks down south in the course of a calendar year are unlikely to be caught by any U.S. tax filing or payment obligations. Those who extend their stay for longer than that (and certainly for those who spend more than half of the year in the U.S.) should seek professional tax advice from an advisor familiar with cross-border taxation, to make certain that they are in compliance with any applicable U.S. tax requirements.
Recognizing that the potential tax consequences of spending extended periods of time south of the border could affect thousands of Canadian taxpayers, the Canada Revenue Agency has published an information booklet on the subject as available on its website at http://www.cra-arc.gc.ca/E/pub/tg/p151/p151-12e.pdf. The Agency has also devoted a section of its website to issues affecting Canadians who vacation out of the country, available at http://www.cra-arc.gc.ca/tx/nnrsdnts/sth-eng.html.
The best advice for those whose plans include an extended stay south of the border, especially for those contemplating repeat visits on an annual basis (and certainly if they are contemplating the purchase of vacation property in the U.S.), is to obtain professional advice in advance on the U.S. and Canadian tax consequences. Doing so can ensure that what was intended to be a relaxing vacation doesn’t end up causing a major tax headache.
