For generations, many retired Canadians have escaped northern winters by spending time in the sunbelt of the United States. As hospitable as our southern neighbours may be, if you overstay your allotted time you could find yourself in hot water.
That could mean being required to leave, being denied entry in future, and being liable to U.S. income tax for the time you were there. That’s why you need to understand the tax rules for snowbirds.
How long can you stay before you have to file a tax return?
You may have heard that you can stay up to half a year without a concern. That’s incorrect, and could get you into tax trouble.
The main test of whether you'll need to file U.S. taxes is whether you exceed 182 days (which is where the half-year reference likely originates), under the three-part formula for what is known as the substantial presence test.
This test tallies:
- Days spent in the U.S. in the current year
- One third of days spent in the U.S. the preceding year
- One sixth of days spent in the U.S. the year before that
To make it even more challenging, the test applies to any 12-month period that ends in the current year, not just for the calendar year itself. As a rough estimate, let’s say you stay for the exact same four months every year (120 days). Using the formula, that would be 120 + 40 + 20 for a total of 180, just shy of the 182 day limit.
But what if you broke it into one or two month stretches at differing times from year to year, or you threw in the odd day-trip? You can see how people can run into problems. It’s hard enough to figure out how much time you’re allowed, but then have to keep very careful track of past years so as not to risk having to file a U.S tax return in future.
What if you exceed the days you're allowed to stay in the U.S.?
If you exceeded your days, the U.S. will consider you a “resident alien”, potentially exposing you to U.S. income tax on your worldwide income. Don’t panic.
If you find yourself in that position you can claim a closer connection to Canada than the U.S. to avoid that liability. Usually it’s sufficient to file the appropriate declaration form with the U.S. Internal Revenue Service (IRS). The document you'll need is Form 8840 - Closer Connection Exception Statement for Aliens. Be aware, though, that sometimes the IRS will request additional evidence, such as proof of a principal residence in Canada, a provincial driver’s licence or other documentation.
However, if you exceed 182 days in the current year alone, you will need to apply for relief under the Canada-U.S. treaty. That can be more complicated and costly, and the IRS has more discretion to deny you in such cases, so it is best to steer clear of that situation if you can.
Will these rules ever change?
If you feel like four months is just not enough southern exposure, the Canadian Snowbird Visa Act, a bill that proposes extending the allowed stay to 8 months, has been a ray of hope. A version of this bill was introduced as recently as June 2019, but considering all the debate going on about U.S. immigration laws, it's far from a sure thing.
Other considerations for long southern stays
Of course, U.S. taxes are only one of a variety of items on the preparation checklist for Snowbirds. Health insurance is another, and as many provinces cease coverage after about seven months out-of-country, you may have to come home sooner than desired anyway.
Also some home insurance policies require extra measures for people who are away for an extended period of time.
Interested in learning more about finances for snowbirds? Contact your Meridian branch today to book an appointment with one of our Wealth Professionals.
A version of this article was originally published on October 27, 2017