Should snowbirds live in the U.S.?

The U.S. wants Canadian snowbirds to stay south of the border.

Section 4503 of the Jobs Originating through Launching Travel Act is titled Encouraging Canadian Tourism to the United States. It proposes to let Canadians stay in the U.S. for up to 240 days within a calendar year.

Read: U.S. tax rates have fallen since 1980

To be eligible, the Canadian would have to:

• be at least 55 years old;
• maintain a residence in Canada; and
• own a residence in the U.S. or have a rental agreement for accommodations in the U.S.

That person could also bring his spouse (although it’s not clear whether the spouse also needs to be older than 55). However, he would not be allowed to work in the U.S.

Section 4504 also proposes to allow a Canadian to reside in the U.S. for up to three years if he gets a special Z Visa. To qualify, the Canadian would have to:

• purchase a U.S. property for at least US$500,000 in cash;
• ensure the property is worth at least US$500,00 during his entire stay;
• reside in a U.S. property valued at US$250,000 or more;
• be older than 55, have health insurance coverage and live in the U.S. for more than 180 days;

He could also bring his spouse and/or minor children, but could not work in the U.S., unless it would be to manage his property.

Read: A look at U.S. tax exposure

For Canadian snowbirds who already own existing U.S. real estate, the Retiree Visa would not apply.

Is the Z visa worth it?

If your clients are considering U.S. property, a $500,000 commitment can go a long way. According to zillow.com, in Arizona, Scottsdale median home prices are $354,100 and Phoenix at $136,500. For Florida, Boca Raton median home prices are $217,300 and in Ft. Lauderdale are $219,700.

So if your client is a Canadian snowbird who wants to find a way to extend her stay, these provisions could work in her favour. But consider the implications of these rules as they relate to income tax in both Canada and the U.S, as well as U.S. estate tax and provincial health care coverage.

In the article Does your client have U.S. tax risk?, I discuss the rules that relate to establishing U.S. tax residency. The Substantial Presence Test is a calculation of the number of days that a snowbird spends in the U.S. over a three-year period. Under this test, if the days calculated are greater than 183, the snowbird is subject to U.S. income tax on their worldwide income.

Read: Don’t forget obscure U.S. tax deadlines

Traditionally, snowbirds that meet the Substantial Presence Test can file IRS Form 8840 (The Closer Connection Exception Statement) so they aren’t subject to U.S. tax.

But U.S. tax residents must file IRS compliance forms when they own Canadian companies, bank accounts, investments and retirement accounts. Failing to comply can trigger penalties starting at U$10,000 that can go as high as 50% of the amount of the foreign account.

And if they own Canadian mutual funds, these are considered PFICs under U.S. tax rules. That means U.S. tax residents must pay tax on the accrued earnings at the highest U.S. marginal rate (39.6%) in 2013. There would be no recognition of favorable tax treatment on dividends or capital gain distributions unless the Canadian mutual fund provided a Qualifying Electing Fund statement (and I only know one company that does this).

Read: New U.S. tax rule fuels frustration

Clients must also disclose their interests in RRSPs and RRIFs, and if they’re snowbirds in California, they’re subject to additional income tax on the accrued earnings within their registered assets.

Finally, clients must file U.S. FBAR (Foreign Bank Account Report – TFD 90-22.1) and the new IRS Form 8938 disclosing ownership of foreign assets. Failure to file these forms will result in significant financial penalties.

U.S. estate tax

And what about U.S. estate tax? Presently U.S. citizens and residents are entitled to an exemption on their worldwide estate of US$5.25 million for the 2013 tax year, and a maximum rate of 40%. Under President Obama’s recently proposed budget, the estate tax exemption would become $3.5 million with an estate tax rate of 45%.

Read: What the cliff act means for estate taxes

Would a Canadian that under the proposed immigration sections be considered a U.S. resident by virtue of the amount of time he spent there? If so, he could be subject to U.S. estate tax on his worldwide estate, including all assets in Canada.

Read: Common U.S. tax troubles

Consider this recent estate tax case, which suggests this would be the case. Robert A. Jack was a Canadian and maintained Canadian income tax residency, but worked in the U.S. under a TN nonimmigrant temporary work visa. He was the medical director of the School of Veterinary Medicine at the University of California. He’d renew his visa to work during the school year, but would return to Canada at the end of each school year.

Jack died and the U.S. court found he’d planned to be domiciled in the U.S. for estate tax purposes, and therefore was subject to estate tax on his worldwide estate, including both his assets in Canada and the U.S.

Read: Handle U.S. estate tax exposure

And what about the impact on provincial health care coverage? Canadians who are out of their province of residency for more than 182 days (243 days in Newfoundland and 212 days in Ontario) are at risk of losing that coverage. The Canadian will then have to find some alternative form, which is generally unavailable if you’re not a permanent resident of the U.S. If it is available, then it’ll be expensive and will not cover pre-existing conditions.

So when you consider the tax and healthcare implications, the majority of traditional Canadian snowbirds may not benefit from these new provisions.

Terry F. Ritchie is the Director of Cross-Border Wealth Services for Cardinal Point Wealth Management (www.cardinalpointwealth.com) with offices in Toronto, Calgary, Vancouver, Boca Raton, FL and Irvine, CA.