Snowbirds: Remember the Residency Rules

Spring is the time when most “snowbirds” return to Canada after fleeing the winter weather for warmer places south of the border. It is also tax season once again and, if you spend significant time in the U.S. during the winter months, you should be aware of the potential tax consequences. For snowbirds who escape to the U.S., did you know that you could be considered a U.S. resident for tax purposes?

The U.S. Internal Revenue Service (IRS) uses the “substantial presence test” (SPT) to determine whether an individual is considered to be a U.S. resident for income tax purposes. It is based on the number of days spent in the U.S. over a rolling three-year period.

Each day spent in the U.S. during the current calendar year counts as one day, each day spent in the prior year counts as 1/3 of a day and each day spent in the year before last counts as 1/6 of a day. If the total adds up to 183 days or more, and you were present in the U.S. for at least 31 days in the current year, you may be considered a U.S. resident for income tax purposes. (A good rule of thumb is to keep your stay to under 120 days annually.)

If you meet the SPT, you may still be treated as a non-resident of the U.S.:

If less than 183 days were spent in the U.S. in the current year:

You would need to file IRS Form 8840, Closer Connection Exception Statement for Aliens, to prove that you maintain a closer connection to Canada and should be exempt from any U.S. tax requirements. In order to qualify, you must be present in the U.S. for less than 183 days in the current calendar year and be able to establish a home, as well as a closer connection, in Canada.

If 183 days or more were spent in the U.S. in the current year:

You may be able to claim treaty benefits under the Canada-U.S. Tax Treaty to support that you are a resident of Canada, but you would be required to file a tax return using IRS Form 1040NR, US Non-resident Alien Income Tax Return as well as Form 8833, Treaty Based Return Position Disclosure Under Section 6114 or 7701(b) to claim treaty benefits.

All of this may be subject to change. There is currently a bill before U.S. Congress that will allow Canadians over the age of 55 to stay in the U.S. for up to eight months of the year, provided they own a U.S. vacation residence or have a signed rental agreement.

There are other instances where a cross-border tax filing with the IRS may still be required. These include:

  1. Canadians who own and sell their U.S. real estate.
  2. Canadians who earn rental income from U.S. real estate for more than 15 days.
  3. Canadians who die owning U.S. situs assets of over US$60,000 and have a worldwide estate value that exceeds US$11.2 million (for 2018), as they may be subject to U.S. estate tax.

Remember, even if no U.S. tax is due, you may still be required to file a U.S. tax return, such as to claim treaty benefits or certain exemptions. As such, if you spend extended periods of time in the U.S., we suggest that you consult a tax advisor who is familiar with U.S. tax law and tax filing requirements for Canadians.