Wintering in the US.

The day count, which is not what people think

The US substantial presence test does not ask how long you were there this winter. It adds up three years:

Meeting the test means the US may treat you as a resident for tax purposes, which brings its worldwide income tax system with it. That is the exposure, and it arrives without anyone crossing a six month line.

Days are counted as days of presence. Part days generally count as whole days, so a drive across the border in the morning and back in the evening is a day. People who keep a rough tally in their head tend to undercount.

Form 8840, the closer connection exception

Meeting the substantial presence test is not the end of it. If you were in the US for fewer than 183 actual days in the current year and can show a closer connection to Canada, you can claim an exception by filing Form 8840, Closer Connection Exception Statement for Aliens.

Two things about it are worth knowing.

• It is a filing, not a status. The exception is claimed by filing the form. People who qualify but never file have not claimed it
• It is filed annually, for each year the test is met

The form asks where your permanent home is, where your family is, where your belongings are, where your licence and vehicle registration are, where you bank, where you vote, and which country you list as your residence on official forms. The answers are usually straightforward for a genuine snowbird, and being able to answer them consistently is the point.

Where the closer connection route is unavailable, because actual days in the current year reached 183 or more, the remaining route is the Canada–US treaty. That involves filing a US return and disclosing a treaty-based position on it, which is specialist territory rather than a form to fill in casually.

If you own property down there

Renting it out

Rental income from US property is US-source income and is reportable there. By default a flat rate of tax applies to the gross rent, with no deduction for expenses, collected by withholding.

There is an election that treats the rental as a business, allowing you to deduct expenses and depreciation and be taxed on the net figure instead, by filing a US non-resident return. For most owners the second route produces a much smaller number, and it is only available if you make the election and file.

The Canadian side continues regardless: the income is reported on your Canadian return as well, with a foreign tax credit for US tax paid so the same income is not taxed twice in full. See rental and real estate.

Selling it

When a non-US person sells US real property, a percentage of the gross sale price is withheld at closing and remitted to the IRS. Not the gain. The gross price.

That withholding is often far more than the tax actually owed, and getting the difference back means filing a US return for that year. It is possible to apply in advance for a reduced withholding certificate, but the application has to be made before or at closing, which is the part that gets missed.

You will also need a US taxpayer identification number to file anything, and obtaining one takes time. This is the single most common reason a sale becomes stressful: everything is workable with three months' notice and awkward with three weeks.

If you die owning it

US estate tax can apply to Canadians on US-situated assets, which includes real property and can include shares of US corporations. The exemption available to Americans is very large, and the treaty extends a proportionate share of it to Canadians, so most estates end up owing little or nothing.

The filing threshold is a different matter. It is low enough that a modest condo can trigger a US estate filing obligation even where no tax is ultimately payable. Executors discover this at a bad time. See estates and final returns.

The Canadian side does not go away

Spending winters in the US does not make you a non-resident of Canada. You keep filing here, on worldwide income, and claim foreign tax credits for US tax paid.

One Canadian filing to watch: if the total cost of your foreign property exceeds $100,000 Canadian, Form T1135 is required. A US rental property counts. A vacation home kept purely for personal use does not, which is the distinction that decides it for most snowbirds. The penalties for missing T1135 are severe and are not proportionate to the tax at stake.

If you are also a US citizen

A fair number of people who winter south hold both citizenships, and this changes the picture entirely. Everything above concerns whether the US might start treating you as a resident. For a US citizen, it already does, and always has.

The United States taxes its citizens on worldwide income wherever they live. Not where the income arises, not where you live, not how long you have been away. A US citizen who has lived in Cobourg for fifty years has an annual US filing obligation.

Who this catches

Citizenship generally follows from being born on US soil, and can also pass from a parent. So it is entirely possible to be a US citizen and have no sense of being one: born in a Buffalo or Detroit hospital, home within days, never a passport, never a thought about it since.

That is the group worth flagging, because they will not raise it. There is nothing to raise, from where they are sitting. It usually surfaces when a bank asks the question, or when a parent's affairs are being sorted out.

Two filings, not one

People who know about the US return often do not know about the second obligation, because it is not a tax form and does not go to the IRS.

• The annual US return, which reports worldwide income. Foreign tax credits and the exclusion for earned income abroad mean many people owe nothing, but owing nothing and filing nothing are different things
• The FBAR, a report of foreign financial accounts filed with FinCEN rather than the IRS, required where the aggregate balance of your non-US accounts exceeds a threshold at any point in the year. It has its own deadline and its own penalties. There is also a separate account reporting form filed with the return itself, at different thresholds

The threshold is an aggregate across all accounts and is measured at the highest point in the year, so ordinary chequing, savings, and registered accounts are counted together. People assume it applies only to something exotic.

Registered accounts do not travel well

This is the practical part, and it catches people who are otherwise compliant.

RRSPs are dealt with reasonably under the treaty. TFSAs and RESPs are not. The tax-free treatment is a Canadian concept that the US does not recognize, so income earned inside them can be taxable to a US person, and they can carry additional reporting of their own. A dual citizen diligently maxing a TFSA every year may be creating a US problem with each contribution.

Worth knowing before opening one rather than afterwards.

If years have been missed

This is more common than it sounds and there are established routes for people whose failure to file was not wilful. Information sharing between Canadian financial institutions and the CRA, and onward to the IRS, means the old assumption that nobody would ever notice no longer holds.

Coming forward voluntarily is treated very differently from being found, which is the same principle as the Canadian voluntary disclosure programme. This is US specialist work and I will point you to someone who does it.

OHIP has its own number

Separate from anything tax related, and worth knowing because the numbers differ. Ontario health coverage requires you to be physically present in the province for a minimum number of days in a twelve month period, and that minimum is not the same as any of the tax thresholds above.

People plan their winters around the US day count, satisfy it comfortably, and fall short on the provincial one without realizing the two are unrelated. Worth confirming the current requirement with the ministry directly, since it has changed over the years and it is not something to be approximate about.

Where I fit

I do not prepare US returns. What I do is notice that the question applies to you, get the day counts recorded properly through the year rather than reconstructed afterwards, handle the Canadian side including the foreign tax credits and T1135, and work with a US preparer where returns are needed there.

The most useful thing by a distance is early notice. Almost everything here is manageable if it is raised before a winter or before a sale, and awkward afterwards.

Questions