Dreaming of warmer climates? Avoid U.S. tax consequences
With Canada’s notoriously cold winters, when Covid clears, you may wish to head south for warmer weather. Travelling to the U.S. during winter offers numerous lifestyle benefits—who wouldn’t like the idea of being a “snowbird”? However, it’s important to consider U.S. taxation and restrictions around the time you can spend in the U.S., and the potential implications.
First and foremost, it’s important to understand how long you can stay in the U.S. before potential tax implications arise. You may be considered a U.S. resident for tax purposes if you exceed your allowed time stateside. In order to determine this, you must pass the substantial presence test.
The substantial presence test is used by the Internal Revenue Service (IRS) to determine if you’re a U.S. resident for tax purposes. Although, it’s important to note that these rules only apply for federal income tax purposes. Depending on which state you’re spending time in, you may need to consider state specific residency rules. According to the IRS, to be considered a U.S. resident for tax purposes, “…you must be physically present in the United States (U.S.) for at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year."
As an example, let’s assume you spent 140 days in the U.S. in 2021, 75 days in 2020, and 132 days in 2019. For purposes of the substantial presence test, your total number of days of physical presence in the U.S. is the following:
As such, you’re considered a U.S. tax resident in 2021.
If you do meet the requirements of the substantial presence test, it’s critical to fill out the Closer Connection Exception Statement for Aliens to avoid U.S. tax implications. This form acknowledges that you met the substantial presence test, but are not going to be filing a U.S. tax return as you maintain a stronger relationship to a foreign country. However, if you have U.S. source income that otherwise requires you to file a U.S. tax return, then the closer connection exception statement would be included with the return. The form explains you will not be treated as a U.S. resident for 2021 if:
- You were present in the U.S. for fewer than 183 days during 2021;
- You establish that, during 2021, you had a tax home in a foreign country; and
- You establish that, during 2021, you had a closer connection to one foreign country in which you had a tax home than to the U.S., unless you had a closer connection to two foreign countries.
If you spend more than 183 days in the U.S. in the current year (2021), you would otherwise have to rely on the residency tie-breaker rules of the Canada-U.S. Income Tax Treaty, and will have to file a U.S. income tax return to claim the benefits of the treaty as well as possibly various U.S. information reporting forms (e.g. FinCEN Form 114, Report of Foreign Bank and Financial Accounts).
Did you know?
If you plan to purchase a U.S. property, other tax considerations arise, such as earned rental income. “If you are like many vacation property owners, chances are that you rent or at least try to rent your property when you are not occupying it. If so, the rental income that you earn may be taxed in both the U.S. and Canada,” says Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Private Wealth. As taxes can become complex when purchasing a U.S. property—it’s advisable to consult Canadian and U.S. tax advisors, ideally before purchasing a property.
To soak up the sun worry-free, it’s critical to think about the time you plan to spend in the U.S., fill out appropriate forms, and consult Canadian and U.S. tax advisors to avoid potential U.S. tax consequences.
Please consult Canadian and U.S. tax and legal advisors, if you have any questions.
This report is published by CIBC with information that is believed to be accurate at the time of publishing. CIBC and its subsidiaries and affiliates are not liable for any errors or omissions. This report is intended to provide general information and should not be construed as specific legal, lending, or tax advice. Individual circumstances and current events are critical to sound planning; anyone wishing to act on the information in this report should consult with their financial, tax and legal advisors.