Many Canadian Snowbirds have only a hazy idea of how long they can stay in the sunny south before being considered U.S. residents for tax purposes. Is it three months, six months, or even eight months (as the persistent rumors go)? Rumors and hearsay are no good at all when it comes to battling it out with Uncle Sam. And if you overstay your welcome, there are likely to be major financial repercussions. So for Snowbirds who are hazy on the current in-force rules for U.S. residency, here’s an important recap.
Living abroad
Although you may consider yourself a resident of Canada, and you've duly filed your Canadian tax return each spring, be aware that if you spend a substantial portion of the year in another country, you may be deemed to be resident in that country for tax purposes.
This status can, in turn, lead to more tax headaches than you ever imagined. For example, if you are found to be resident in the U.S. for tax purposes, you will be taxed in the U.S. on your worldwide income in much the same manner as a U.S. citizen. That means you will be required to file a U.S. tax return and pay U.S. tax on your income from all sources – even in Canada.
Specifically, you will be resident in the U.S. if you meet the lawful permanent resident (or Green Card) test, or the “substantial presence” test. Under the first test, if you have a Green Card, you will be treated as a U.S. resident, regardless of whether you are physically present in the U.S. The second test, however, requires a little more analysis.
Substantially present in the U.S.
Under the “substantial presence” test, you will be considered a U.S. resident if you spend a substantial portion of the year in the U.S. The Internal Revenue Service deems you to have a substantial presence if:
* You have been in the U.S. for more than 30 days in the current year; and
* If the total number of days you spent in the U.S. during the current year, plus one third of the days you spent there last year, plus one sixth of the days you spent in the year before that, equals or exceeds 183 days.
You can, therefore, spend up to 120 days each year in the U.S. without crossing IRS “substantial presence” threshold. When calculating the number of days, note that a partial day in the U.S. counts as a full day, although you can exclude days that you were in transit in the U.S. (for less than 24 hours) on your way to another foreign country.
As well, you may be able to exclude days spent as a teacher, trainee, student, or professional athlete competing in certain charitable sporting events.
If you cross the “substantial presence” threshold, you will be subject to U.S. tax and filing requirements, even though you may also be a Canadian resident and pay Canadian taxes.
If you are advised that the IRS deems you a U.S. resident for tax purposes, you can try to extricate yourself from the U.S. by either claiming the “closer connection exception” allowed under the U.S. Internal Revenue Code, or by claiming a treaty exemption under the Canada-U.S. Tax Treaty.
Do you have a closer connection to Canada?
To claim the “closer connection exception” under the Code, you have to establish that you:
* Maintain a permanent home in Canada (no need to own; you only need continuous access), as well as personal belongings.
* Have family in Canada.
* Are employed or carry on business in Canada.
* Do banking and hold investments in Canada.
* Vote in Canada.
* Participate in social or religious organizations in Canada.
You cannot, however, claim the “closer connection” exception if you spend more than 183 days in the U.S. in the current year or if you have applied for a Green Card.
The tie-breaker rules
If you can't claim the “closer connection” exception, there are so-called “tie-breaker” rules under the Canada-U.S. Tax Treaty, which take you through a series of tests.
Home at home. First, if you have a home available to you only in Canada, you can claim residence in Canada. However, the likelihood is that if you’re looking to escape U.S. residency rules, you may already own property in the U.S., so you would have to look at the next test.
Vital interests. This test focuses on where your “centre of vital interest” lies (i.e., where your personal and economic relations are closer to) and claim residence in that jurisdiction. Note that there is no hard-and-fast test to answer this question. Rather, you need to show that all sorts of factors go into proving that your centre of vital interests lies in Canada.
Habitual abode. If your centre of vital interests cannot be determined, you will be deemed to be resident where you have your “habitual abode.” If that happens to be in both countries (or in neither), then you will be deemed resident in the country of which you are a citizen. Finally, if you are a citizen of both countries (or neither), then the U.S. and Canada will mutually settle the question for you.
Note: You will be subject to certain filing requirements in the U.S. in order to claim any of the above exemptions. Care should be taken to ensure you have filed the appropriate forms and that they have been filed by the deadlines.
Courtesy Fundata Canada Inc. ©2015. Samantha Prasad, LL.B. is Tax Partner with Toronto law firm Minden Gross LLP. Portions of this article appeared in The TaxLetter, published by MPL Communications Ltd. Used with permission.
