CANADIAN SNOWBIRDS SOON TO BE SNARED BY BORDER PATROL

Originally published on December 4, 2008

 

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, CA or Phoenix, AZ .  Several of these same snowbirds  may have filing requirements in the United States depending on the number of days spent there each year.   Ignoring these filing requirements are not for the feint of heart with failure to file penalties at  $1,000 per year.

 Resident Alien or Nonresident Alien

 If you are not a citizen of the United States, specific rules apply to determine if you are a resident alien or a nonresident alien for tax purposes.  If you are categorized as a non-resident alien, then you'll be taxed in the United States only on income from U.S. sources.  But, if you are categorized as a resident alien then you are expected to file a U.S. income tax return and be taxed in the United States on your worldwide income from all sources.

 For Canadian snowbirds who are not U.S. citizens,  meeting  the "substantial presence test" effectively  categorizes the Canuck as  a resident alien making him or her subject to U.S. tax filing requirements.  

The Substantial Presence Test

 Most Canadian snowbirds seem to realize that so long as they do not spend more than six months in the United States then they do not have any U.S. tax filing obligations.  This is referred to as the  "183 days or more" rule which states that Canadians spending this amount of days in the United States are considered resident aliens and have a tax filing obligation to the Internal Revenue Service (IRS).

 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:

a.   take all the  days you were present in the United States in the current year (it must be more than 30 days or you will not be caught by this test) and add it to,

b.   one-third of the days you were present in first preceding year and then add this to,

c.   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 then you are a non-resident alien with no  U.S. filing requirements.    The 'magic number' to stay under is 120 days per year.  For example: 120 days + (1/3 * 120 days) + (1/6 * 120 days) = 180 days.

Closer Connection Exception Statement for Aliens (Form 8840)

 If the substantial presence test categorizes you as a resident alien then by filing Form 8840 you are able to re-categorize yourself as a non-resident 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 affiliates, the jurisdiction in which you hold a drivers license and vote.

 By completing this form, you will in most cases be able to prove "closer connection" to Canada and regain your non-resident status.  This is only available to those Canadian snowbirds who have spent less than 183 days in the current year.

US Nonresident Alien Income Tax Return (Form 1040NR) and Claim for Treaty Protection (Form 8833)

 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 simply 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 15th of the following year.

Closing comments

 In the not-too-distant future, the United States Border Patrol will begin sharing the entry and departure dates of the Canadian passports with the IRS. With this information, the IRS will be able to count the days that the Canuck was in the United States and determine if he or she has met the substantial presence test and should be  subject to U.S. domestic tax law.  If the Canadian meets this residency test then he or she will be contacted to file a U.S. return, and could be penalized $1,000 per year.

 The Decision Tree illustration across from this column is meant to help us secure an understanding of a snowbird's U.S. filing requirements.   How long can a snowbird stay in the U.S.?  If he or she doesn't mind filing the closer connection exemption (Form 8840) then 182 days.  If you don't want to file Form 8840, then 120 days.

 

 

Allyn Tastad, certified general accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at allyn@hth-accountants.ca or website www.hth-accountants.ca. He is also involved in the family farm near Loreburn, Saskatchewan.  The opinions expressed in this column are for information only.