Currently, the Internal Revenue Service (IRS) considers US citizens, greencard holders, and foreigners who pass the substantial presence test to be American residents and, as such, potentially liable for income and estate tax.
Many snowbirds, or other Canadians spending a substantial amount of time in the US, are at risk of passing the substantial presence test. This includes Canadians who travel to the United States frequently for business.
To pass the substantial presence test, you must:
Total Days Spent in The US in The Current Year + 1/3 Of The Days Spent in The US The Year Before + 1/6 Of The Days Spent in The US The Year Before That
For the purpose of this equation, if any part of the day is spent in the US it is often classified as a full day spent in the US. One exception is if individual entering the US is in transit through the US.
There are, however, two exceptions in which a Canadian citizen, who spends a substantial amount of time in the US, can avoid being classified as a US Citizen and therefore not have to pay taxes in the US.
1. The Closer Connection Exception
If a Canadian Citizen, who frequents the US, can demonstrate that they have been in the US for less than 183 days in the year and have a closer connection to Canada.
To prove that you have a closer connection to Canada, you must be considered a tax resident of Canada and you must have socioeconomic ties that remain closer to Canada. Specifically, the IRS will look at the location of your primary residence, family connections, and business ties. They will also look into your banking relationships and whether or not you have access to Canadian healthcare coverage, etc.
If you believe that you are able to claim the closer connection, you must file US Tax Form 8840, by June 15, for each year that you passed the substantial presence test and the closer connection exception.
2. The Treaty “Tie-Breaker” Exception
If you spend more than 183 days in the United States, there is still a possibility of avoiding the US resident classification, and its implications.
This can be achieved if the “tie-breaker” rules set forth in the Canada-US Income Tax Treaty Work in your favour. To take advantage of this exception, you must provide more details and disclose more information, than is expected for the closer connection exception.
To claim this exception, you must file an income tax return, including Form 8833, which should explain why you are a resident of Canada, by June 15.
Keep in mind, however, that even if the Treaty Exception applies, you may still have to disclose other information to the IRS. If you fail to comply with these requests, substantial penalties could be levied.
Ultimately, the best security is to limit your presence in the US to 182 in any given calendar year. Doing so better protects your wealth and estate from US taxes.
For more tax planning advice and to ensure your estate is protected from the implications of being classified as a US resident, contact us today! We are happy to help.