Snowbirding in the U.S.

While we brave the cold in Canada, many of our clients spend the better part of winter in warmer climes. Most migrate south of the border for an average of 30 days or so. Some, however, prolong their pleasure for as long as six months—the maximum time permitted in the U.S. without being required to apply for immigration status. These annual Canadian sojourns down south should not exceed four months (122 days per year to be exact) as mandated by U.S. tax regulations.

The Substantial Presence Test allows the U.S. Internal Revenue Service (IRS) to tax the income of foreign citizens who qualify as resident aliens merely by dint of having spent too many days in the United States, in the current year and two years preceding.

Hence, your snowbird clients who frequently travel to the United States could be considered U.S. residents for tax purposes if they meet the Substantial Presence Test for the calendar year.

The IRS, however, has its own way of defining a day, which does not necessarily equate to being physically present on U.S. soil for 24 hours.

In calculating the number of days to determine resident status for tax purposes, a same-day return trip or a few hours spent in the United States count as one day.

Let’s suppose your client was physically present in the United States on 120 days in each of the years 2009, 2010 and 2011. To determine whether she meets the Substantial Presence Test for 2011, count the full 120 days of presence in 2011, 40 days in 2010 (1/3 of 120), and 20 days in 2009 (1/6 of 120). As the total for the three year period is 180 days, your client wouldn’t be considered a U.S. resident for tax purposes for 2011.

If this tally had exceeded 182—even by a day—your client would have met the test and, consequently, been recognized as a resident alien for U.S. income tax purposes.

Spending half the year

Now let’s assume the client habitually spends six months a year in the United States. In this case, if we count the full 180 days of presence in 2011, 60 days in 2010 (1/3 of 180), and 30 days in 2009 (1/6 of 180), we arrive at 270 days, far more than the 182 permitted.

As a result, in addition to paying income tax in Canada, this client could have to pay income tax in the United States as well. Some individuals, however, are exempt from having to count days of presence (see “Exempt individuals,” below).

Substantial Presence Test

To meet this test, you must be physically present in the United States for at least:

• 31 days during the current year, and
• 183 days during the 3-year period, which includes the current year and the two years immediately before that, counting:
• All the days you were present in the current year;
• 1/3 of the days you were present in the first year before the current year; and
• 1/6 of the days you were present in the second year before the current year.

In order to avoid having to pay taxes in the United States on their total income for the year, Canadians who regularly cross the border—and meet the Substantial Presence Test—must fill out and submit IRS form 8840, Closer Connection Exception Statement for Aliens, each year, before June 15 of the following year. In case of spouses, each person must fill out a separate form.

If your client doesn’t submit this form on time, there’s another,more complex way to avoid having to pay tax in both countries—complete and submit forms 1040-NR (U.S. Non-resident Alien Income Tax Return) and 8833 (Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)) in the United States.

Clients should be aware that if they do not produce the required paperwork and meet the Substantial Presence Test, they expose themselves to penalties for failure to file a return, and risk having to pay income tax in the United States for each year they are considered to have been resident aliens in the country.

To serve your clients better, it’s important to know their travel habits so you can refer them to U.S. tax experts, when needed. A complete and detailed analysis of their financial assets is equally important, to determine if they might be subject to U.S. estate taxes on property they own south of the border.

Exempt individuals

The term “exempt individual” does not refer to someone exempt from U.S. tax, but to anyone in the following categories who is exempt from counting days of presence in the U.S.:

• An individual temporarily present in the United States as a foreign government-related professional
• A teacher or trainee temporarily present in the United States under a J or Q visa, who substantially complies with the requirements of the visa
• A student temporarily present in the United States under an F, J, M, or Q visa, who substantially complies with the requirements of the visa
• A professional athlete temporarily in the United States to compete in a charitable sports event If you exclude days of presence in the United States because you fall into a special category, you must file Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition.

Source: IRSM

When and how to file U.S. taxes

If you have clients who are U.S. citizens or resident aliens residing overseas, on the regular due date of their returns, they are allowed an automatic two-month extension to file their returns and pay any amounts due without requesting an extension. For a calendar year return, the automatic two-month extension is to June 15.

If clients are unable to file their returns by the automatic two month extension date, they can request an additional extension to October 15 by filing Form 4868 before June 15. However, any tax due payments made after June 15 will be subject to both interest charges and failure-to-pay penalties.

Each taxpayer who files, or is claimed as a dependant on, a U.S. tax return will need a social security number (SSN) or individual taxpayer identification number (ITIN). To obtain an SSN, clients should use form SS-5, Application for a Social Security Card. To get form SS-5, contact a Social Security Office or visit Social Security International Operations. If clients are ineligible for an SSN, they can obtain an ITIN by filing form W-7 along with appropriate documentation.

Source: IRS

Annie Boivin, BBA, Fin.Pl., D.Tax., TEP is Manager, Tax and Estate Planning at Richardson GMP Limited. Our team of in-house experts collaborates with Investment Advisors to deliver customized wealth management solutions designed to address tax, estate, insurance, philanthropic and succession needs.