The first issue to cover is the US residency rules for tax purposes. There are 2 types of residency that can trap Canadians and put them in the IRS line of fire.

1. Residency through the Substantial Presence Test:

The IRS has a formula to calculate residency for US tax purposes. It is composed of a 3 year rolling average, giving different weights to the number of days in each year. If according to the test, the result is 182 days or less, the individual is not a resident, however, if the result shows 183 days or more, then the individual is considered a US resident for tax purposes and is obligated to file a return.  To see where you wind up, see the substantial presence test calculator on our website (http://www.ustaxesincanada.com/substantial-presence-calculator/).  If someone is considered a resident under this test, which is pretty easy as it requires only 122 days annually in the US, there is a get-out-of-jail-cheap card available to you. This is the closer connection exemption. This exemption requires the filing of form 8840 annually. It is a simple form that essentially asks you to show the Americans that you can’t be considered a resident of the USA because you are really a resident somewhere else. File this form annually by June 15^th and you can avoid any further US filing requirements. Failure to timely file this form can result in your being deemed a US resident for tax purposes for the year in question. Late filed exemption requests are not automatically accepted and can be costly to file.  This isn’t pleasant but it’s a simple form and will result in the elimination of the requirement to file a US tax return other than this specific form. This option is available only to those who spent less than 182 days in the US in that calendar year.

2. Residency through the Canada-US income tax treaty:

This method of avoiding US tax is available to those people who spend 183 days or more in the US in a calendar year. It too will result in the substantial elimination of US tax liability. However, this comes with a huge IRS gotcha. In order to claim this benefit, you are required to file a complete US resident return and claim a treaty exemption. To do this, you will need to prove that you are genuinely a resident of Canada and not a resident of the USA. This might be difficult if you are spending 240 days annually in the USA. However, this will eliminate the tax on income earned outside the USA.

However, income taxes are usually not the problem facing Americans living abroad. The major problem is the myriad information returns that one must file and the treaty does not eliminate this. You will be required to file a complete US tax return for the year with all required attachments and schedules. This will result in needing an FBAR, 3520/3520A for your TFSA, 8891 for your RRSP, 8621 for mutual funds and whatever other forms that may apply to you. The cost of preparing this return can be substantial, plus the penalties for not filing in a timely manner can be terrifying as well.

So how does all this affect you specifically? If you are a snowbird, don’t leave your tax situation to chance. Your winter in Florida might cost you more than you can possibly imagine. The good news is that most of these problems can be avoided with proper planning. Don’t wait until it’s too late. Call us at 1-800-905-0380 or contact us through the website (www.ustaxesincanada.com) and schedule a free consultation with our tax professionals who will advise you as to what the optimal strategies are for you and how to avoid problems in the future.

US tax residency is determined through the Substantial Presence Test. This test determines residency by the following method. If an individual meets the criteria, they are considered a US tax resident for the year. This will result in the individual being considered a resident alien and will be obligated to file a full tax return for the year including the disclosures of all non-US owned asset forms. The test consists of 2 different questions and individuals must answer yes to both questions to be considered a resident. Note that any part of a day spent in the USA counts as a full day.

1. Did the taxpayer spend 31 days or more in the USA during the current year?
2. Did the taxpayer spend more than 183 days in the USA over the past 3 year period with the days weighted as follows?
   • Number of days present in the current year ADDED TO . . .
   • 1/3 the number of days present in the USA in the prior year ADDED TO . . .
   • 1/6 the number of days present in the USA in the 2^nd prior year.

Note that if an individual spends more than 121 days a year in the USA they will meet the substantial presence test. To avoid the onerous requirements of US residency and tax filing, the individual can consider the following two options.

1. File form 8840 requesting a Closer Connection Exemption.
2. If the Closer connection exemption is not available, an individual can use tiebreaker criteria under article IV of the Canada US income tax treaty.

1. File form 8840 requesting a Closer Connection Exemption

To claim a Closer Connection Exemption, individuals will need to be able to demonstrate they have a closer connection to Canada than the USA. To be eligible for this approach, an individual must meet the following 3 criteria:

• The individual must be present in the USA for fewer than 183 days during the current year.(A greater presence will also result in being in violation of immigration law)
• The individual must maintain a “tax home” in a Canada or outside the USA.
• The individual must be able to demonstrate that they have a closer connection to the foreign country than to the USA.

Examples of this could include owning a home in Canada while not owning one in the USA, or keeping active government health insurance and maintaining a Canadian drivers’ license. All individual cases are judged independently on the merits of the case in question. To claim this exemption, form 8840 must be timely filed with the IRS by June 15^th of the following year, or October 15^th if an extension request is filed.

2. Use tiebreaker formulas under article 4 of the Canada-US income tax treaty.

The treaty produces a method whereupon no individual can be claimed as a resident of both countries. There are 5 items used to determine which country has the primary residency. They are as follows:

• Location of permanent home: (Where does the individual maintain a home)
• Center of Vital Interests: (Where does the individual work, bank, invest)
• Habitual Abode: (Where does the individual regularly live)
• Citizenship: (This would be a determining factor for Canadian citizens because if the individual is an American citizen, they would have to file anyway)
• A panel is assembled to adjudicate the case: (If the above 4 tests are not decisive then the case is to be determined  by a panel who will issue a final ruling)

To determine which country is primary, start at the top of the list. If the answer is clear, then ignore the other questions. If it is unclear, keep going down the list until it can reasonably be determined. To claim the treaty benefits, file form 8833 with a US tax return. One point to consider though in using the treaty is that states are not bound by federal tax treaties. Therefore if someone is spending the winter in California, they may have state tax issues as well as the federal ones.

If you, or someone you know, may be unsure if you may have American filing responsibilities, please check out our Substantial Presence Test Calculator . If you have any other questions or are unsure as to what your next steps should be, please contact one of our tax experts for a free consultation.