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Canadian Snowbirds & US Tax Trap

Canadian Snowbirds & US Tax Trap

Every winter over a million Canadians travel to the southern U.S. to spend the winter in warm weather, thereby escaping and avoiding the cold, snowy Canadian weather. While the warm weather is a welcome change from the Canadian winters, U.S. taxes laws for Canadian snowbirds may not be a warm welcome.

Snowbirds who spend their time in the United States should pay special attention to the U.S tax implications to avoid potential adverse tax consequences on both sides of the border. Unfortunately, there are many myths and misconceptions about U.S taxation, including that spending 182 days or less in the United States in any given year will not render snowbirds “residents” of the U.S. for tax purposes. Frankly, this isn’t always the case and could cause you to inadvertently exceed the U.S tax residency rules.

U.S. Residency Rules

Similar to Canada, under U.S. income tax law, a foreign individual may be subject to U.S. tax depending on whether they are considered a “resident” or a “non-resident”. A U.S. resident is taxed on worldwide income and is required to file U.S tax returns and pay tax on income earned from all sources. On the other hand, non-resident individuals generally are only taxed on the income earned from U.S sources, with limited deductions and exemptions available to them.

A Canadian snowbird will be treated as a “resident” for tax purposes if they meet either of two tests, lawful permanent resident or green card test, or the substantial presence test. The first test is obvious, with the individual living, working in the U.S. They are considered a U.S resident.
However, under the substantive presence test a foreign national may become a United States resident for tax purposes if they spend a substantial portion of the year in the U.S. This is the simplest way for Canadian snowbirds to prevent becoming U.S. tax residents, making sure you don’t meet the IRS Substantial Presence Test.

Under this test a Canadian snowbird will be considered a U.S resident for tax purposes if:

  • The individual is present in the U.S on at least 31 days in the current calendar year; AND
  • More than 182 days during a three year period, including the current year and the two preceding years.

A non-resident will be treated as being present in the U.S on any day that they are physically present in the U.S at any time during the day. So your trip to a U.S border city to do a day’s shopping counts as a day in the U.S.

The “Substantial Presence Test” is calculated as follows:

  • The total number of days spent in the U.S in the current calendar year; Plus
  • One-third (1/3) of the days spent in the U.S in the preceding year; Plus
  • One-sixth (1/6) of the days spent in the U.S in the prior preceding tax year

Example 1.

Year: 2020
Days Present in the US: 120
Equivalent Days “Substantial Presence”: 120

Year: 2019
Days Present in the US: 120 X 1/3
Equivalent Days “Substantial Presence”: 40

Year: 2018
Days Present in the US: 120 X 1/6
Equivalent Days “Substantial Presence”: 20

The individual is considered a foreign national and will be only taxes on income earned in the U.S because they spent 180 days in the U.S under the “Substantial Presence Test”.

Example 2

Year: 2020
Days Present in the US: 120
Equivalent Days “Substantial Presence”: 130

Year: 2019
Days Present in the US: 120 X 1/3
Equivalent Days “Substantial Presence”: 40

Year: 2018
Days Present in the US: 120 X 1/6
Equivalent Days “Substantial Presence”: 20

The individual is considered as “resident” of the U.S for tax purposes.

Thus, Canadian snowbirds who stay in the U.S for long periods of time and who visit the U.S. during the year should be aware of the requirements for the physical presence test or risk becoming U.S residents for income tax purposes. If they are not careful, a Canadian will be required to file a U.S tax return reporting income from all sources, including income from Canada. It is important to understand that as a general rule, Canadian snowbirds that have not spent more than 121 days in the U.S in any tax years will never be considered a U.S resident under the substantial presence test.

There are exceptions to the “substantial presence test” which allow Canadian snowbirds to be taxed as a “non-resident” rather than as a “resident” under U.S tax law, the Close Connection Exception and tax home. A number of factors are utilized in determining whether an individual has a closer connection to Canada than to the U.S. Contacts with the U.S are weighed against those of Canada and include:

  • Regular or principal permanent home
  • Family ties
  • Automobiles
  • Personal belongings
  • Social, cultural, religious and political organization
  • Location of banking activities
  • Voter registration
  • Drivers license registration
  • Investments

Generally, an individual can establish that their tax home is in a foreign country by showing that their principal place of business and employment or abode are located Canada. The tax home must be in existence for the entire taxable year and must be in a country that the individual claims a closer connection.

Both the tax home and closer connection determinations are based on an individual set of facts and are subject to some degree of interpretation and uncertainty. Therefore, a Canadian should rely on the closer connection to a foreign country exemption only as a last resort.

In order to qualify for the “Closer Connection Exception” a Canadian snowbird should file a Form “8840 Closer Connection Exception Statement for Aliens” which allows eligible Canadians to reside in the United States for up to 182 days every year without becoming “resident” for income tax purposes. This form should be filed annually in a timely manner to claim the Closer Connection Exemption.


Disclaimer

This course material deals with complex matters and may not apply to particular facts and circumstances. As well, the course material and the references contained therein reflect laws and practices which are subject to change. For these reasons, the course material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter. Although the course material has been carefully prepared, neither the author, and/or firm, nor any persons involved in the preparation and/or instruction of the material accepts any legal responsibility for its contents or for any consequences arising from its use.

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