Release date: November 25, 2015
Guest: Ian Macdonald
Running time: 9:39 minutes
In this episode of our “US Offshore Voluntary Disclosure” series, Ian Macdonald discusses the implications of spending extended periods of time in the US and the tax filing requirements that may result. He outlines the Substantial Presence Test and the reasons it’s crucial to track your annual ‘day count’ spent in the US.
Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.
You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.
Alison: Hi, it’s Alison Cumming of PwC Canada. Welcome to another installment in our podcast series on US Voluntary Disclosure. Today we are discussing “Snowbirds and frequent visitors to the US”. With us we have Ian Macdonald, a Senior Manager from our cross border tax group. Welcome, Ian.
Ian: Thanks Alison, it is a pleasure to be here.
Alison: Ian, I know that many Canadians looking to escape the cold winters will travel south of the border to spend the cold months in the United States. Are there any tax implications of spending time in the US?
Ian: People who travel to the US for an extended period of time, either as a Snowbird or as a frequent visitor, should be monitoring the number of days that they spend in the United States. Canadians need to be aware of their day count for both immigration and tax purposes, but there are different rules for each of these. For tax purposes, if you’re a US resident you could be required to file a US tax return and report your worldwide income.
Alison: Oh, that sounds like something individuals should try to avoid. I have heard that if an individual is in the US for less than 180 days in a year there are no issues — is that correct?
Ian: The US uses what is called a “Substantial Presence Test” each calendar year to determine if an individual is a resident or not. This test will require an individual to file a return if they exceed 182 days in the US over a three year period based on a formula. Under the formula, you add the days spent in the US in the current year plus 1/3rd of the days in the prior year and 1/6thof the days in the year before that. For example, if you spend 150 days each year in Arizona you’d add 150 days for the current year, plus 50 days for last year, plus 25 days for two years ago. This total would be 225 days and you would meet the Substantial Presence Test. Under this test, if a Canadian limits their time in the US to about 4 months each calendar year then they will not be caught by this rule.
Alison: What if someone was unaware of the day count rules and met the Substantial Presence Test for the current year — does that automatically trigger a US tax filing?
Ian: Yes, the individual will need to file disclosure with the IRS. Once an individual is caught under the Substantial Presence Test they have two options: The first option is referred to as the “Closer Connection” exception. This option is only available to individuals who have been in the US for less than 183 days in the current year. This requires the individual to file US Form 8840. It discloses information such as the location of your bank, where your driver’s license was issued, and where your family is located. This is a fairly simple solution and doesn’t require the filing of any other US forms.
Alison: What if the person has met the Substantial Presence Test and also spent at least 183 days in the US? Would that mean they are required to file a US tax return?
Ian: This would be option 2, referred to as the Treaty Exemption. Where the individual exceeds 183 days in the calendar year, the individual will have to look to tie breaker rules in the Canada-US Tax Treaty. This would require the individual to file a statement with the IRS claiming that they are relying on the treaty to tie-break their residency back to Canada. The individual will have to file a US non-resident tax return referred to as “Form 1040NR” and also Form 8833 to claim the treaty benefits. While this relieves the individual from being subject to US tax, it doesn’t provide relief from various informational reporting in the US which could include information on all non-US bank and investment accounts. These reporting requirements are covered in part 2 of our podcast on US Offshore Voluntary Compliance Programs.
Frankly, the better solution is to keep the day count below the 183 day threshold in the year.
For both the closer connection and the treaty exemptions options there are possible penalties if the required forms are not filed or are not filed on time.
Alison: Thanks Ian, it seems that there are some very good reasons to keep track of how many days an individual spends in the US. Historically, have many individuals been challenged by the US government based on the Substantial Presence Test?
Ian: Historically, this hasn’t been an issue for many individuals. However, since 2012 the US and Canadian governments have been making a push to track the entry and exit of individuals. The plan is to implement a tracking system at all land border crossing locations. As this information becomes available to the US government, and it is easier to track individuals, this could become a very easy way for the IRS to determine who meets the Substantial Presence Test.
Alison: When an individual is counting the number of days in the US, does the day-count reset once they return to Canada?
Ian: Good question Alison. This is another area of confusion for many people. The Substantial Presence Test is calculated based on days in a calendar year, regardless of the length of any given visit to the US — and this includes the day of arrival and the day of departure. In other words, it’s the total number of days spent in a year, whether consecutive or not.
Alison: Ok, so far we have been discussing the day count rules from a tax perspective. What about immigration - why does there seem to be such confusion in regards to the US’s immigration rules?
Ian: This is an area where the US government has recently made changes and also has been vocal about potential future changes.
Currently, when a Canadian enters the US as a visitor they are allowed to stay for up to six consecutive months. If a Canadian were to stay in the US as a visitor for more than six consecutive months without receiving authorization from the US government to do so, they would be “unlawfully present”.
Individuals, who are unlawfully present for more than 180 days, but less than a year, are barred from entering the US for three years from the date of their departure.
Individuals, who are unlawfully present for more than one year, are barred from entering the US for ten years from the date of departure.
A second issue which may affect Canadians who spend a lot of time in the US is that the US Customs and Border Protection Officers may determine that you are intending to stay in the US permanently based on the duration of your visits, the frequency of your visits, and other relevant factors, such as whether or not you have a spouse that lives in the US. If an officer determines that you are not in fact visiting the US, but instead have the intent to permanently reside in the US, you could be refused entry.
Alison: Ian, thank you for sharing this with us today so that we are all aware of some major implications when spending long periods of time south of the border.
Ian: My pleasure Alison.
Alison: For any questions, Chantal’s contact details are available on our PwC podcast website www.pwc.com/ca/taxtracks or also on the page dedicated to information about US voluntary disclosure at www.pwc.com/ca/usdisclosure.
I encourage our listeners to stay tuned for upcoming podcasts in this US Voluntary Disclosure series, including the second podcast on this topic that will cover the other two options available to individuals under the US Offshore Voluntary Compliance Programs.
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