How to file taxes for snowbirds

Why read this?

• › Your client is a snowbird
• › Your client owns U.S. property

Tips

• Unsure if your client is considered a Canadian resident? Fill out Form NR73, Determination of Residency Status (Leaving Canada), send it to the International Tax Services Office and CRA will evaluate her.
• When completing the identification section of the return, don’t fill out a date of entry or departure. That’s for immigrants and emigrants—not snowbirds. Entering a date may cause CRA to reduce your client’s non-refundable tax credits.
• Did a client forget to convert costs from U.S. to Canadian dollars? CRA offers an average exchange rate for the year on its website.

What to do?

• Confirm your client meets CRA’s definition of a factual resident of Canada. (See “Determining a client’s residency,” next page.)› If your client doesn’t have significant Canadian residential ties, and spent fewer than 183 days in the country during the tax year, she may be a non-resident. But it’s rare for someone to become a non-resident inadvertently, says Jennifer Horner, senior manager, tax, at BDO Canada.
• Factual residents are taxed as if they never left Canada. Use the General Income Tax package to determine rates for your client’s home province or territory.
• Ensure your client reports all income from inside and outside Canada, and claims all federal and provincial deductions and credits. To calculate federal tax and applicable credits, use Schedule 1, Federal Tax.
• Fill out Form T1248, Information About Your Residency Status (Schedule D) and attach it to your client’s return.
• File it by April 30.

Reporting foreign rental property

• If your client owns a home in the U.S. and rents it out, she must report the income on Form T1135, Foreign Income Verification Statement and mail it to CRA. Canadian residents are taxed on their worldwide income, says Michael Hayward, tax partner at Collins Barrow Ottawa LLP. (The T1135 also applies to other foreign property, including securities.) › CRA suggests your client keeps records to support her income and expense claims.
• But there’s a grey area. If your client simply collects some rent to defray expenses and doesn’t make a profit, Hayward says CRA may consider the home as personal property and exempt from the T1135. “My advice to clients is, if there’s any regular rental activity, I lean to the side of caution and simply file the form,” he says.
• She has until June 15 to file her return, but any taxes owed are still due April 30.

› Regardless of profit, if your client is collecting rent, she’ll also have to pay U.S. tax on the net income, note experts.

› The new T1135 form is more extensive than past versions, and it’s causing concern (see “Last year’s tax traps,” AER February 2014). Recover the U.S. tax on the Canadian return with Form T2209, Federal Foreign Tax Credits.

Claiming U.S. health costs

To do this, she’ll need:
• › If your client, or her spouse or dependants, needs medical help while away, she can claim some expenses.
• › Any 12-month period ending in a given tax year is eligible.
• › Expenses must be more than the lesser of $2,152 or 3% of net income.

Sources: CRA, Jennifer Horner, senior manager, tax, at BDO Canada.

Compiled by Jessica Bruno

Determining a client’s residency

A. If your client has any of these in Canada, she’s likely a factual resident.

Primary ties:

• › a home
• › a spouse or common-law partner
• › dependants

Secondary ties:

• › personal property, such as a car or furniture
• › social ties, including memberships
• › economic ties, including bank accounts and credit cards
• › Canadian driver’s licence
• › Canadian passport
• › provincial or territorial health insurance

B. But if your client has similar ties in the U.S., use the Canada-U.S. Tax Treaty, Article 4, to determine residency. These tie-breakers apply sequentially, says Mike Hayward of the Department of Finance. “You start with the first one, and if you can break the tie, you stop.”

• 1. Location of permanent home
• 2. Centre of vital interests (closer personal and economic ties)
• 3. Location of habitual abode
• 4. Country of citizenship
• 5. Referral to government authorities

For instance, if she has a house in Canada and the U.S., then move on to #2. If she only has vital interests in Canada, she’s a Canadian resident. No need to go on to #3.

Source: CRA, Jennifer Horner, senior manager, tax, at BDO Canada and Michael Hayward, tax partner at Collins Barrow.