Taxes aren’t the easiest issue to understand at the best of times. But when you spend part of the year in Canada and part of the year in the United States, taxes get downright complex. In a worst-case scenario, owning property and other investments in both jurisdictions can subject you to tax in both countries.
Here are some tax rules and regulations snowbirds need to know.
Filing U.S. taxes
Even though you’re technically a citizen of Canada and only visit the U.S. in the winter, you could still owe tax to the U.S. government. And even if you don’t owe anything, you still may be required to file a U.S. tax return.
How do you know whether you need to let Uncle Sam know about your income? It comes down to whether the IRS considers you a resident alien or a non-resident alien. Resident aliens are generally taxed in the United States on income from all sources throughout the world — even if they already pay Canadian taxes on some or all of those assets.
Non-resident aliens, on the other hand, are generally taxed only on income from U.S. sources. Furthermore, not all non-resident aliens have to file tax returns. So, all things considered, it’s much better to be a non-resident alien, at least when it comes to taxes.
To determine which category you’re in, the IRS will consider the length of time you’ve spent in the U.S. by using what’s called the “substantial presence test.” This test will put you into one of three categories.
If you were in the United States for 31 days or less during the current year, things are simple: you don’t meet the substantial presence test, and are considered a non-resident alien of the United States. You don’t have to file a U.S. tax return, unless you’ve generated certain kinds of income from U.S. sources — rental income is the one snowbirds have to pay attention to, but employment income or income from a U.S. domiciled business counts too.
Things are equally simple if you were in the United States for 183 days or more in the current year: you meet the substantial presence test and are considered a resident alien of the United States. You will be required to file a U.S. tax return. You may be able to avoid being taxed on worldwide income if you are eligible and wish to claim a “treaty tiebreaker” under the current Canada-U.S. tax treaty. Doing so requires you to file a nonresident income tax return on Form 1040NR with an attached treaty tiebreaker election. The process is complicated; you’ll likely need professional help.
If the length of time you’ve been in the U.S. is between these two goalposts — between 31 and 182 days in the current year — things get a little more complicated. Your status will be determined according to a specific formula: 100% of days spent in the US in the current year, plus 1/3 of the days you spent in the U.S. in the prior year, plus 1/6 of the days you spent in the year preceding that. If the total of that calculation is greater than 183, you’ll be considered a US resident alien and will be required to file a US tax return, unless you can demonstrate that you have a “tax home” in Canada.
When totalling all the days for each of those three years, remember the days don’t have to be consecutive. And, as far as the IRS is concerned, part of a day constitutes a full day. In general, travel days count just as much as days spent in your destination, so if the tally is going to be tight, keep track of days spent on planes, trains, and automobiles too.
You can claim exemptions for days on which you had to remain in the United States because of a medical condition, or for days spent in transit between two foreign countries (such as a layover at a U.S. airport). There are other acceptable reasons for deleting days; so ask the IRS for more information.
Exemptions under the “Closer Connection Category”
If you’ve spent fewer than 183 days in the U.S. in the current year and haven’t applied for or received permanent resident status (i.e., a green card), you may be able to avoid paying U.S. taxes by claiming a closer connection exemption.
If you are not employed or self-employed, your tax home is where you regularly live — as proved by owning or renting a house, condo, apartment, or furnished room. Keep in mind your Canadian home must be available to you continuously throughout the year — if you rent it out while you’re wintering down south, that’s a big strike against you. If you’re employed (or self-employed), your tax home is the location of your principal place of employment (or your business), regardless of where you maintain your family home.
There are other factors that demonstrate you’ve maintained more significant ties to Canada than the United States. These factors include the location of your permanent residence; where your family lives; where you keep your personal belongings (cars, furniture, clothing, jewelry, etc.); where your bank is located; social/cultural/religious/political organizations you belong to; where you vote; and the jurisdiction where you hold a driver’s license. Each will be weighed by U.S. tax authorities to determine which country you’re most closely connected with.
If you believe you meet the criteria, you’ll have to file IRS Form 8840, the Closer Connection Exception Statement for Aliens, by June 15 of the following year (you’ll have to do this every year you claim the exemption). If you don’t file by the deadline, you may lose the benefit of the exception and thus be taxed by the US on your worldwide income.
Don’t take this deadline lightly: the IRS is notoriously inflexible about missing filing dates, and has become more so as the U.S. deficit has grown. Late filing penalties can be steep: several forms have penalties of $10,000 or more for late filing or failure to file.
Exemption under the Canada-U.S. Tax Treaty
If you can’t claim the Closer Connection exemption, you may still be treated as a non-resident alien under the Canada-U.S. tax treaty. You could be considered a non-resident alien if you are considered a resident of both the United States and Canada under each country’s tax laws, your permanent home is in Canada, and your personal and economic ties are closer to Canada than the United States.
The rules for this exemption are a little complicated, and to claim it, you’ll have to contact a Canada Revenue Agency income tax office or an International Taxation Office. If you’re in the U.S., you can contact the closest IRS office for more information.