Global warming is still a theory to many Canadians, stuck as they are for many months in the snow and cold. So, the attractions of much warmer weather in the Southern United States remains a major draw for those “snowbirds”. Immigration and visa requirements are fairly relaxed for snowbirds, but there are tax issues that could cause problems for the unwary.
U.S. residents, like Canadian residents, are subject to tax on their worldwide income. But did you know that if you, as a Canadian resident, spend 183 days or more in the U.S. in any twelve month period (and not just in a calendar year) you would be considered a U.S. resident for tax purposes too? This would make you subject to tax on your worldwide income in both Canada and the U.S., and although there is a tax treaty between Canada and the U.S. to eliminate double-taxation, the result would lead to problems. And not just tax: extended residence in the U.S. can jeopardize or complicate your medical insurance coverage, immigration status, and estate tax exposure.
The simple way to avoid all these problems is to monitor your time in the U.S., and ensure that you are not present in the U.S. for 183 or more days in any twelve month period. But that’s not the end of it. The “less than 183 days” rule is a provision in the Canada-U.S. tax treaty. There is also a U.S. domestic rule called the “Substantial Presence Test“, and if a non-resident individual meets that test, they are required to file a form in order to prove that they have a closer residency connection to another country. The substantial presence test goes as follows:
- You spent 31 days or more in the U.S. in the current year, AND
- The total of all the days in the current year, plus 1/3 of the days in the previous year, plus 1/6 of the days in the second previous year equals 183 or more
Take the example of a Canadian who spends just 120 days in the U.S. in each of of 2010, 2011 and 2012. Using the formula above, the individual meets the first test by exceeding 31 days. However, the second test the total works out to 180 days. Since the total in this example is under the second test limit of 183 days, the individual would not be considered a U.S. resident for tax purposes, and would have nothing to worry about.
However, if the same individual stayed in the U.S. for just 4 extra days in 2012, then the second test would results in 184 days – exceeding the limit. The unfortunate soul would then begin a more extensive paperwork exercise, in order to claim the “Closer Connection to a Foreign Country” exception to the substantial presence test. He or she would do that by filing IRS Form 8840. In most cases, that should prove Canadian residence, with no further problems. So long as Form 8840 is filed, the individual should not have any further U.S. filing obligations.
Here is a link to the U.S. Form 8840 Closer Connection Exception Statement, complete with instructions for filers