If you are a Canadian resident who is planning to spend an extended period of time in the United States you should be aware of the IRS tax regulations that may effect you. Perhaps you have just purchased a US residence in the Sun Belt and plan to become a snowbird or perhaps you plan to enjoy a long vacation in the US or an extended visit with a relative.
Non-residents who spend extended periods of time in the US can be deemed to have a substantial presence in the US and may be taxed by the IRS as US residents, subject to US taxes on their worldwide earnings. Basically, it is felt that anyone enjoying the comforts and benefits provided by the United States for an extended period of time has an obligation to contribute to the support of those amenities.
The Substantial Presence Test
The IRS considers non-residents to be U.S. residents for tax purposes if they meet the substantial presence test. A non-resident who was physically present in the United States for a total of 183 days during a calendar year clearly meets this test and will be taxed as a US resident. You may only consider yourself to be a Canadian in the us temporarily but in all things taxes, the IRS gets the final say while you are in the states.
A non-resident Canadian who has spent more than thirty days in the United States during a calendar year will be deemed to have a substantial presence in the US if the sum of the following calculation of the cumulative number of days spent in the US over a three-year period equals 183 or more:
• The number of days spent in the US during the current year, plus
• One third the number of days spent in the US during the previous year, plus
• One sixth of the number of days spent in the US the year before that
The IRS considers you to be present in the United States on any day that you are physically present in the country at any time during the day.
For purposes of the substantial presence test the IRS does not include the following:
1. Days a non-resident regularly commuted to work in the United States from a residence in Canada or Mexico.
2. Days a non-resident was in the United States for less than 24 hours while traveling between two places outside the United States.
3. Days a non-resident was temporarily in the United States as a crew member of a foreign vessel engaged in transportation between the United States and a foreign country.
4. Days a non-resident was unable to leave the United States due to a medical condition or medical problem that arose while in the United States.
5. Days a non-resident was an exempt individual.
Non-residents who may otherwise be entitled to exclude days present in the United States for purposes of the substantial presence test must include any days when they engaged in trade or business.
The following individuals are considered to be exempt individuals by the IRS:
• Foreign government-related individuals
• Teachers or trainees
• Students
• Professional athletes competing in charitable sports events.
Non-residents, who are not foreign government-related individuals, qualifying as exempt individuals to exclude days of presence in the United States from the substantial presence test must file Form 8843, (Statement for Exempt Individuals and Individuals With a Medical Condition).
The IRS also requires non-residents who qualify to exclude days of presence in the United States due to a medical condition problem to file Form 8843
Closer Connection Exception
Non-residents that otherwise meet the substantial presence test may be exempt from being taxed as a U.S. resident if they are granted an exemption by reason of having a closer connection to another country. This subject will be covered in more detail in a separate article.
If you intend to remain in the United States for an extended period of time the cross border tax specialists at Aylett Grant can help ensure that you avoid potential tax problems that may arise from not fully understanding tax implications of prolonged stays in the US.
Our international tax experts will assist you to file the necessary forms to obtain any exemptions you may be entitled to prior to your departure from Canada.
Remember, it is much easier to avoid tax problems than to straighten them out afterwards. Ignorance is not an excuse accepted by the IRS and failure to comply with regulations and deadlines can result in severe penalties.
Aylett Grant Tax LLP
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with US and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to US, Canadian, and other international tax laws. We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- US Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
