Canadians who spend the winter in the Southern United States need to know how to avoid being considered a U.S. resident for tax purposes. Although there are no universal rules, there are some strategies you might consider to protect your tax status. As a snowbird, you should definitely understand the tax rules and what you can do to avoid being taxed under U.S. law if you plan to spend several months in the U.S. each year.
Here are some details that might shed some light on the situation. To be on the safe side, it's always a good idea to seek professional advice from a trusted tax professional.
Avoid Being Misinformed
You've probably heard that you won't be considered a resident if you spend fewer than 183 days a year in the United States. You might want to think again, as this is just a myth! The Internal Revenue Service (IRS) calculation is different.
The Substantial Presence Test
Those who meet the IRS substantial presence test are considered U.S. residents and are subject to U.S. tax laws.
The substantial presence test requires that you be physically present in the United States for the following periods:
- 31 days in the current year, and
- 183 cumulative days over three years, which includes the current year and the previous two years, counting:
● All the days you were present in the current year, and
● 1/3 of the days you were present in the first year prior to the current year, and
● 1/6 of the days of presence from the second year prior to the current year.
An Example to Illustrate the Calculation
During the years 2021, 2022, and 2023, you were physically present in the United States for 125 days each year. The calculation is as follows:
2023 (125 days * 1) 125 days
2022 (125 days* 1/3) 42 days
2021 (125 days * 1/6) 21 days
Total: 188 days
According to this example, you are considered a permanent resident under the substantial presence test for 2023 because your total is 188 days, which is more than the 183 days allowed.
How Long Can You Stay in the U.S. Without Being Considered a Resident for Tax Purposes?
You can spend up to 120 days in the U.S. a year without reaching this limit.
In order to calculate the number of days, you should be aware that a partial day in the U.S. counts as a full day when calculating the total number of days.
This calculation excludes days when you are in transit in the U.S. (less than 24 hours).
Exemption Through Form 8840
Canadian snowbirds can live in the United States for up to 182 days per year without paying U.S. taxes by filing Form 8840. You must meet the criteria and send this form to the IRS by June 15 of the year following the year in which you qualified as a U.S. resident for tax purposes.
Applicants must meet ALL of the following requirements to qualify for this exemption:
1. Spend less than 183 days in the current calendar year in the United States
2. Be able to establish a home in Canada in the current calendar year
3. Establish closer ties with Canada than with the U.S. during the calendar year
The Closer Connection Exception Statement for Aliens (Form 8840) is a brief form that asks several questions. You can use this form to state that you have a stronger economic and personal connection to Canada than to the United States.
Whether you should be considered a Canadian resident for tax purposes will depend on how the following questions are answered (the factors described below are similar to those on Form 8840):
- Where was your primary residence?
- Where was your family located?
- Where was your car located?
- Where was your car registered?
- Where were your personal belongings, furniture, and other personal effects?
- Where were the bank(s) with which you did your regular personal banking business?
- Did you do business in a place other than your tax location?
- Where was your driving licence issued?
- If you have a secondary driving licence, where was it issued?
- Where were you registered to vote?
- What country did you list as your country of residence when filling in official documents and forms (e.g., do you use a U.S. address on your U.S. tax return)?
- In which country or countries did you keep your personal, financial, and legal documents?
- From which country did you receive most of your income in the current tax year?
- Did you have any income from a U.S. source?
- In which country or countries were your investments located?
- Did you benefit from any type of "national" health plan sponsored by a foreign country?
Even if you meet the substantial presence test, the Closer Connection Exception assesses whether you have maintained more significant ties to Canada than the United States and, therefore, should be treated as a Canadian resident.
The Canada-U.S. Tax Treaty
It may still be possible for you to claim an exemption under the Canada-U.S. tax treaty if you spend more than 183 days in the United States within a single tax year.
Taking this option is the most complicated and expensive option to implement, and you will need to ask for the assistance of an experienced U.S. tax advisor who can guide you through the process. Be aware that you must file a 1040NR Non-U.S. Resident Income Tax Return and a Treaty Based Return Position Disclosure (Form 8833). You will also need a U.S. Individual Tax Identification Number (ITIN) to file these documents with the IRS.
Plan Your Annual Visit to the U.S. Carefully
It is essential for you to keep track of all your stays in the U.S. and to calculate how many days you spend there. Consult a tax professional if you plan to spend several months in the U.S. each year and make sure you meet IRS requirements.
This article is for information purposes only. It does NOT constitute legal, tax, accounting or other advice and should not be relied upon as such. If you require such advice, you should seek the services of a qualified professional to advise you.