Many Canadian snowbirds ask about the tax consequences of spending time in the United States. Below, you will find a basic discussion of some general tax considerations for Canadians who regularly spend time in the United States.
An overview of U.S. tax residency
The United States taxes its citizens and green card holders on their worldwide income, regardless of where they live. For those who are not citizens or green card holders, the IRS uses two tests to ascertain if you are considered a U.S. resident for U.S. tax purposes. Similarly, there are ways to determine you to not be a U.S. resident, which we will discuss later.
WHEN THE FOLLOWING IS TRUE, YOU ARE A U.S. RESIDENT:
1) You are in the United States for 183 days or more in the current tax year; OR
2) You are physically in the United States for more than 31 days in the current year and 183 days or more during the previous three years, based on the Substantial Presence Test. Here is the formula:
- 100 percent of the days in current year;
- one-third of the days in the previous year;
- one-sixth of the days in the second previous year.
WHEN YOU ARE NOT A U.S. RESIDENT
If you meet the following tests, you are not considered a U.S. tax resident. You will however still need to prepare the appropriate returns:
1) If you are in the United States for more than 31 days in the current year and 183 days or more over 3 years (Substantial Presence Test) and you don’t exceed 183 days in the current year:
File form 8840, known as the Closer Connection Exception Statement for Aliens, by June 15 of the following year. This indicates to the IRS that your ties to Canada are closer than your ties to the United States and that you are only a Canadian resident. Obviously, you should file this form only if your social and economic ties are in fact more closely tied to Canada.
2) If you are in the United States for 183 days or more in the current calendar year:
File form 1040NR, Non-resident income tax form; If your home, family, business dealings and other ties are closer to Canada, file IRS Form 8833 to claim that these close ties entitle you to be treated as a Canadian resident (not a U.S. resident under the U.S.-Canada Income Tax Treaty). Form 8833 must be filed by April 15 if you are employed in the United States and if you are not, you may file it by June 15 of the following year. However, everyone's circumstances are different, so you may need to file other forms with the U.S. tax return and the penalties for not filing can be quite steep.
The IRS may also compel you to file forms with the United States Treasury divulging all of your financial accounts outside of the United States. If you are planning to be in the United States over 183 days in a calendar year, speak to a professional.
WHAT HAPPENS IF YOU DON'T FILE THE FORMS?
In short, nothing good:
- You can be deemed to be a U.S. resident;
- The IRS can levy a tax on your worldwide income;
- You may end up owing U.S. estate tax on your worldwide estate;
- You may fall under U.S. gift tax rules, if you give away more than $15,000 during the year;
- You may be banned from entering the United States;
- You may be subject to the Affordable Care Act (Obama Care) (however the Obama Care penalty tax expires in 2019); and
- You may receive significant penalties for failure to file certain forms.
WHAT ABOUT WHEN YOU SELL PROPERTY IN THE UNITED STATES?
If you sell U.S. property, the IRS expects a U.S. tax return. Sometimes a state return is also due. Apply for a U.S. taxpayer identification number when you sell the property, if you don’t already have one. The real estate agent in the United States is obligated to withhold up to 15 per cent of the gross proceeds and remit them to the IRS. The withholding rate can be decreased if the buyer plans to live in the property as the principal residence and the purchase price of the property does not exceed $300,000 U.S. dollars. Some states may also withhold tax, such as California or Hawaii.
A primer on estate tax
If the U.S. property is worth more than $60,000 USD and your worldwide estate adds up to more $11.18 million in 2018 (indexed annually), then your estate may owe U.S. estate tax upon your demise. This includes U.S. stocks in your investment portfolio, regardless of whether or not they are held in an RRSP.
Speak to a tax professional to learn more about the intricacies of U.S. tax and how they may affect you.