Snowbirds: Is Uncle Sam Planning on Eating your Lunch?

Given that it's the middle of July it's probably a good time to think about your plans for the winter as I know many of you are likely considering flying down south with the geese come the fall. Something that is incredibly misunderstood still is what the rules are for residency in the US including how much time can you spend there before you start running into problems.

Listen, I get it, we would all love to spend half the year (particularly the snowy half) in Palm Desert or sunny California, but the tax nightmare may not be worth the few extra degrees in temperature – or maybe it is. In any case, it's always good to plan with your eyes wide open.

What Do Snow Birds Need to Watch Out For?

Really what you need to avoid is being forced to file a US tax return with the IRS and in order to do so you need to avoid becoming a US resident. For Canadians, the easiest way to do this is to avoid establishing a 'substantial presence' in the US. What equates to a substantial presence? According to the US, if a Canadian spends 31 days or more in the current calendar year AND 183 days during the three-year period including this calendar year and the two preceding on a weighted basis then you have established a 'substantial presence'.

The 183 days is where most people need to be careful so let me break it down. If you have spend 121 days or less in the US in each of the past three years then you are good to go and have nothing to worry about. If however, you have spent more than 121 days in any of the years then we need to do some quick math. Here's the formula assuming we're looking at this calendar year: 2019 total days + (2018 total days / 3) + (2017 total days / 6) = your total days related to substantial presence.

If the total is less than 183 days then great news, you're done! If the total is greater than 183 days, the IRS determines that you have established a substantial presence. This doesn't mean that you necessarily need to file a US return at this point, but rather that we need to take a closer look at things. With a substantial presence established the next step is to try and avoid filing a US tax return.

To do this you will need to file Form 8840 also known as the 'Closer Connection Exception Statement for Aliens' form. The goal in completing this form is that you want to establish that you are more closely connected to Canada than the US. The questions cover a broad range of topics and I will warn you. Given that it's a statement of exception for 'aliens' you might feel like it's a bit of an alien probe, but it is what is required.

The questions range from:

Where is your permanent home? Where do you keep your belongings? Where does your family live? Where are you registered to vote? Where are your banking and financial institutions located? Etc. If after completing this form it is established that you have closer ties to Canada, then once again – woohoo you're done! If not, I would recommend that it's time to get a US qualified tax accountant in your corner.

There is one final chance to avoid filing a US tax return which is by filing a US non-resident tax return form 1040NR to claim an exemption under the Canada US tax treaty. This is by far the most onerous step and requires a great deal of patience and knowledge. In my experience it is well worth the money to pay a US tax specialist to take care of for you. Once completed you will be informed whether you need to go ahead and file a full tax return or not.

The Bottom Line Is

If possible, try and avoid becoming a US resident if you don't want to file a US tax return. The best way to do this would be to avoid the 'substantial presence' criteria. However, as I always recommend, don't let tax govern your life and if it makes you that much happier spending more time in the US and you can afford the tax, then you need to do what is best to live a rewarding life. If that is the case, then shake hands with Uncle Sam and enjoy the sun!

- Grant White, CIM, CFP

Grant White is an award-winning Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.