02/16/2016
This is an article I wrote in June 2011. It was in our local newspaper, but I never did get it posted on-line, so I'm posting it now. The information is generally accurate as it hasn't changed. The one caveat to that is the mention of amnesty for US citizens filing tax returns - that has expired (but don't lose hope, there are options.)
June 2011
Cross Border Planning (Canada & U.S.)
One of the great things about retirement is the ability to head to warmer climes during the winter. Travelling to the US for the winter – typically to Arizona, California, or Florida – has grown in popularity so much that we have a name for these Canadians, we call them Snow Birds.
Most people who travel regularly to the U.S. assume that because we have much in common regarding language and culture, and we cross the border fairly freely, that there’s not much to worry about. That’s not necessarily true.
The purpose of this article is not to delve into the immigration issues, but rather some of the potential tax issues. Because of how complex this can get, I’m going to narrow it down further – this is information for CANADIANS who are not also US citizens or US residents. All US citizens (whether you are also a Canadian or not does not matter) MUST file a US tax return every year. There are no exceptions to this. The US taxes based on citizenship, so unless you have formally renounced your American Citizenship, you must file. If you are an American Citizen and have not filed a US return, the US has given some time for voluntary disclosure. Don’t delay! The penalties and costs of not doing it are severe.
Canadians who spend more than four months in the US need to start filing some US paperwork. I’ll get to that in more detail in a minute.
It is a common thought that Canadians can spend 6 months in the US without worrying about the implications of their stay. The first part of the rule states that any Canadian who spends more than 183 days in the US in any one year is considered a resident for tax purposes. This sounds pretty close to the 6 month number – but it’s not. The rest of the rule further identifies how that 183 days is calculated. It’s calculated over 3 years – and it’s not an average. Here’s how it works:
In Year 1 each day counts for a full day.
In Year 2 each day counts for 1/3 of a day
In Year 3 each day counts for 1/6 of a day.
So, if you were to spend 124 days in the US, this is what your number would look like, it’s called
The Substantial Presence Test
Number of days in the US this year 124 X 1 = 124
Number of days in the US last year 124 x 1/3 = 42
Number of days in the US previous to last year 124 x 1/6 = 21
Total days deemed in the US in the current year 187
It is important to note that every day you are in the US counts – even if you just made a quick shopping trip across the line for a couple of hours, it’s considered a full day.
If you have spent more than 183 days in the US using this formulae, all is not lost, you are not in trouble. You can file one of two forms.
The first is form 1040NR – this is simply a non-resident tax form. Remember, just like Canada, the US taxes on world-wide income, not just income generated in the US. In most cases this shouldn’t attract a large tax bill, as the Canada-US tax treaty protects most income from being “double taxed”.
The second option is simpler – file a form 8840 (the Closer Connection Exception statement). There are advantages to also filing the 1040NR over just the 8840, but again, that’s getting beyond the scope of this article.
So, who must file a US tax return (1040NR) or a 8840?
1. Any non-resident (of the US) that sells any US real property.
2. Any non-resident who spends 4-6 months/year in the US is deemed a resident under the substantial presence test (see above) and must file either a 1040NR or 8840.
3. Any Canadian who spends more than 183 days in any one year.
4. Any non-resident who collects rental income (including rent from a personal-use home!)
5. Any non-resident who carries on business of any form in the US regardless of whether that business is profitable.
6. Lottery and certain gambling winnings are considered taxable income in the US – and are subject to a non-resident withholding tax of 30 percent.
There’s a few other cases, but they are less common. Basically, if you are a Canadian visiting the US and have any kind of financial dealings there, you may be required to file a US return and I’d suggest you speak with a competent cross-border planner.
