Canadian and US governments will soon share information regarding the number of days their respective citizens are spending in each other’s country. This may have serious US tax implications for Canadians who visit the US for long periods of time.
Overextending your stay in the US could result in becoming a US tax resident, raise questions and delays when crossing the border, and in some cases, can even result in you being prevented from entering the US altogether.
“If you’re not keeping track, or you’re fudging the number of days,” says Terry Ritchie, director of cross-border wealth services with Cardinal Point Wealth Management Inc. in Toronto, “you’re compromising all the good things you want to go down there for.”
Starting June 30th, both US and Canadian border services will collect biographical data – including name, date of birth, nationality, and passport information – when visitors enter and exit at all border crossings.
“Someone is going to be aware of the number of days (an individual spends visiting the US), even if you aren’t.” says Christine Perry, a lawyer with Keel Cottrelle LLP in Toronto who specializes in cross-border tax law.
The number of days spent in the US is the key element in the US “substantial presence” test (SPT); if a person meets the SPT, he or she may be considered a US resident and be liable for US income and gift taxes.
If the sum of the SPT is greater than 183, and if the individual has spent at least 31 days in the US in the current year, he or she will be considered a US resident for tax purposes. Days commuting to the US for work and a few other specific exceptions aren’t counted.
Snowbirds who meet the SPT may be able to avoid obligation to file a US tax return by annually filing US Internal Revenue Service (IRS) Form 8840 to apply for a “closer connection” exemption, thus declaring that they have a primary economic, tax, and family connection to another tax jurisdiction. The due date for submitting the form is June 15 of the following year. (April 15 if the individual earned employment income in the US).
You can apply for relief from double taxation under the Canada-US tax treaty by filing IRS Form 1040NR – the US non-resident alien tax return – and IRS Form 8833. However, applying for relief under the tax treaty is a complicated process. Filing a Form 8840 on time and not overstaying is the preferable option.
Avoiding Unlawful US Presence
Canadians who remain in the US beyond 180 days in any rolling 12-month period may be considered “unlawfully present,” and barred from entry into the US for three years. If you have been unlawfully present in the US for more than 365 days, the ban extends to 10 years.
“It’s pretty draconian,” says Ian Morris, a lawyer specializing in international taxation with Morris Kepes Winters LLP in Toronto. “I’m sure there’s a good number of (snowbirds) today running up against that six month provision.”
A Canadian who doesn’t meet Canadian residency requirements may jeopardize his or her eligibility for health-care services in his or her home province, as well as access to other social benefits. It’s more important than ever for Canadians to track their days, file IRS Form 8840 if necessary and generally be aware of the US immigration rules as they affect the time those individuals are allowed to be in the US. “It’s an information-sharing world now,” Perry says. “The stuff you used to be able to get away with – or kind of take a ‘hope for the best’ approach – you can’t do anymore.”
With excerpts from Investment Executive, May 2014 by Rudy Mezzetta