By Dale Jackson
Canadians who spend their winters in the warmer climates of the United States may be attracting some unwanted attention starting this year.
A new tax treaty between Canada and the United States has spawned a cozy relationship between the Canada Revenue Agency and the U.S. Internal Revenue Service. The two tax departments will be sharing a lot more information including the number of days Canadian sun-seekers spend in the good old U.S.A.
That sort of information could invite new taxes, double taxation or even penalties for Canadians who don’t file a U.S. return or report information accurately.
Country of residence
The rules aren’t changing. Any Canadian who spends more than half of the year in the U.S. always runs the danger of being subject to U.S. taxes. Most snowbirds already know they need to keep track and report how many days they spend in each country. Now the tax overlords will actually be comparing results.
Of course, in the world of tax accounting tabulating anything like the number of days spent in a country is not as simple as it seems. Calgary-based Moody’s Gartner specializes in Canadian clients with U.S. tax considerations and uses what is called the substantial presence test. Canadians who spend more than 30 days in the U.S. in one year must add the total number of days to one-third of the number of days spent in the U.S. in the previous year, and one-sixth of the days spent in the U.S. in the previous year.
If the test yields a number above 182 you can be taxed as a U.S. citizen on all your income and have all the reporting obligations of a U.S. citizen.
According to Moody’s Gartner, anything less than 183 makes you not “substantially present” in the United States and not obliged to pay taxes. You do still have to file a form (8840) to state you are more closely connected to Canada.
Dire consequences
Moody’s Gartner says some really bad things can happen to snowbirds who spend too much time in the U.S. or out of Canada including:
- A three year travel ban for Canadians who are unlawfully present in the U.S. for more than 180 days over a consecutive12-month period. A travel ban can be as high as 10 years for Canadians who spend more than 365 consecutive days in the U.S.
- Being deemed a U.S. resident and subject to U.S. tax on income from any country.
- Subject to U.S. estate tax on all assets at death. The definition of U.S. resident for estate tax is fundamentally different than income tax. As a result, the heirs of the deceased snowbird can find a chunk of their inheritance being eaten up by the IRS.
- Canadian departure tax. If a Canadian is no longer considered a resident he is deemed to have disposed all of his assets. At that point he must recognize any gain on those assets, and pay tax on it. Too much time in the U.S. could result in a hefty tax bill from the CRA.
- Loss of provincial health care. This could be a tough pill to swallow. Canadian residents are entitled to provincial health services. Once the individual is no longer a resident of that province he loses that entitlement. Moody’s cautions that the definition of residency in the context of health care is different than the rules for income and estate taxes.
We may think of governments as bumbling agents of mismanagement but it’s important to recognize how efficient they can become when it comes to collecting our money. It’s a new age in international tax co-operation and the best way to avoid a sizable tax penalty in the future may be to invest in professional tax advice now.