This year’s cold and lengthy winter had me constantly daydreaming of beaches and warmer weather. I certainly envy those lucky ones who head south at the first sign of snow.
The only thing that makes me a little less envious is the knowledge that those Canadian snowbirds down in Florida, enjoying the sun and sand for months at a time, also have to deal with the potential tax traps that Uncle Sam has carefully laid out for them.
Living Abroad Tax Considerations:
Although you may consider yourself a resident of Canada, and you’ve duly filed your Canadian tax return each spring, be aware that if you spend a substantial portion of the year in another country, you may be found to be resident in that country for tax purposes.
This can, in turn, lead you to more tax headaches than you imagined. For example, if you are found to be resident in the U.S. for tax purposes, you will be taxed in the U.S. on your worldwide income in much the same manner as a U.S. citizen. That means you will be required to file a U.S. tax return and pay U.S. tax on your income from all sources.
Specially, you will be resident in the U.S. if you meet the lawful permanent resident (or green card) test, or the “substantial presence” test. Under the first test, if you have a green card, you will be treated as a U.S. resident, regardless of whether you are physically present in the U.S. The second test, however, requires a little more analysis.
Under the “substantial presence” test, you will be considered a U.S. resident if you spend a substantial portion of the year in the U.S. This test is calculated (generally) as follows:
* You have been in the U.S. for more than 30 days in the current year; and
* If the total number of days you spent in the U.S. during the current year, plus one-third of the days you spent there last year, plus one-sixth of the days you spent in the year before that, equals or exceeds 183 days.
You can, therefore, spend up to 120 days each year in the U.S. without crossing this threshold test. When calculating the number of days, you should know that a partial day in the U.S. counts as a full day, although you can exclude days that you were in transit in the U.S. (for less than 24 hours) on your way to another foreign country.
As well, you may be able to exclude days spent as a teacher, trainee, student, or professional athlete competing in certain charitable sporting events.
If you meet the above “substantial presence” test, you will be subject to U.S. tax and filing requirements, even though you may also be a Canadian resident and pay Canadian taxes.
In case you are considered a U.S. resident, you can try to extricate yourself from the U.S. by either claiming the “closer connection exception” allowed under the U.S. Internal Revenue Code, or claiming a treaty exemption under the Canada-U.S. Tax Treaty.
To claim the “closer connection exception” under the Code, you have to establish that you:
. Maintain a permanent home in Canada (no need to own; you only need continuous access), as well as personal belongings
. Have family in Canada
.Are employed or carry on business in Canada
. Do banking and hold investments in Canada
. Vote in Canada
. Participate in social or religious organizations in Canada
You cannot, however, claim this exception if you spend more than 183 days in the U.S. in the current year or if you have applied for a green card.
The “Tie-breaker” Rules
If you can’t claim the closer connection exception, there are “tie-breaker” rules under the Canada-U.S. Tax Treaty which take you through a series of tests.
First, if you have a home available to you only in Canada, you can claim residence here. However, the likelihood is that you may also own property in the U.S., so you would have to look at the next test.
This next test focuses on where your centre of vital interest lies (i.e., where your personal and economic relations are closer to) and claim residence in that jurisdiction. Note that there is no hard or fast test to answer this question. Rather, you need to show that all sorts of factors go into proving that your centre of vital interests lies in Canada.
Next, if your centre of vital interests cannot be determined, you will be resident where you have your habitual abode. If that happens to be in both countries (or in neither), then you will be deemed resident in the country of which you are a citizen. Finally, if you are a citizen of both countries (or neither), then the U.S. and Canada will mutually settle the question for you.
Note: You will be subject to certain filing requirements in the U.S. in order to claim any of the above exemptions. Care should be made to ensure you have filed the appropriate forms and that they have been filed by the deadlines.
To be continued in part 2, on June 17th.
– Samantha Prasad LL.B.
The TaxLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846