Most snowbirds know they must keep track of how many days they’re in the U.S. and outside Canada. Adverse tax and non-tax consequences await those who exceed the guidelines.
But prior to 2014, neither the U.S. nor Canada knew how many days someone had spent within its borders. That will change as new rules go into effect, and snowbirds need to know how these changes affect them.
Changes for snowbirds
Beginning June 30, 2014, both Canada and the U.S. will implement the final phase of the Entry/Exit Initiative of the Perimeter Security and Economic Competitiveness Action Plan. Both countries will share information on people entering and leaving.
For the first time, both countries will know, in real time, which country snowbirds have been in and for how long. That means snowbirds must be much more vigilant than in the past about counting and reporting days in and out of each country.
Before the implementation of Phase IV of the Entry/Exit Initiative, each country counted people’s presence when they entered the country, but not when they left. This information was rarely shared, so typically neither country knew how long someone had been within its borders.
Previously, if someone wanted an accurate accounting of the days in (or out) of both countries, she would have to contact U.S. Customs and Border Protection (USCBP) and the Canadian Border Services Agency (CBSA) and request border entry data. Only after receiving both reports and comparing the data could she be sure how many days she was in Canada or the U.S.
When requesting the entry report from either USCBP or CBSA, it’s best to plan ahead. It typically takes 30 days to receive the report from CBSA, and two months to get it from USCBP. Putting the request in too late can make it difficult to meet IRS and CRA filing deadlines.
When clients overstay their welcome
Five main consequences can result from being in the U.S. or out of Canada too long. They hinge on whether the person is resident or not. Unfortunately, the definition of resident is different in each of the five cases.
- Banned from travel to U.S. if unlawfully present. Perhaps the most draconian consequence of spending too much time in the U.S. is falling under the unlawful presence rules. Canadians who remain in the U.S. for more than 180 days in a rolling 12-month period risk being deemed unlawfully present. The consequences are: a. a three-year travel ban if unlawfully present for between 180 and 365 days; and b. a 10-year travel ban if unlawfully present for more than 365 days.
- Liability for U.S. income tax on worldwide income. The U.S. taxes citizens and U.S. residents on their worldwide income. If the snowbird’s in the U.S. for too many days he risks being deemed a U.S. resident and subject to tax on his worldwide income.
- Liability for U.S. estate tax on fair market value of worldwide assets. The U.S. also taxes citizens and U.S. residents on the fair market value of their worldwide assets at death. Unfortunately, the definition of U.S. resident for estate tax purposes is different than that for income tax purposes. The result is that heirs of the uninformed snowbird can find their inheritances subject to U.S. estate tax.
- Liability for Canadian departure tax. Canada taxes residents on worldwide income. Once someone is no longer resident, she is deemed to have disposed all her assets (subject to exceptions). She must also recognize the gain on those assets and pay tax on that gain. Her intent to leave Canada is the key factor for determining if she’s no longer resident. This is measured in various ways, including the amount of time she spent in the U.S. So, snowbirds who spend too much time south of the border risk a nasty Canadian tax surprise.
- Loss of provincial health care. Canadian residents are entitled to provincial health services. In most provinces, a client loses this entitlement if he no longer makes Canada his permanent home, or does not intend to be in Canada for at least 183 days in a 12-month period. Intent’s determined the same way as it is for departure tax.
By Roy A. Berg, JD, LLM, director of U.S. tax law at Moodys Gartner Tax Law LLP in Calgary.
Originally published in Advisor's Edge Report
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