As the cold weather approaches, many Canadians look to escape to the warmer climate of the United States (U.S.). For these retired Canadians (commonly known as ‘Snowbirds’), this getaway can involve an extended stay for the duration of our winter months. Although this offers tremendous health and wellness benefits, as a Snowbird, you should be aware of the potential tax implications of your annual visits. This article focuses on a cross border taxation issue facing Snowbirds – the substantial presence test.
Substantial Presence Test
Canadian residents who winter in the U.S. are technically subject to U.S. income tax if they exceed a specific number-of-days calculation in the U.S. This U.S. test is called the “substantial presence test”. Many individuals believe that if you spend fewer than 183 days in the U.S., you need not worry about U.S. taxes. This is incorrect and is a common misconception about U.S. residency requirements.
Anyone who meets the U.S. substantial presence test will be considered a U.S. resident and, therefore, must comply with U.S. tax laws. To meet this test, you must be physically present in the U.S. for at least:
1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current and the immediately preceding 2 years, counting:
a. All the days you were present in the current year, and
b. 1/3 of the days you were present in the first year before the current year, and
c. 1/6 of the days you were present in the second year before the current year.
You were physically present in the United States for 125 days in each of the years 2015, 2016 and 2017. The calculation works as follows:
2017 (125 days * 1) 125 days
2016 (125 days * 1/3) 42 days
2015 (125 days * 1/6) 21 days
Total: 188 days
You are considered a resident of the U.S. under the substantial presence test for 2017 because your total is greater than 183 days.
If you meet the substantial presence test, you can still be treated as a non-resident alien of the U.S. if you qualify for one of the following exceptions:
1. Filing Form 8840 “Closer Connection Exception Statement for Aliens” with the IRS. This form can only be completed if you were present in the U.S. for fewer than 183 days in the current year but have greater than 183 days based on the substantial presence test; or
2. Exception to the Substantial Presence Test for Foreign Students. Filing of Form 8843 “Statement for Exempt Individuals” with the IRS.
Form 8840 asks many questions to support your claim that your personal, social and economic ties in the latest tax year are closer to Canada than to the U.S. The filing deadline for Form 8840 is April 15th or June 15th, depending on your circumstance.
If you spend 183 days or more in the U.S. in the current year, you may still be able to avoid being considered a U.S. resident under the Canada–U.S. Tax Treaty. Form 8833 “Treaty-Based Return Position Disclosure” along with a U.S. non-resident tax return will need to be completed. This procedure is much more rigorous and complicated than the Closer Connection form.
For more information, contact us. We are here to help.