As we approach the season of the pretty white stuff, a topical visit to the potential tax hangovers of an extended visit to southern warmth is a good idea. Like an errant snowball to the side of the head, nobody needs a run-in with health insurance, or worse, the IRS.
Grey-Haired Snowbirds:
Before heading off to the U.S. this winter, Canadians should take all U.S. tax and estate issues into account. Failing to adhere to applicable U.S. laws may have serious implications if not followed carefully. The issues are not merely south of the border -- eligibility for Canadian provincial health care coverage may also be affected by a long stay out of province.
This information assumes that you are a Canadian resident and not a U.S. citizen or a green card holder.
Residency Status and U.S. Income Tax
Canadian snowbirds that spend a considerable amount of time in the U.S. each year may be considered to be U.S. residents under U.S. income tax laws.
U.S. residents must file a U.S. income tax return to report worldwide income.
The Substantial Presence Test (STP)
U.S. income tax laws use a test based on physical presence (days spent in the U.S.) referred to as the Substantial Presence Test to determine if a Canadian snowbird is a U.S. resident in a particular year.
The SPT averages the number of days of presence in the U.S. during the past three-year period, beginning with the current year. If the total days of presence amount to at least 183 days the SPT will be met and the Canadian snowbird will be considered to be a U.S. resident.
A Canadian snowbird can determine if they will be considered a resident of the U.S. in a particular year under the SPT as follows:
add up all the days you will be present in the U.S. in the current year plus;
one third of the days you were present in the U.S. in the prior year plus
one sixth of the days you were present in the U.S. two years prior.
If the sum adds up to at least 183 days, you will be considered to be a U.S. resident under U.S. income tax laws for that particular year.
As a rule of thumb, if a Canadian snowbird spends more than four months (122 days) every year in the U.S. they will meet the SPT after the third year and annually thereafter.
Qualifying for Relief from U.S. Resident Status
If the SPT is met, there are two possible options to qualify for relief from U.S. resident status.
Under U.S. tax rules, Canadian snowbirds that spend no more than 182 days in the current year in the U.S. may be able to claim the "closer connection exception" by filing U.S. Form 8840 - Closer Connection Exception Statement for Aliens. By filing this form on a timely basis with the Internal Revenue Service, a Canadian snowbird will generally be exempt from having to file a U.S. income tax return or other U.S. filings.
If a Canadian snowbird does not qualify to claim the "closer connection exception", the other option is to claim a treaty exemption under the Canada-U.S. tax treaty.
To claim the treaty exemption, Canadian snowbirds must show that personal and economic ties, or "center of vital interest" are closer to Canada than to the U.S. For example, Canadian snowbirds would need to establish that they have a permanent home, family, personal and financial property, drivers' license, voting, religious, political or cultural organizational memberships in Canada.
Canadian snowbirds who are considering establishing ties in the U.S. and/or severing ties to Canada due to a longer stay should consider the effect on their ability to claim the treaty exemption.
U.S. estate tax
In addition to the U.S. income tax issues, Canadian snowbirds should consider potential U.S. estate tax exposure. If the U.S. considers a Canadian snowbird to be domiciled in the U.S. as a result of extended stays, they may also be subject to U.S. estate tax on their worldwide assets as opposed to only U.S. assets (i.e. assets with a U.S. location such as U.S. real estate or U.S. securities). Domicile may be established due to the time spent in the U.S. and facts and circumstances that support an intention to permanently reside in the U.S.
Provincial HealthCare Coverage
Canadians who are out of their province of residency for extended periods of time (the length of time differs by province) may jeopardize their entitlement to provincial health care coverage. Finding health care coverage in the U.S. may be difficult and more costly. It is unknown whether any changes to provincial eligibility will be made to allow for Canadians taking extended stays in the U.S.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities, and can be reached at [email protected].
