Published on September 24th, 2015 | by Rick Ziemski0
Snow Bird “Borderphobia”
“The cool thing about being famous is traveling. I have always wanted to travel across seas, like to Canada and stuff.” ~ Britney Spears
Ever wonder what goes on in an American’s brain when asked for an image of Canada? To those of us living up here in the tundra of “The True North Strong and Free” the response often seems well-meaning but lacking in understanding. It can spark a really good giggle though. Just ask any Rick Mercer fan.
There is, however, one topic that is not so funny, especially to Canadian retirees spending time as “Snowbirds” in the US. That topic is the set of rules related to tax residency and the amount of time allowed in the US. To complicate matters, changes to the rules effective June 30, 2014 now allow both Canada and the US to calculate exactly the number of days you are within the borders, allowing for easier rule enforcement. This means that the former self-reporting of days and residence status is over. You now definitely need to keep accurate record of days inside the US and support your Canadian residency status with adequate documentation.
Exposure for overstaying your welcome and being deemed a US tax resident comprise numerous potentially nasty risks:
- Loss of provincial health care
- Liability for income tax in the US
- Liability for estate tax in the US
- Liability for capital gains tax in Canada on deemed disposition of Canadian assets
- Ban on travel to US
The bad news about calculating the allowed days is that there is no single, logical or consistently applied formula. For purposes of Ontario healthcare you are allowed to be out of country for 212 days. For tax purposes, by Canada-US Tax Treaty, the allowed time for a Canadian inside the US is 182 days in any twelve month period. However, the IRS first uses a residency threshold test called the “Substantial Presence Test” to determine if you are potentially a US resident for tax filing purposes. You are considered a US tax resident and subject to tax filing if you’ve spent 31 days in the US in the current year and the following three year rolling average exceeds 182 days inside the US:
- 100 percent of days in the current year; plus
- 1/3 of days in the previous year; plus
- 1/6 of days in the second previous year.
Based on this method, the average annual days allowed is 120 days.
Most “Snowbirds” fall into this category and in order to be exempt from tax filing in the US they need to file annually with the IRS, “Form 8840”; proof of a “Closer Connection to a Foreign Country”. With the exact days calculated, US border authorities are more likely to challenge your status at border crossings. It is advisable to travel with a copy of the Form 8840 as well as copies of other documents that support your closer connection to Canada. It is important to note that every short hop across the border counts as a day in the US for purposes of residency threshold calculations. On the flip side recent experience indicates instances where US Border has denied short trips back to Canada as time outside US.
On a non-tax note, US Immigration also has a deep interest in time spent by Canadians inside the US. Their powers can result in the most draconian treatment for any of us found to be “unlawfully present” in the US; 3 year travel ban for unlawful presence between 180 and 365 days and a 10 year ban for days above 365.
With a ski home in Western NY, I too live with “borderphobia”. So I’ve:
1. Prepared a “Time in States” worksheet on my smartphone.
2. Filed the “Closer Connection Exemption Statement” using Form IRS 8840.
3. Placed copies of Form 8840 and other support documents in my car.
4. Reduced the short trips and other holidays to US to keep days number down.
5. Aborted any expansion plans for my ski home, just in case. And, FYI……still no letter of thanks from any US agency for that $20,000 US that finds its way annually from my bank into the US economy.
W. R. Ziemski, CPA, CA