Canadian Snowbirds Should Know These US Tax Residence Rules – Tips from A Canadian Tax Lawyer

Canada is known for its long and harsh winters, so many Canadian snowbirds spend those months in Florida, California or some place warm in the U.S. each year. While the beautiful sunshine and beach can be relaxing, Canadian snowbirds should carefully plan their stay so they won’t accidentally become U.S. tax residents who are subject to U.S. tax based on their world wide income.

How Non-U.S. citizens are considered as U.S. Residents for Tax Purposes The 1st is called the Green Card Test – if you are a lawful permanent resident then you are deemed to be a resident.

The 2nd way is called the Substantial Presence Test – a numerical formula which measures days of presence in the United States.

Under this test, if you are physically present in the U.S. for

• at least 31 days in the current year, and
• at least 183 days during the 3-year period including the current year and 2 years immediately before that,

you will be considered a U.S. resident.

Note that the days in each year of the 3-year period are counted differently:

• In the current year, all the days you were present are counted.
• In the 1st year before the current year, 1/3 of the days are counted.
• In the 2nd year before the current, 1/6 of the days are counted.

For example, if Ryan spends 120 days each year in California in 2019 (the current year), 2018 and 2017, the total number of days he is present in the U.S. in the 3-year period would be 120+120 x 1/3 + 120 x 1/6 = 180. Since he hasn’t met the 183 days threshold of the test, he will not be considered a U.S. resident for tax purposes.

You are generally treated as present in the United States on any day you are physically present in the country, at any time during the day. However, there are exceptions that your presence won’t count (e.g., you are unable to leave due to a medical condition or commute regularly to the U.S. for work from Canada or Mexico).

Even if a Canadian snowbird meets the substantial presence test, he may still be able to avoid U.S. residency by way of two exceptions – closer connection exception and the treaty exception.

Closer Connection Exception to the Substantial Presence Test

If you are present in the U.S. for less than 183 days in the current year, you may be exempt from being considered a U.S. resident if you can demonstrate a closer connection to Canada than the U.S. by filing form 8840, which is often referred to as the closer connection exception.

You will be considered to have a closer connection to Canada than the U.S. if you or the IRS establishes that you have maintained more significant contacts with Canada than with the United States. In determining that, the facts and circumstances to be considered include, but are not limited to, the following:

• The country of residence you designate on forms and documents,
• The types of official forms and documents you file, such as Form W-9, W-8BEN, etc.

The location of:

• Your permanent home
• Your family,
• Your personal belongings, such as cars, furniture, clothing, and jewelry,
• Your current social, political, cultural, or religious affiliations,
• Your business activities (other than those that constitute your tax home),
• Where you hold a driver’s licence,
• Where you vote, and
• Charitable organizations to which you contribute.

You cannot claim this exception if:

• you file form 8840 to the IRS later than June 15 in the current year. But this does not apply if you can show by clear and convincing evidence that you took reasonable actions to become aware of the filing requirement and comply with them.
• You are physically present in the U.S. for at least 183 days in the current year, or
• You have applied to change your status to that of a lawful permanent resident in the U.S. or have a pending application for adjustment of status in the current year.

The Tie-Breaker Rules in the Canada-US Tax Treaty

For Canadians who spend at least 183 days in the U.S. in the current year, they have one last resort – the tie-breaker rules under the Canada – US Income Tax convention (Tax Treaty) which allows a Canadian snowbird to be taxed as only a resident in Canada if he could establish a closer connection with Canada.

To claim this exception, you must file

• Form 1040NR – a U.S. non-resident tax return, and
• Form 8833 – a disclosure explaining why the person should be considered a resident of Canada

Both forms are due on June 15 annually.

To determine the degree of attachment that an individual has with a country, the tie-breaker rules consider factors in a descending order, and you only move to the next factor if the first one is not conclusive:

• Location of permanent home;
• Centre of vital interest;
• Habitual abode; and
• Nationality.

If none of the factors are conclusive which is a very rare situation, you must ask the competent authority of each country to make a decision.

Tax Tips from A Canadian Tax Lawyer

The best way for a Canadian snowbird to avoid being taxed as a U.S. resident is to fail the substantial presence test. But if you already meet the test, hiring an experienced lawyer from our Top Canadian Tax Law Firm would be your best option. We will not only help you carefully plan your stay to avoid being taxed as a US resident, but also make sure you properly file any forms required that are often complicated and onerous. Use this in-depth guide to moving for snowbirds to learn some more general best practices.

About the Author

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David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

Learn more about David J. Rotfleisch