U.S. tax planning considerations for Canadian “snowbirds”

To escape from the colder winters, Canadian “snowbirds” are accustomed to spending time in the United States. However, the U.S. and Canadian governments have an Entry/Exit Information System to track and share entry/exit data with one another.

This tracking puts snowbirds or frequent visitors to the U.S. at risk of being subject to the U.S. income tax system by simply staying in the U.S. for a significant number of days.

The U.S. uses a Substantial Presence Test (SPT) to determine an individual’s U.S. tax residency for a particular year based on physical days present in the U.S. As a result, it is important to monitor your days in the U.S. and have a good understanding of the U.S. SPT to ensure you are compliant with any U.S. tax and information return filings and resulting tax liabilities that may arise due to meeting the SPT.

U.S. Substantial Presence Test

The requirement to file a U.S. individual income tax return is generally based on citizenship but can also be based on U.S. green card status or the number of days you are present in the U.S. You may be considered a U.S. tax resident if you meet the SPT for a given calendar year, and, if so, may be required to file a U.S. income tax return to report your worldwide income. This test considers the number of days present in the U.S. in a 3-year period, and it counts any day physically present in the U.S., at any time during the day and for any amount of time. For example, a partial day spent in the U.S. would count unless waiting at an airport for a connecting flight.

You would meet the SPT if you were physically present in the U.S. on at least:

• 31 days during the current year, and
• a total of 183 days during the 3-year period that includes the current year and the two years immediately preceding, counting:
  • All the days present in the current year, and
  • 1/3 of the days present in the first year preceding the current year, and
  • 1/6 of the days present in the second year preceding the current year.

An illustrative example of the SPT

This illustrative example does not meet the SPT, as the formulative result is less than 183 days. Hence, you may not be considered a U.S. tax resident for 2023.

Implications of meeting the SPT

If you meet the SPT and are considered a U.S. tax resident, you may be required to file a U.S. individual income tax return with the U.S. Internal Revenue Service (IRS) and be subject to U.S. income tax on your worldwide income. However, even if you meet the SPT, there are two exceptions to exclude you from being considered a U.S. tax resident:

1. The closer connection exception

This exception is only available if time spent in the U.S. is less than 183 days in the current year and you have a home in another country (i.e., Canada) where you have more significant ties. In these circumstances, you may file U.S. Form 8840 “Closer Connection Exception Statement for Aliens” with the IRS, which discloses information indicating a closer connection with Canada. This information includes but is not limited to your home’s location, family members, business activities, and jurisdiction where you vote and hold a driver’s license. U.S. Form 8840 must be filed on or before June 15 in the year after the SPT is met to maintain non-resident status for U.S. tax residency purposes.

2. The Treaty “tie-breaker” rules exemption

This exception is applicable if time spent in the U.S. is 183 days or more in the current year. If you are a Canadian tax resident, you must refer to the “tie-breaker” rules in the Canada-U.S. Tax Convention (Treaty), which outlines the various tests that must be satisfied in sequence to determine your country of residence. If the Treaty determines you are a Canadian tax resident by tie-breaking to Canada, you must still file U.S. Form 1040-NR “U.S. Nonresident Alien Income Tax Return,” along with U.S. Form 8833 “Treaty-Based Return Position Disclosure,” to make a treaty election to claim tax residency in Canada. Compared to the closer connection exception, additional information must be disclosed; generally, the process is more comprehensive. Both forms are due on or before June 15 in the year after the SPT is met.

Substantial Presence Test decision tree

Failure to file the forms mentioned above within the specified time frame could lead to the following implications:

• You will be considered a U.S. resident for tax purposes,
• You will be subject to U.S. income tax on your worldwide income,
• You may be required to file a U.S. individual income tax return and applicable U.S. foreign disclosure forms,
• You may be subject to penalties if you do not comply with the filing obligations outlined above.

Summary

It is essential to track your days in the U.S. closely to understand your U.S. tax requirements and comply with your tax filing obligations. Even with two exceptions to mitigate your U.S. income tax exposure and filing obligations, there are possible penalties and implications if the required forms are not filed or filed on time.

Everyone’s situation is unique, and not all general tax planning opportunities may benefit every person. Speak with your own tax advisor for further discussion and analysis and before implementing any tax planning strategies.

source https://rosenbergdri.ca/u-s-tax-planning-considerations-for-canadian-snowbirds/