It’s that time of year again when travel plans are formulating and the perennial questions around how long is too long are asked, and not just because of home sickness.
The traditional wisdom is to be back in Canada within six months of departure to avoid loss of medical coverage, although this has been somewhat clouded for B.C. residents who can now remain out of country for seven months.
Health care aside, there could be foreign tax implications that develop due to the time spent outside of Canada.
When it comes to travel to the U.S., the continuous time spent outside of Canada and in the U.S. is not the crucial factor. Instead, it’s the total days spent in the U.S. in a year – and more accurately, total days spent there over the past three years.
The U.S. Internal Revenue Service (IRS) applies its “substantial presence test” to determine whether a foreigner 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 – that is 182 days – in the U.S. in a calendar year. In actual fact, the test considers travel on a prorated basis over the past three years. For example, every day spent in the U.S. in 2014 counts as 1 day, every day in 2013 counts one third and for 2012, one sixth. It’s this 3 year total that matters.
To the point of calculating total days, a 30 minute cross-border gas run counts as a day.
Using the IRS formula, the math indicates a Canadian visiting the U.S. 121 days each year over successive years is a resident alien of the U.S. and therefore U.S. tax law applies. This leads to one of two actions – file a U.S. tax return or prove “residential ties” to Canada by filing IRS Form 8840.
Residential ties include having a home and job in Canada. Other typical considerations include having a spouse or dependant currently living in Canada and economic connections like a bank account, driver’s license, passport and medical coverage. Having a postal address in and of itself does not qualify as a tie.
If residential ties with Canada are accepted by IRS, an exemption to file a return is granted and as long as Form 8840 is filed every applicable year, a Canadian can actually visit the U.S. up to 182 days each year instead of only 121, although the U.S. is considering legislation to create a visa for Canadian’s over 50 to be in the U.S. for up to 240 days.
By the way, it’s better to self-identify and establish the U.S. tax filing exemption than have IRS demand a filing after the fact.
Domestically, Canada’s tax policy is a different story. If Canada Revenue Agency determines residential ties exist for any person of any nationality within Canada, they are considered a resident of Canada and as such, file a tax return. Regardless of any foreign travel by a Canadian resident, and sometimes regardless of how long that travel was, typically a T1 return is to be filed.