Attention southward-bound Canadians

..."maintaining “residency ties” in Canada is necessary if you wish to file your taxes in Canada..."

Choosing to ski Nevada or sunbath in Arizona?  Well the time spent in the U.S., or more accurately, the timely return to Canada is not jU.S.t a matter of continuing provincial health care coverage.  Although health coverage is very important, there are implications for taxation too, on both sides of the border that should not be ignored.

First of all, regardless of what countries you visit, maintaining “residency ties” in Canada is necessary if you wish to file your taxes in Canada, as Canada determines its requirement for filing taxes based on residency and not citizenship.  Having said this, it may be advantageoU.S. to not be a resident of Canada and pay taxes in another country – but that’s an entirely separate discU.S.sion.

Regarding U.S. taxation policy as it applies to its visitors. The U.S. Internal Revenue Service (IRS) applies a “substantial presence test” to determine whether a foreigner in their country is a non-resident alien (visitor) or a resident alien of the U.S..

The substantial presence test is more complicated than people realize.  Many believe it means simply spending no more than 6 months – fewer than 183 days  – in the U.S. in a calendar year when in actual fact, the test considers time spent in the U.S. on a prorated basis for the most current three years.  This is how it works.  Every day spent in the U.S. in 2013 counts as 1 day, every day in the U.S. in 2012 counts one third of a day and for 2011, one sixth.  It’s this three year total that is U.S.ed for the IRS’s test.  By the way, that quick dash to the U.S. for gas, parcels and a six pack counts as a day.

Working through the math, if a Canadian spends 121 days or more (about 4 months) each year during successive years visiting the U.S., that Canadian is actually a resident alien of the U.S., and as a resident alien, U.S. tax law applies and the filing of a U.S. tax return is required.

However, it is possible to avoid the need to file a U.S. tax return if a Canadian applies for an exemption by filing IRS form 8840.

This involves proving to the IRS that, among other things, a home in Canada exists. A job in Canada certainly helps too.  It also means having spent fewer than 183 days in the U.S. in that particular year of filing form 8840 – this “under 183 days current year criteria” likely is what creates the confU.S.ion around how the actual substantial presence test is calculated.

It’s far better to establish the U.S. filing exemption as soon as it’s realized that the resident alien statU.S. is going to be a certainty rather than doing it after the fact.  By the way, the filing deadline is June 15.  Also, form 8840 mU.S.t be completed every year a Canadian qualifies as a resident alien in the U.S..  It’s not a perpetual exemption.  A fact often over-looked, and when so … regretted.

So it may appear this discU.S.sion has gone full circle becaU.S.e if form 8840 is filed every year, a Canadian can visit the U.S. up to 183 days every year, not jU.S.t 121 days, without having to file a U.S. tax return.

By the way, the U.S. is considering enacting a “retiree visa” that will allow a visitor to remain in the U.S. for up to 240 days, although it is uncertain how, or if, the prorated three year rule will apply.  This is proposed under the “Jobs Originated through Launching Travel Act” … so apparently it’s about wanting Canadians to stay longer and spend more in the U.S..  For now, the 183 day rule applies.

Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.

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