You may be the envy of your neighbours as you spend your endless summer days working on your chip shot instead of chipping away at the ice on your driveway, but did you know that by flying south for the winter you may be increasing your income tax compliance obligations?
You are a resident of Canada if you have established that you have a home in Canada which you enjoy with your family, and if you have created social and economic ties to Canada.
Similar rules exist within the United States. However, you may have unintentionally established a substantial presence in the U.S. depending on the number of days that you are sojourning there.
The substantial presence test in the United States considers both quantitative and qualitative analyses.
A resident alien of the United States is a person who was physically present in the United States for at least 31 days during the current year and 183 days in total over the last three years (counting all of the days in the current year, plus 1/3rd of the days in the previous year, and 1/6th of the days in the second previous year). For example, if you were in the U.S. for four months in each of the last three years then you would include 122 days for 2012, 41 days for 2011, and 21 days for 2010 for a total of 184 days.
Once you have determined that you are a resident alien of the United States based on your physical presence in that country over the past three years, you will need to establish that you have a closer connection to Canada than the US in order to maintain your residential status with Canada.
The Internal Revenue Service will look to your social and economic ties with Canada to determine which country you are closer connected to. Some examples of social and economic ties include where your immediate family resides; where you hold your bank accounts, personal belongings, and social memberships; where you regularly conduct business; and where you are registered to vote.
If you are deemed to be a resident alien of the United States, you will be required to file a federal income tax return reporting your worldwide income for the year to the Internal Revenue Service.
If you have determined that your ties are closer connected to Canada, you will need to complete and file Form 8840 Closer Connection Exemption Statement for Aliens with the Department of the Treasury of the Internal Revenue Service.
Purchasing Property in the United States
Snowbirds that enjoy spending a significant amount of time in the southern States tend to purchase a home there.
The impact of this decision on your income tax compliance obligations will depend on how you use the property. The property can be categorized as either Personal Use Property or Foreign Investment Property.
If the primary intent of your property is personal use, then you would not have a foreign income tax obligation until you sell the property. The capital gain on the sale of the property would currently be subject to a 10% withholding tax, and you would be required to file a US federal non-resident tax return in the year of sale. The capital gain will also need to be reported on your Canadian tax return in the year of sale. It should be noted that foreign property cannot be sheltered by the principle residence exemption available in Canada.
If you plan to rent out you home-away-from-home, then any rental income your earn would currently be subject to a 30% withholding tax or you could elect to file a U.S. federal and state income tax return to report the income on a net basis.
Taxes paid in the United States on rental income or on the sale of your home can offset some or all of the Canadian taxes on that worldwide income by way of a foreign tax credit.
Your Canadian compliance obligations will also be increased if the total cost of all your foreign investment properties exceeds $100,000. This includes the aggregate cost of foreign rental properties, foreign investment portfolios, and shares in foreign corporations. Exceeding this threshold will require that you complete Form T1135 Foreign Income Verification Statement annually with your Canadian tax return.
Before purchasing property in the United States, or spending a significant amount of time there, be sure that you understand the impact those decisions could have on your personal income tax compliance obligations.
Give us a call if you would like more information.
Written by: Justine Jarrett