Q: We have been snowbirds for years, and recently retired from the farm and moved to town. So we ended up buying a place in the United States and spend roughly half the year there, renting our place out for the other half. Are there any things we should know about residency?
A: This question was dealt with in part last week, when I discussed some Canadian tax consequences that arise from foreign property ownership. This week I discuss U.S. tax issues that can come up.
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Your question does not say how much time you spend in your U.S. home. This is important information, assuming you have remained Canadian citizens.
You say you spend roughly half the year there. If you spend this much time, you are probably a resident of the U.S. under its tax laws. You need to figure out whether you are a resident according to the U.S. formula, which uses the last three years to determine this issue.
The magic number is 183 days. In the immediate past year all your days count fully. The year before, each day spent in the U.S. counts as 1/3 day; the year before that, 1/6 day. So if you spent 150 days (five months) in the U.S. in each of 2005, 2006 and 2007, would you be a US resident? I think so:
2005: 150 days x 1/6 = 25 days
2006: 150 days x 1/3 = 50 days
2007: 150 days x 1 = 150 days
Three-year total: 225 days.
So, you’re a U.S. resident for the purposes of American tax law unless you fit under a legal exception.
If you can show you have a “closer connection” to Canada than to the U.S., then you won’t have to pay the U.S. tax. You have to show three things: that in the tax year in question you spent less than 183 days in the U.S. in that year alone; that you still own a home in Canada; and that your connection to Canada is closer than to the U.S.
The authorities look at things like whether you have a permanent home elsewhere, whether you keep things in Canada (cars, furniture, bank accounts, investments, clothes), where you hold a passport and driver’s licence and where you vote.
Some of these situations are so close that it is impossible to tell whether the person is primarily a resident in Canada or the U.S. In such a case there are rules under the U.S.-Canada tax treaty to break the tie.
You do not get to determine this yourself. You have to file a bunch of forms with the American tax authorities and they will assess the situation and decide if you must pay U.S. tax. So it is important to keep track of the number of days you stay in the U.S., as well as being able to prove a real and continuing connection with Canada.
Further, even if you do not get caught by the rules making you a U.S. resident for tax purposes, you may still have to register with the Internal Revenue Service and file proof of any income earned in the U.S. If this isn’t complex enough, different states have different laws and you may have to comply with state tax authorities.
As discussed last week with respect to Canadian law, a sale of the U.S. home or your death while still owning it may attract tax consequences.
Significant tax and estate planning is required, and often companies are used to own the property and defray taxes.
There are numerous issues created by owning a home in the U.S. You need good tax advice from a qualified professional to avoid converting your retirement dream into an ongoing nightmare.
Rick Danyliuk is a practising lawyer in Saskatoon with McDougall Gauley LLP. He also has experience in teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
