Residency for Canadian Snowbirds in the US
As more and more Canadians purchase discounted vacation homes in Arizona, California, Florida and other US states, with a desire to spend much of the Canadian winter in warmer destinations south of the border, many fail to fully understand the potential tax implications of spending a portion of the year in the US.
Residency issues can be complex and they play an important role in both the American and Canadian tax systems. Both the US and Canada have tax system that tax residents on their worldwide income. They both also have tax systems with rules relating to “non-residents.” Being a “non-resident” for tax purposes does not always mean that you won’t have a tax filing requirement in the other country.
Given the complexity of residency, this article focuses on some of the issues that Canadians who spend, or plan on spending, a portion of the year in the US. In particular this focuses on Canadians who may or may not own properties in the US and who plan on spending a few months or longer down south- such as snowbirds.
One of the tests in determining an individual’s residency from a U.S perspective is through a “Substantial Presence Test.” This test essentially looks at people who have not established residence through another means, such as obtaining a green card, but who spend a substantial amount of time in the US. Most people are aware that they can spend a certain number of days in the U.S. without having to file tax returns, but often overlook or do not fully understand the exact mechanics of it. The most important item is that even if you spend less than 183 days in the U.S. in any given year, you could still be considered a resident under the Substantial Presence test.
The time required to meet the substantial presence test is 183 days. How this is calculated is not however based solely on the current year, but also the previous two years. The substantial presence calculation is done by taking the full number of days you spent in the US in the current year and adding one-third of the days you spent in the U.S in the previous year and adding one-sixth of the days you spent in the US in the second preceding year.
Let’s look at it from the perspective of someone who spends roughly four and a half months in the U.S each year. For simplicity we’ll say 135 days.
Year # of days in U.S Inclusion rate Days included
Current year 135 days 100% 135
Previous year 135 days 1/3 45
2nd preceding year 135 days 1/6 23
___________________________________________________ 203 days
As you can see from this example, although the individual spent under 183 days in each year, because the calculation is based on the current years number of days spent in the U.S. as well as the previous two years, the individual would actually have exceeding the 183 day substantial presence test.
The individual may file form 8840, which is a closer connections exception to the Substantial presence test. Essentially, you are making a claim that although you meet the substantial presence test, you should not be treated as a U.S. resident because you have stronger ties or a “closer connection” to Canada. To be able to meet the closer connections criteria, you would need to have spent less than 183 days in the U.S. in the current year, be able to establish that you have a tax home in your foreign country during the year as well as show that you have other closer residency ties to Canada (such as a Canadian driver’s license, religious affiliation, social ties, etc).
For more information on form 8840, click here
If you are unable to meet the closer connections exemption and you meet the substantial presence test, you will be considered a resident and will need to report your worldwide income on a US 1040 tax return. You may have other additional tax filing requirements depending on your situation. If you are treated as a resident of both US and Canada, there are measures in the Canada/US tax treaty to help negate any double taxation.
Whether or not you meet the substantial presence test; if you earn income from U.S. sources, such as individuals who rent out their US property or earn investment income in a U.S. institution, may still have an obligation to file form 1040NR. If you are required to file a 1040NR, and exceed the 183 days substantial presence test, but are able to meet the closer connections exemption, than you would want to file form 8840 with the 1040NR.
A treaty based position may also be available to certain individuals who spend over 183 days in the Unites States. We recommend that you consult with an experienced cross border accountant to assess the options that may be available to you under your circumstances.
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