We’re getting to that time of the year where Canadian Snowbirds are starting to contemplate their winter exodus down to the southern U.S.While most people may only go for a week or two, there are many retirees that stay for extended periods of time; there are also many who have invested in property down south given their extended stay throughout the winter months.
Buying U.S, property and staying for extended periods can have some significant tax consequences for those that are not familiar with the often complicated US immigration and tax rules.
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 wealth advisory team.
To be free of filing any IRS forms or having to file a U.S. tax return, three conditions must be met. You:
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
- To calculate the score add together
- The number of days spent in the U.S. in the current tax year
- One-third of the days from the prior tax year
- One-sixth of the days of the year prior to that
- Example – Days in the US in 2014 = 140, 2013 = 93, 2012 = 120
- 140 + 93/3 + 120/6 = 124 + 31 + 20 = 175
Again, all three of these conditions must be met.
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.
Key Factors to Know:
- Canadians who earn any U.S. source income must file a US tax return, 1040NR (non-resident)
- When you sell their U.S. property the buyer is required to withhold 10% of the purchase price and send it to the IRS if the seller (you) are foreign to the U.S.
- Filing a 8288-B can reduce the withholding amount down to the anticipated tax amount even if the tax is zero
- To file an 8288-B, a tax identification number (TIN) like a U.S. Social Security Number is needed, so apply for one a year in advance of when they might decide to sell since both the TIN and 8288-B are time consuming applications and there isn’t time for both, typically
- The buyer’s lawyer will ensure this happens, because if it doesn’t the IRS will require the buyer or the buyer’s lawyer to provide the 10% to them.
- If a Canadian stays in the U.S. for 183 days or more they will have to file a full return or a non-resident return
- If your Substantial Presence Score is 183 or higher file an 8840 form to prove that you have a “closer connection” to Canada, since a person can only have one home country at a time.
Changes like this happen all the time. Ensure you are kept up to date by staying in touch with your advisory team.