Proposed U.S. immigration reforms could impact older clients

Recently, several advisors and clients have asked us about the so-called snowbird visa being proposed in the U.S. A cross-border financial-planning firm has been strongly encouraging Canadian snowbirds to contact U.S. senators, congresspeople and sponsors of this bill to push the proposed legislation forward.

This legislation, however, could cause significant income tax problems on both sides. In addition, Canadians could face U.S. estate-tax exposure on their worldwide estate, and risk losing provincial healthcare coverage.

Sens. Chuck Schumer (D-N.Y.) and Mike Lee (R-Utah) introduced this bill in October 2011 as part of the homebuyer provision of the VISIT USA Act. The purpose of the act is to increase foreign travel and investment into the U.S. The U.S. Chamber of Commerce, the U.S. Travel Association, and the American Hotel and Lodging Association have all endorsed the legislation.

If passed, this bill would allow snowbirds to stay up to 240 days a year in the United States. Currently, Canadian snowbirds are legally entitled to stay no longer than 182 days per year. The snowbird visa would be renewable every three years.

For advisors with snowbird clients who’d like to spend more time on the golf course or tanning poolside, this might seem quite appealing. However, the devil is in the details.

Real estate bait

Lee indicated the primary objective of the legislation is to provide “a free-market method for increasing demand for housing.” A recent report released by the Bank of Montreal indicated home prices in the U.S. have fallen 34% from their peak levels in 2006. In areas frequented by Canadian snowbirds, prices have dropped even lower.

According to the report, Tampa has declined 48%, Miami 51%, and Phoenix 56%. Over the last few years, Canadians have been some of the strongest purchasers of U.S. real estate. With drastic declines in real-estate values, and with the dollar dancing with parity, Canadians will likely continue to consider purchasing U.S. property irrespective of this legislation.

In order to qualify for the visa, the snowbird would have to be older than 50 years of age (a spouse or minor children would also be covered under the legislation). The snowbird would also have to purchase—in cash—U.S. residential real estate worth US$500,000 or more. Of that, at least $250,000 needs to go toward a residence in which they’d have to live for more than 180 days.

I commute between our Calgary and Phoenix offices monthly, and you can buy a nice house in Phoenix for between US$250,000 and $500,000. According to real-estate monitoring Web site zillow.com, as of January 2012, the median home price in Phoenix was US$95,300 and $282,700 in Scottsdale. In my experience, most snowbirds are not buying homes for more than $500,000, or in cash. That stipulation alone will disqualify a number of snowbirds. Another issue: tying up between $250,000 and $500,000 in American real estate isn’t a good investment for many snowbird clients.

Tax implications

What are the tax implications of being in the U.S. for more than 182 days? If you refer back to my article, “Nesting Period”, I discussed the substantial-presence test, which is a calculation of the number of days a snowbird spends in the U.S. over a three-year period of time.

Under this test, if someone spends more than 183 days a year in the U.S., she’s deemed a U.S. tax resident and subject to U.S. income tax on worldwide income, along with other U.S. income tax and compliance requirements.

There could be additional taxes—and penalties—if the snowbird had an interest in a Canadian company, trust or other Canadian entity. For example, if the snowbird owned Canadian mutual funds, these would be considered PFICs under U.S. tax rules and be subject to arduous U.S. tax and filing requirements. Clients would also be required to disclose their interest in RRSPs and RRIFs. A snowbird client in the state of California would be subject to additional income tax on the accrued earnings within their registered assets.

Lastly, the client would be required to file a U.S. FBAR (Foreign Bank Account Report – TDF 90-22.1) and the new IRS Form 8938 disclosing ownership of foreign assets. Failure to do so could result in significant financial penalties.

Snowbirds who meet the substantial presence test can file IRS Form 8840 (the Closer Connection Exception Statement) to exempt them from being subject to U.S. tax on their worldwide income. Under the new legislation, I suspect this provision will remain because the proposed legislation is under immigration law; the filing requirement for Form 8840 is under U.S. tax law.

Worldwide estate

As it currently stands, U.S. citizens and residents are entitled to a US$5.12 million exemption on their worldwide estate for the 2012 tax year. Under President Obama’s current budget, the estate-tax exemption would come down to $1 million in 2013, with an estate-tax rate of 55%.

Would snowbirds, who qualify for this visa, be considered domiciled in the U.S. by virtue of their time spent in that country on a consistent basis? And might they be subject to U.S. estate tax on their worldwide estate, including all assets in Canada?

Some years ago, there was an estate-tax case related to the estate of Robert A. Jack, a Canadian who maintained Canadian income tax residency but worked in the U.S. under a TN non-immigrant temporary work visa.

Jack was medical director of the School of Veterinary Medicine at the University of California Davis. He used to return to Canada at the end of the school year, and then go back to the U.S. to work under his temporary work visa, which was regularly renewed.

Jack died and the U.S. court found he had formed sufficient intent to be domiciled in the U.S. for estate-tax purposes and therefore was subject to estate tax on his worldwide estate, including his assets in Canada—not just the small amount of assets he held in the U.S. Could this also be the case for a Canadian snowbird under this visa?

Healthcare coverage

Lastly, what about the impact to snowbirds’ provincial health care coverage?

Canadians who are out of their provinces of residency for more than 182 days (243 days in Newfoundland and 212 days in Ontario) are at risk of losing their provincial healthcare coverage. The snowbird would then have to find some alternative form of medical coverage—generally not available unless you’re a permanent resident of the U.S. Even if insurance were available in the U.S., it would likely be more expensive, and wouldn’t cover pre-existing conditions.

As we’ve seen, the devil is truly in the details; and the details just don’t make sense for a majority of Canadians.

Terry Ritchie, CFP (U.S.), RFP (Canada), TEP, EA, is a Calgary-based cross-border financial planner with expertise in both American and Canadian tax regimes; and co-author of The Canadian Snowbird in America, The Canadian in America, and The American in Canada.