This is the time of year when Canadian snowbirds leave behind their parkas, snow shovels and winter boots to trek to those warm and pleasant climates of Palm Springs, California, or Phoenix, Arizona.
They may have tax filing requirements in the United States, depending on the number of days spent there each year. Ignoring these filing requirements is not for the faint of heart – penalties are $1,000 per year.
If you are not a U.S. citizen, specific rules apply to determine if you are a resident alien or a nonresident alien for tax purposes.
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Nonresident aliens are taxed in the U.S. only on income from U.S. sources. However, resident aliens are expected to file a U.S. income tax return and be taxed in the U.S. on worldwide income from all sources.
For Canadian snowbirds who are not U.S. citizens, meeting the “substantial presence test” effectively categorizes them as resident aliens, which makes them subject to U.S. tax filing requirements.
Most Canadian snowbirds seem to realize that so long as they do not spend more than six months in the U.S., they do not have any U.S. tax filing obligations. This is referred to as the “183 days or more” rule that states Canadians spending this amount of time in the U.S. are considered resident aliens and have a tax filing obligation to the Internal Revenue Service.
What surprises Canadian snowbirds is that this residency test is not limited to the number of days in one calendar year. It is possible for Canadian snowbirds who spend less than 183 days in the current year but whose three-year total is more than 183 days to be caught by the substantial presence test and categorized by the IRS as resident aliens.
Here’s the test:
- Take all the days you were present in the U.S. in the current year (it must be more than 30 days or you will not be caught by this test) and add it to,
- One-third of the days you were present in the first preceding year and then add this to,
- One-sixth of the days you were present in the second preceding year.
If the total is 183 days or more, then you’ve met the substantial presence test and will be considered a resident alien, subject to U.S. tax filing requirements. If the total is fewer than 182 days, you are a nonresident alien with no U.S. filing requirements. The magic number to stay under is 120 days per year. For example: 120 days + (one-third of 120 days) + (one-sixth of 120 days) = 180 days.
If the substantial presence test categorizes you as a resident alien, filing Form 8840 allows you to recategorize yourself as a nonresident alien. Form 8840 asks questions about your “tax home,” specifically the location of your family, your personal belongings, your business, your political, professional or religious affiliations and the jurisdiction in which you hold a drivers licence and vote.
By completing this form, you will in most cases be able to prove “closer connection” to Canada and regain your nonresident status. This is available only to Canadian snowbirds who have spent fewer than 183 days in the current year.
If you can’t claim the closer connection exception, then you may be able to rely on the “tie-breaker” rules in the Canada-U.S. tax treaty to avoid U.S. residency for tax purposes. To do this you must file both a U.S. tax return (Form 1040NR) and a Form 8833, which is a statement explaining that you are a resident of Canada and, under the Canada-U.S. tax treaty, are not subject to regular tax in the U.S.
You will have to file either the closer connection exception (Form 8840) or the U.S. return (Form 1040NR) along with the claim for treaty protection (Form 8833) by June 15 of the following year.
In the not-too-distant future, the U.S. Border Patrol will begin sharing the entry and departure dates of Canadian passports with the IRS. With this information, the IRS will be able to count the days that Canadians were in the U.S. and determine if they have met the substantial presence test and should be subject to U.S. domestic tax law. If Canadians meet this residency test, then they will be contacted to file a U.S. return and could be penalized $1,000 per year.
Allyn Tastad, certified general accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon, at 306-653-5100. He is also involved in the family farm near Loreburn, Sask.
