Before snowbird clients head south for the winter, advisors may want to remind them to take a close look at a calendar if they want to avoid filing U.S. income tax. ‘
“Many people are snowbirds [and] a lot of people I’ve met this week have places in Arizona, places in Montana, some in Florida,” said Linda Leung, director, U.S. tax planning, wealth planning group, BMO Nesbitt Burns Inc. in Toronto. “If your client is in that boat they should be counting the days that they are physically present in the U.S.”
Leung spoke at the 12th annual Institute of Advanced Financial Planning (IAFP) Symposium in Calgary on Sunday.
Until recently, the U.S. didn’t keep close watch as to exactly how many days snowbirds were staying in the country, said Leung, and people could get away with not counting or filing the correct paperwork. However, that is no longer the case.
Canadian citizens who winter in the U.S. want to make sure they don’t meet the substantial presence test as doing so would make them a U.S. resident for income tax purposes. Individuals who meet the test have spent 31 days in the current calendar year and a total of 183 days over the last three years (including the current year).
The test includes all days spent in the U.S. in the current year plus one-third of the days spent in the U.S. the year before and one-sixth of the days from the year prior to that.
Essentially, individuals who spend 120 days or less each year will not meet this test. For example, the test would calculate 120 days for 2014, 40 days in 2013 (one-third of 120) and 20 days in 2012 (1/6 of 120) for a total of 180 days.
Should a client meet the 183-day test, he or she will have to file U.S. income tax returns every year and do the same kind of tax reporting as U.S. citizens. “Which is not fun,” said Leung, “and that’s just something most people want to avoid.”
Clients who do meet the substantial presence test can try one of two ways to avoid filing income tax as a U.S. citizen. First, clients can file the Closer Connection Exception Statement for Aliens (form 8840) with the Internal Revenue Service (IRS) in which they can list all of their connections to Canada to show they are not U.S. citizens. Clients looking to fill out this form should be careful not to stay more than the 183 days in America, said Leung, as they will no longer qualify for the exception.
Another option for Canadians who stay in America for 183 days within one calendar year is to try and get an exemption under the Canada-U.S. tax treaty. Going through the treaty, however, is a more complicated process and not as straightforward as the closer connection exception, said Leung, as well there is no guarantee that clients will be able to get out of their reporting obligations.