Taxation for Canadian Snowbirds

Posted on by Tax Partners
21
Dec

Introduction

For many Canadian snowbirds, escaping harsh winters to enjoy the sunshine in the U.S. is a yearly tradition. However, prolonged stays can trigger U.S. tax residency rules, subjecting snowbirds to U.S. taxes on their worldwide income. 

This article explores the factors that determine U.S. tax residency, exceptions to avoid it, and strategies for Canadian snowbirds to navigate cross-border tax obligations effectively.

 

U.S. Tax Residency Rules

Non-U.S. citizens can be considered U.S. residents for tax purposes through one of two tests:

1. Green Card Test

  • Individuals with lawful permanent resident status in the U.S. (Green Card holders) are automatically considered U.S. tax residents.

2. Substantial Presence Test

This numerical formula evaluates the total number of days spent in the U.S. over a three-year period:

  • Current Year: Counts all days present in the U.S.
  • 1st Year Before: Counts 1/3 of the days present.
  • 2nd Year Before: Counts 1/6 of the days present.

Example:
If Ryan spends 120 days in the U.S. each year from 2021 to 2023:

  • 2023 (current year): 120 days.
  • 2022 (1/3 of 120 days): 40 days.
  • 2021 (1/6 of 120 days): 20 days.
    Total: 180 days.

Since the total is below 183 days, Ryan does not meet the substantial presence test and is not a U.S. tax resident.

 

 

Exceptions to Counting Days:
Days spent in the U.S. may not count toward the substantial presence test if:

  • The individual cannot leave due to medical reasons.
  • The individual commutes regularly to the U.S. for work from Canada or Mexico.

 

Avoiding U.S. Tax Residency

Even if a snowbird meets the substantial presence test, two key exceptions can help avoid U.S. tax residency:

Closer Connection Exception

  • Applicable if the individual spends fewer than 183 days in the U.S. during the current year.
  • The individual must demonstrate stronger ties to Canada than the U.S. by filing Form 8840 (Closer Connection Exception Statement).

Factors Considered:

  • Location of permanent home and family.
  • Where personal belongings are kept (e.g., vehicles, furniture).
  • Where the individual votes or holds a driver’s license.
  • Social, cultural, and economic affiliations.

Filing Deadline:

  • Form 8840 must be submitted to the IRS by June 15 of the current year.

 

 

Canada-U.S. Tax Treaty Tie-Breaker Rules

For Canadians who spend at least 183 days in the U.S., the Canada-U.S. Tax Treaty provides tie-breaker rules to determine residency:

  1. Permanent Home: Residency is assigned to the country where the individual has a permanent home.
  2. Centre of Vital Interest: Personal and economic ties are evaluated.
  3. Habitual Abode: Where the individual spends most of their time.
  4. Nationality: Citizenship determines residency if previous factors are inconclusive.

Filing Requirements:

  • File Form 1040NR (U.S. Non-Resident Tax Return).
  • File Form 8833 (Treaty-Based Return Position Disclosure).

Both forms must be submitted to the IRS by June 15 annually.

 

Best Practices for Canadian Snowbirds

  1. Plan Your Stay:
    • Limit days spent in the U.S. to avoid meeting the substantial presence test.
  2. Keep Records:
    • Document travel dates, locations, and reasons for presence in the U.S.
  3. File Required Forms:
    • Submit Form 8840 for the closer connection exception if applicable.
    • Use tax treaty provisions to avoid double taxation if residency becomes ambiguous.
  4. Leverage Tax Treaties:
    • Familiarize yourself with Canada-U.S. Tax Treaty provisions, particularly tie-breaker rules.

 

Conclusion

Canadian snowbirds must carefully manage their U.S. presence to avoid being classified as U.S. tax residents. Understanding residency rules, exceptions, and filing requirements can prevent unwanted tax liabilities. Proper planning and compliance ensure you enjoy sunny winters without worrying about complex tax issues.

 

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

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