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November 12th, 2014

If You’re Heading South for Warmer Weather, Make Sure You’re Aware of the Potential U.S. Tax Implications

Avoiding the harshness of Canadian winters and spending time down south in the U.S. is a great way to enjoy a portion of your retirement. However, thanks to new tracking systems used by Canadian and U.S. authorities, Canadian snowbirds will now have to pay close attention to how many days they spend each year in the U.S. or face potential U.S. income tax implications.

New Tracking Could Catch Snowbirds on U.S. Residency Rules

Canadian residents now have their passports swiped every time they either enter or leave the U.S. or Canada, and this information is shared between the two governments.[1] Previously, there was no tracking of time spent in the U.S., and most snowbirds did not worry about being deemed to be a U.S. resident. Also, because there was no tracking system, most Canadians have never paid attention to the details of the U.S. residency rules, which are often misunderstood as ‘183 days’.

The ‘substantial presence test’ used to determine residency is the total of all the days in the U.S. for the current year PLUS 1/3 of the days from the previous year and 1/6 of the days of the year before that. Put more simply, anyone averaging 122 days or more in the U.S. for 3 consecutive years could be deemed a U.S. resident. Further complicating the rules are partial days (all part days count as full days) and short trips home (you must be out of the U.S. for a full 2 weeks to stop the clock).

Since the IRS has much more stringent and complex tax filing requirements than Canadians are used to, having to comply with U.S. tax rules can be like a journey through a minefield.

What Can You Do About It?

Most snowbirds will be able to get exempted from having to file U.S. tax returns if they file form 8840 “Closer Connection Exception For Aliens” with the IRS each year that the substantial presence test is met, but where the number of days of U.S. residency for that year is still under 183. [2]

And If You Don’t?

If you fail to abide by these new requirements, you may be banned from travel to the U.S., become liable for U.S. worldwide income tax, be required to pay Canadian departure tax, and risk losing your provincial healthcare eligibility[3]. If there is any possibility that you could be spending a substantial time in the U.S., be sure to get professional advice from a U.S. tax expert.

 


 

[1] Melnitzer, Julius. “Border Shakeup Could Have Tax Consequences for Snowbirds.” Financial Post. N.p., 11 May 2014. Web.

[2] Munro, Michelle. “Residency Rules Snowbirds Need to Know.” Advisor.CA. N.p., 11 May 2013. Web.

[3] Jackson, Dale. “Snowbirds Beware! Days of Strict Tax Enforcement Are Here.” Business News Network. N.p., 21 Mar. 2014. Web.