Canadians love to fly south during the cold winter months, but snowbirds who nest too long could find themselves at the mercy of the U.S. taxman.
- Taxman clamps down on snowbirds heading south
- Cheap Canadian dollar hurts U.S. sunbelt states as snowbirds stay home
- Canadians regularly going to U.S. for long stays need to be mindful of changes
- Canadian snowbirds: Rules you need to know
This is especially true if planned new information-sharing rules passed in 2014 come into effect. The rules would allow border officials in both countries to track how much time Canadians spend in the U.S. and vice versa.
If you're among the millions of Canadian snowbirds out there, here's what you need to know to keep Uncle Sam out of your pockets.
Don't stay too long
A commonly cited rule is that if you spend more than 183 days in the U.S., you'll be considered a U.S. resident and subject to U.S. taxes on your worldwide income. But the 183-day rule rule isn't quite as simple for repeat visitors.
The IRS uses a "substantial presence" formula to add up the number of days you have spent in the U.S. over a three-year span, calculated as follows:
- Each day in the U.S. in the current calendar year counts as one day.
- Each day in the U.S. in the prior year counts as one-third of a day.
- Each day in the U.S. in the year before that counts as one-sixth of a day.
If these "days" add up to 183, you would meet the "substantial presence" test.
It's generally a good rule of thumb to keep your stay under 120 days annually. Over three years, that would total 180 days under the IRS formula.
Establish a 'closer connection' to Canada
If you do meet the substantial presence test, you would need to file a Closer Connection Exception Statement for Aliens, better known as an IRS 8840 form or snowbird filing.
This is your opportunity to prove to the U.S. Internal Revenue Service that despite your lengthy visits, you maintain a closer connection to your Canadian homeland and should be exempt from American tax requirements.
This connection is established based on the location of:
- Your permanent home.
- Your family.
- Personal belongings, such as cars, furniture, clothing and jewelry.
- Social, political, cultural or religious affiliations.
- Business activities.
- Driver's licence.
- Where you vote.
Do your homework
There are consequences to overstaying your American welcome that an 8840 form will not guard against, said Roy Berg, director of U.S. tax law at the Calgary-based firm Moodys Gartner. Each has a different trigger.
Health care: Each province and territory has a different set of rules governing how long you can be away before losing your residency status, and therefore your access to provincial health care.
Canadian departure tax: If you lose your Canadian residency, the CRA will deem you to have sold all of your assets, and force you to pay taxes on the capital gains.
Estate tax: If you own property in the U.S. and you die, there is a federal and sometimes a state inheritance tax, with no capital gains exemption.
- Immigration: If you stay in the U.S. for more than six consecutive months without a visa, you could be labelled an illegal alien, and barred from re-entry for three to 10 years.
What's more, residency requirements can vary from state to state; so even if you pass muster with the feds, you might find yourself subject to state taxes.
"The biggest thing people can do is educate themselves," Berg said.
Beware of property taxes
"The two most common events that will require the filing of a U.S. tax return will be the renting of U.S. property or the sale of U.S. property," said Terry Ritchie, director of cross-border wealth services with Cardinal Point Wealth Management and co-author of The Canadian Snowbird in America: Professional Tax and Financial Insights into a Temporary U.S. Lifestyle.
If you earn rental income in the U.S., you have to include that on both your U.S. and Canadian tax returns, he said.
And if you sell your U.S. property — an increasingly popular option as the loonie loses value — you may be subject to U.S. tax withholdings of 10 to 15 per cent on the proceeds.
"This can be a bit of a problem because there may be snowbirds that have either broken even or have a loss in the property," Ritchie said.
In that case, you can file for an exemption with the IRS form 8288-B.
When you're in the U.S., it's important to keep records handy to prove your Canadian citizenship, said Berg. Your "border kit" should include:
- Your passport.
- Copies of your Canadian tax returns.
- Canadian utilities statements, like a gas or hydro bill.
- Proof of property ownership in Canada, such as a mortgage agreement.
- A copy of your 8840, if you've filed one.
- A detailed calendar of travel dates in and out of the U.S., and documents to back them up.
Travel documents are especially important if U.S. border officials claim you've spent more time down south than you actually have, said Berg. This can happen if you travel abroad from the U.S., then re-enter Canada by way of another country.
Canadians can check U.S. records of arrival and departure dates online by requesting their I-94 from the U.S. Department of Homeland Security.
"Diligent record-keeping, and having it organized and available, and being prepared goes a long, long way," Berg said.
A previous version of this story incorrectly reported new information-sharing rules came into effect in 2014. In fact, the implementation of the new rules has been delayed because of some concerns raised by Canada's privacy commissioner.Apr 12, 2016 8:38 AM ET