I’ve lost track of the number of clients who have told me that as soon as Christmas is over they are heading to their vacation home someplace warm. It seems as soon as the weather gets colder, many people start to picture sunny beaches and emerald green golf courses. If this escape location happens to be in the United States, consideration should always be given to whether (vs. weather) the stay (as it gets longer year over year!) triggers an income tax liability in that country.
If you are not a citizen of the United States, the U.S. applies tax to your income depending on whether you are a resident of the U.S. or a non-resident. A resident of the U.S. is taxed on worldwide income – all income from all sources – in much the same way a Canadian citizen is taxed in Canada. On the other hand, a non-resident of the U.S. is taxed only on U.S. source income, less a few deductions.
Canadian snowbirds, who are not U.S. citizens, are generally treated as non-residents of the U.S. unless they meet one of two residency tests. The two tests are:
- the ‘lawful permanent resident test’: This considers any person who holds a green card to be a resident of the U.S. no matter where they live, or
- the ‘substantial presence test’: This second test depends entirely on how much time you spend in the U.S., regardless of your status or intent.
Under the substantial presence test, you will be considered a U.S. tax resident if:
- you are a foreign citizen who is present in the U.S. for at least 31 days during the current calendar year; and
- the sum of the number of the days you are present in the U.S. in the current year, plus one-third of the days you were present in the U.S. in the prior year, plus one-sixth of the days you were present in the U.S. in the year before that, is at least 183 days.
Sam, a Canadian retiree who ordinarily resides in Canada, makes frequent long trips to the U.S. but maintains a home in Canada, where his family resides. He does not have a green card. In 2017, Sam is present in the U.S. for 130 days. He was present in the U.S. for 120 days in 2016, and 120 days in 2015.
Under U.S. domestic law, Sam is considered to be a resident of the U.S. in 2017 because he was present in the U.S. for at least 31 days in 2017 and his number of equivalent days in 2017 and the two preceding years was 190 days, as calculated using the formula.
Meeting the substantial presence test results in being fully taxable in the U.S. during the year and the requirement to file a U.S. tax return – a significant effort. However, snowbirds such as Sam may qualify for the ‘closer connection to a foreign country’ exception where they are present in the U.S. less than 183 days in the current year and maintain a tax home and close ties with another country, such as Canada. To claim this exception though, a closer connection form (form 8840) must be filed with the IRS on an annual basis.
These rules would apply in a similar way to travellers to the U.S. for any reason, not just snowbirds.
In addition to the income tax considerations of travel to the U.S., there is also risk that lengthy absences from Canada could impact a snowbird’s access to social benefits including employment insurance, old age security and child tax benefit programs. Changes in residency can also affect a traveller’s ability to access health care in Canada. All things to keep in mind if you travel to the U.S. on a frequent basis!