So you’re retired and choose hot over cold? Or you have a job that affords you time off to visit the US frequently. Here is some helpful information about personal taxation policy as it pertains to vacationing in the US.
Most people understand that the administrative routine is pretty normal upon return to Canada if they maintain a home here and stay no longer than six months in the US. Often the return is prompted by the desire to continue provincial medical coverage. Although very important, the implication for taxes, on both sides of the border, should not be underestimated.
If the “residential ties” are maintained, regardless of what country vacationed in, upon return to Canada the routine of personal tax preparation is as usual with the reporting of income and claiming of deductions and tax credits. Lose this tie, and lose many of Canada’s tax comforts, if I can use that word.
However, the matter of time spent out of Canada is not just an issue of continuing health care in Canada. When it comes to travel to the US, it is an issue of US tax policy. The US Internal Revenue Service (IRS) applies a “substantial presence test” to determine whether a foreigner is a non-resident alien (visitor) or a resident alien of the US – not a subtle difference.
The substantial presence test is more complicated than people realize. Many believe it means simply spending no more than six months – no more than 182 days – in the US in a year when in actual fact, the test considers travel on a prorated basis over the past three years. For example, every day spent in the US in 2011 counts as 1 day, every day in the US in 2010 counts one third and for 2009, one sixth. And yes, this information is tracked by the IRS. By the way, those 20 minute cross-border gas and post office runs, count as a day.
It’s this three-year total that counts for the IRS test.
So using the IRS formula, the math says if 121 days or more (about four months) each year over successive years vacationing in the US, a Canadian is actually a resident alien of the US, and as a resident alien, US tax law applies requiring the filing of a US tax return. Or, conversely, adherence to the IRS protocol to be exempt from the necessity to file a US tax return. The IRS exemption rules are paper intensive and, at the very least, time consuming.
Without getting detailed, if a resident alien files IRS form 8840 and proves to the IRS that a home in Canada exists and is employed in Canada, among other things, and has been in the US for fewer than 183 days in THAT particular year, the resident alien will likely be exempt from filing a US tax return. The last criterion of fewer than 183 days in one year is likely the factor that confuses people when it comes to the substantial presence test.
As for tax tips, it’s far better to establish the US filing exemption as soon as a Canadian self-identifies the certainty of resident alien status rather than doing it after the fact. Form 8840 must be completed every year a Canadian qualifies as a resident alien in the US, a fact often over-looked … but usually only once. And file it before June 15. So, if this form is filed every year, then a Canadian can vacation for up to 6 months every year without having to file a US tax return.
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.