IRS provides tax relief for snowbirds stranded in the U.S.

The U.S. Internal Revenue Service (IRS) is allowing snowbirds stranded south of the border to exclude up to 60 days in 2020 from the substantial presence test (SPT) that determines their U.S. tax residency — and therefore whether they have a U.S. tax-filing obligation for the year.

In Revenue Procedure 2020-20, released last week, the IRS states that the “Covid-19 emergency period” is available to people who are neither U.S. citizens nor holders of U.S. green cards and who cannot leave the U.S. because of pandemic-related travel disruptions.

The emergency period is “a single period of up to 60 consecutive calendar days selected by an individual starting on or after February 1, 2020 and on or before April 1, 2020 during which the individual is physically present in the U.S. on each day,” the IRS guidance indicates.

While snowbirds are already allowed to exclude days from the SPT if a medical condition arises while they are in the U.S., that rule does not extend to events such as stay-in-place orders, border closures or other travel restrictions.

With the SPT relief announcement, “the IRS is simply going to treat [the Covid-19 emergency] like it’s a medical condition,” says Azam Rajan, director of U.S. tax law with Moodys Gartner Tax Law LLP in Calgary.

A non-U.S. citizen or non-holder of a U.S. green card will nevertheless be deemed a U.S. tax resident if they otherwise meet the SPT. The U.S. considers a “substantial presence” to be a cumulative 183 days or more in the U.S. in a year, or if the total number of days spent in the U.S. in the current year, plus one-third of the number of days spent in the previous year, plus one-sixth the number of days spent in the year before that is 183 or more.

Most snowbirds will not have to file Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, to be able to rely on the IRS’s 60-day grace period, but must keep all relevant records in support, the tax agency states. However, snowbirds who are required to file Form 1040NR, U.S. Nonresident Alien Income Tax Return — for example, because they earned U.S. source income in the year — will have to attach Form 8843 to that filing to claim the Covid-19 exemption.

“If you don’t have to file a Form 1040NR, then the IRS is going to basically trust you,” says Rajan, who adds it’s unclear to him how long a snowbird would have to hold on to supporting records. “The general rule is you only start the statute of limitations when you file a tax or information return. So does that mean the statute never starts?”

The IRS also released guidance stating that the Covid-19 relief did not change other possible exceptions to the SPT, including the “closer connection” exception, and any treaty-based exception, such as the one available under the Canada-U.S. tax treaty.

However, claiming the 60-day grace period would likely be an easier option for snowbirds than claiming a closer connection exception or a treaty-based one, says Michelle Connolly, director of tax and estate planning at Sun Life Financial in Toronto.

“You have to get competent cross-border tax advice to prepare those returns, which is not cheap,” Connolly says.

Rajan notes that the tax residency relief provided by the IRS does not address any immigration issues snowbirds may be facing due to being inadvertently stranded in the U.S. A snowbird may be able to file for an extension of their immigration status; however, the U.S. has yet to offer “any immigration relief like they’ve done on the tax side of things.”

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.