It can be Taxing to be a SnowbirdChristopher Briggs, RRC®
With the days growing longer and nights warmer, it may be easy to forget the polar vortex that froze many parts of Canada this winter. For some, the cold prompted an escape to warmer climates down south. If you are a “snowbird” — spending considerable amounts of time in the U.S. — you need to be aware of U.S. income tax implications.
Even if you have no U.S. tax to pay, you may be subject to various U.S. tax filing requirements. Here are some areas to consider:
Overstaying — While you may consider yourself to be a resident of Canada, the U.S. may think otherwise. The “substantial presence test” is one of the tests used by the U.S. Internal Revenue Service (IRS) to determine whether an individual is considered a U.S. resident for tax purposes. It is a weighted formula that takes into account the days you are physically present in the U.S. over a three-year period, which includes the current year and the two preceding years. Qualifying as a U.S. resident for income tax purposes can have consequences, which may include increased compliance costs and potential U.S. filing requirements.
Owning a U.S. property — Canadians who own and then sell a U.S. property are liable for U.S. taxes on the capital gain on its disposition, and may be required to make certain U.S. filings. Canadians are generally subject to a U.S. withholding tax on real property on the gross proceeds if the sales price exceeds US$300,000, or the property is not acquired for use as a residence. The withholding tax may be reduced in certain circumstances, which generally requires planning in advance of the sale of the property. As a Canadian resident, you are generally subject to Canadian income tax on worldwide income, which may include any capital gains realized on a U.S. property. However, Canada would provide some relief for U.S. taxes paid in the form of a foreign tax credit.
Renting out your U.S. residence — Generally, Canadians who earn rental income from their U.S. property are subject to a 30 percent withholding tax, which tenants are required to deduct from the gross rent paid and remit to the IRS. If you have expenses associated with the rental property (such as mortgage interest, property taxes, utilities), you may have a much lower net rental income. In this case, you may wish to speak with a cross-border tax advisor about filing a U.S. non-resident tax return and making an election that would allow you to pay tax on the net rental income.
Dying while owning U.S. property — Canadians could be subject to U.S. estate tax on the fair market value of U.S. situs assets held at death, which includes assets such as U.S. real estate or U.S. marketable securities. The current top estate tax rate is 40 percent and the Canada-U.S. Tax Treaty may provide a credit to reduce or eliminate your U.S. estate tax. However, a U.S. estate tax return may need to be filed if your U.S. situs assets at death exceed US$60,000. The U.S. estate tax laws change frequently and you should discuss how future changes may impact your estate plan.
It is important to remain in good standing with U.S. authorities if you travel or own assets across the border. Over recent years, more information is being shared by U.S. and Canadian governments. Canadian and U.S. border services now track the movement of citizens as they enter/exit border crossings. The Canada Revenue Agency (CRA) and IRS also require financial institutions to share certain financial information in an attempt to reduce tax evasion.
If you are a snowbird, there may be significant tax, financial or estate planning implications to consider. There may also be ways to help minimize the implications. Plan ahead and seek cross-border tax and legal advice for your particular situation.