Understanding the tax code and filing requirements in your home country is complicated enough. To provide tax advice to Canadians who spend significant time in the United States can be very difficult.
To be free of filing any IRS forms or having to file a U.S. tax return, three conditions must be met:
- Do not earn any U.S. source income (interest, dividends, capital gains, rent) AND
- Do not be physically present in US more than 182 days AND
- Score less than 182 on the Substantial Presence Test
Each jurisdiction and every elected official is searching for new tax revenue, with the United States leading the way on this globally. They also do not want to upset their residents or voters, so non-voting foreign owners of domestic property are a key component of this strategy.
Therefore Snowbirds, Canadians owning real estate in the U.S. southern states are prime candidates as payers of increasing taxes. Since the rules are complicated, and this group is often concerned about making an error (or conversely looking for loopholes), it is vital to stay informed now more than ever.
At some point your property will be sold freeing up investable capital, or transferred to the next generation. In both cases this may be an opportunity to have meaningful conversations with your financial advisor.
A very important definition is “day”. The IRS counts any time spent during a calendar day, as a full day. If you cross into the U.S. at 11:55 pm, and return at 12:05 the next day, only 10 minutes later, the IRS considers this to be 2 days.
These calculations are further complicated by the fact that the IRS follows the calendar year, and typically snowbirds stay 6-8 weeks in one year and then another 8 weeks in January and February.
And the IRS includes all of your visits throughout the year, not just for the winter holiday. Daytrips for shopping or sporting events, for example, are also included. You may want to keep a small journal in your car, and write down the date, time and occupants for each time you enter and exit the United States. Currently, a credible journal is sufficient proof for the IRS.
You should be aware that the U.S. Immigration and Naturalization Service (INS) shares massive data files with the IRS, and the Canadian Border Service (CBS) shares data with the U.S. federal government. At some point, they will be writing computer code, to flag travellers, if they haven’t already done so.