Just because you only live in Florida for the winter doesn’t mean the IRS doesn’t want your tax dollars, too. See if you’re at risk.
John is a Canadian resident. He is not a U.S. citizen or green card holder, but each year he spends the winter months with his wife in Florida. In some years, John may decide to spend a substantial amount of time (say four months) in the U.S. to escape the prolonged bitter cold. But he always returns to Canada in the spring – just in time to enjoy the warmer weather, and to make sure that his Canadian personal income tax return is timely filed by the April 30th deadline. As far as John is concerned, he is a compliant taxpayer of Canada.
Little does John realize that serious tax problems may be brewing south of the border.
Like John, many Canadians may not be U.S. citizens or green card holders, but they could be deemed by the Internal Revenue Service (IRS) to be U.S. tax residents. In other words, they could be subject to U.S. tax. Specifically, if John meets the “substantial presence test,” he will be deemed to be a U.S. resident for tax purposes – even though he is not a U.S. resident for immigration purposes. Under the “substantial presence test, 122 days each year for the previous three years is enough to allow the IRS to deem John as a U.S. resident.
The consequences of meeting the “substantial presence test” can be an unexpected and sometimes expensive surprise to Canadian snowbirds. If John meets this test, not only would he be required to file a 1040NR to the IRS in order to report worldwide income by June 15th, he may also be required to file Form TD F 90-22.1 “Report of Foreign Bank and Financial Accounts” (also known as the “FBAR” form) and/or Form 8938 “Statement of Specified Foreign Financial Assets.” Each of these forms carries substantial non-filing penalties.
In such a situation, John may wish to consider filing Form 8840 “Closer Connection Exception Statement for Aliens” by June 15 of the following year with the IRS. Form 8840 establishes that John is a tax resident of Canada and not of the U.S. As such, John’s U.S. tax filing requirements can potentially end by filing Form 8840.
For Canadian snowbirds who travel each year, it is imperative for them to be aware of their potential exposure to U.S. tax filing obligations. Especially now that short trips back and forth can be counted as continuous stays under certain situations, snowbirds should look after their tax situations in both countries in order to protect their wings from being clipped.
Charles Fu is the Senior Tax Manager at Sloan Partners. Contact the tax professionals at Sloan Group today for an analysis of your substantial presence requirements.