Don’t Pay to Stay - U.S. Residency Rules

Smiling female returning passport and tickets to businessman in airport

Don’t Pay to Stay – U.S. Residency Rules

By Krysta Adamski, CPA, CA, WBLI Chartered Professional Accountants

Canada’s increasingly harsh winters and shorter summers have resulted in more Canadian citizens crossing the border to vacation with our neighbours to the south. But while you’re packing your sunscreen and warm-weather clothing, are you also taking note of how this trip might affect your taxes?

A lot of people go by the ‘183-day rule’ but it’s actually a little more complicated than that. You could be in the U.S. for as little as four months and still get caught up in their residency rules.

Under current U.S. law, the rule is called the Substantial Presence Test. So how do you know where you fall?

Have you been in the U.S. for at least 31 (consecutive or non-consecutive) days in the current calendar year, either for business OR pleasure?  If so, the IRS will calculate:

  • All of your U.S.-based days in the current year,
  • PLUS 1/3 of your U.S. based days in the preceding year,
  • PLUS 1/6 of your days U.S. based in the second preceding year.
    (The IRS generally counts any part of a day spent in the U.S. as 1 day for this calculation)

If that totals up to fewer than 183 days, then you are not considered a U.S. resident, and at most, will only have to file a U.S. non-resident tax return for any U.S.-sourced income. Or, if you have U.S.-sourced income but have not visited the U.S. at all (such as with many freelancers or contract workers who work remotely), then you may not have to pay U.S. taxes at all.

If, however, your total time is 183 days or more, then you are considered a U.S. resident for taxation purposes, and will have to file tax returns with both the IRS and CRA.

Not all hope is lost, however. If every other aspect of your life is located in Canada, you may be able to file a ‘closer connection’ form, which is form 8840. This form is to claim that you’re a Canadian resident with closer ties to Canada, and you should therefore be taxed as a Canadian resident, not a U.S. one.

The “closer connection” form isn’t applicable if you’ve spent more than 183 days in the U.S. in the current year: however, there is still one last chance: the “tie-breaker rule”. This is a Canada-U.S. Tax Treaty exemption requiring you to provide substantial proof that Canada is your permanent home and the location of your personal and economic relations.

U.S./Canadian tax implications can be complicated, so here is the bottom-line takeaway:

First of all, if traveling to the U.S., for any reason, make sure you track how many days you spend there.

Secondly, if you have any travel to or financial dealings with the U.S., either for business or pleasure, it’s always best to give your accountant a ‘heads-up’, so that we (as accountants) can make sure you’re well-informed. It’s better to be cautious and ask those questions in advance instead of assuming you’re fine and getting a nasty surprise at tax time.

 

Please note that this article is not appropriate for US citizens or green card holders.