Are you enjoying the sunny south and overlooking U.S. income tax?
Leaving Canada to travel to the United States for a few months at a time requires a lot of preparation. One thing that can be overlooked is U.S. income tax and reporting requirements. Canadian residents are often surprised to discover that travel to the U.S. can make them subject to U.S. tax on worldwide income.
The substantial presence test
The Internal Revenue Service (IRS) uses a “substantial presence test” to determine residency in the U.S. Based on this test, it tallies the days spent in the U.S. in the current calendar year and the two preceding years. If the sum of the formula is 183 days or more and in the current year you have spent at least 31 days in the U.S., you meet the substantial presence test. The IRS will consider you a resident unless you take further action.
Form 8840 — “Closer Connection” to Canada
If you meet the substantial presence test in any calendar year, you want to file the Form 8840 – Closer Connection Exception Statement for Aliens, also known informally as the “snowbird filing.” If you meet its conditions, filing Form 8840 will allow you to maintain your tax status as a non-resident of the U.S. under U.S. law. The filing deadline for a Form 8840 is generally June 15 following the end of the relevant tax year. If you do not file this form on time, you could become subject to U.S. tax on your worldwide income.
Defining a “closer connection”
The final condition of Form 8840 requires a closer connection to another country than to the U.S. As a Canadian you can meet this requirement by establishing that you maintained more significant social and economic ties with Canada than with the U.S.
Form 8840 and the CRA?
Form 8840 allows Canadians to declare their closer connection to Canada — and thus avoid U.S. tax. However, filing Form 8840 with the IRS has no impact on your Canadian income tax return. It is important you do not let your U.S. trip interfere with your Canadian responsibilities. If you travel to the U.S. near your Canadian filing deadline, don’t forget to file your Canadian return.
Green cards and the substantial presence test
Note that this is a test of income tax residency for U.S. tax purposes and it is generally not dependent on your U.S. immigration status. If you have a green card:
- You will be considered resident by virtue of the green card and not by virtue of the “substantial presence test.”
- Nor can you avoid U.S. taxes using the “closer connection” exception in Form 8840.
Do I need to track every single day?
In limited circumstances, Canadian snowbirds can exclude some time spent in the U.S. when calculating their days for the substantial presence test. Talk to your tax advisor regarding these exceptions to the days you are counting.
Scott Conner is a Tax Partner at BDO Canada LLP. With over 15 years of experience as CPA, CA specializing in Canadian income tax, Scott helps a variety of individuals and private companies pay the least amount of tax possible with great tax planning strategies. He also specializes in planning for estates, trusts, and non-resident dispositions of real estate.