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by Michelle Munro for www.advisor.ca

Avoiding Canadian winters by heading to the warmer climate of the southern United States has long been a common goal for Canadian retirees. These snowbirds look to enjoy the warm weather while maintaining their Canadian ties. For many it’s a great way to spend a part of their retirement, as long as they are aware of the potential tax consequences.

Many of them are just like the parents of my friends, a healthy sun-seeking couple named Mary and James. They’re well-to-do and readily able to afford a few months in Florida’s warmth, and they think they have all the knowledge they need to avoid any tax or financial pitfalls that may be caused by their extended time in the U.S. At a gathering recently, James confidently told me he and Mary have no fears that their sojourn down south will cause them to be considered as U.S. residents for tax purposes. He and his wife hold to the conventional wisdom that says if you spend fewer than 183 days in the U.S., the Internal Revenue Service will leave you alone.

He seemed a bit surprised when I told him that he had fallen into a common misconception about U.S. residency requirements. The reality is more complicated than staying under the 183 day barrier. U.S. visitors like James are subjected to what the IRS calls a ‘substantial presence’ test to see if they will be deemed to be U.S. residents for tax purposes. Indeed, you may well have clients just like James, people in need of some useful advice about the intricacies of U.S. residency requirements before they head for the border.


Anyone who meets the IRS’s substantial presence test will be considered a U.S. resident and will therefore have to comply with certain U.S. tax laws. That’s the simple reality. The test itself, however, is a little more complicated, making it essential that Canadians who plan to stay in the U.S. for extended periods count their days carefully to ensure they don’t go over the threshold.

The first thing your clients need to know is that the IRS has its own definition of what constitutes a day, and it isn’t necessarily 24 hours. For the purpose of calculating residency, a day can be any part of a 24-hour-period in which an individual is physically on U.S. soil. So, for example, an early morning trip to the airport for a flight back to Canada would count as a full day (not a partial day) in the calculation.

Given this caveat, the IRS imposes its substantial presence test this way: you qualify as an U.S. resident for tax purposes if you have been physically present in the U.S. for 31 days during the current year, and for 183 days on a weighted average basis in the three years that include the current year and the two preceding years.

Here’s where the calculation becomes a bit more complicated for your clients (and allows a bit of leniency for taxpayers). To arrive at that three-year total, the IRS allows them to add the number of days they were in the U.S. during the current year to one third of their total U.S. days in the previous year and one sixth of their U.S. days the year before that. If the total is less than 183 days, generally residency isn’t established. If it’s 183 days or more, your clients could have a problem.

As an example, let’s assume that James will spend 120 days in the U.S. this year, and that he spent the same number of days there in each of the preceding two years. His calculation under the substantial presence test for the three years will then be 120 plus 40 (1/3 of 120) plus 20 (1/6th of 120) for a total of 180 days. He won’t qualify as a U.S. resident. Of course, had James spent an extra 10 days in the U.S. last year, he would have incurred an extra three days under the formula. That would have pushed him to the 183-day threshold, making him a U.S. resident for tax purposes.


Even if James meets the substantial presence test, he can still avoid being labeled a U.S. resident by filing a Form 8840 with the IRS. This form has the coldly cumbersome name “Closer Connection Exception Statement For Aliens.” James can complete this form if he was present in the U.S. for fewer than 183 days in the current year, can establish a tax home in Canada in the current year, and can establish a closer connection to the tax home in Canada than to the U.S. By filing this form, James would still be considered a non-resident of the U.S.

Form 8840 asks James a barrage of questions to support his claims that his personal, social and economic ties in the latest tax year are closer to Canada than to the US. The IRS wants to know the location of his permanent home, where his family resides, where his automobile is registered, and where he keeps his personal belongings. Among other things, the form also asks where he conducts his banking relationships, where his driver’s license was issued, where he is registered to vote, and the locations of personal, financial and legal documents. The form even requests the location of investments and whether James qualifies for any type of national health plan sponsored by a foreign government. About the only thing it doesn’t want to know about is information about his birthmarks.

As intrusive as it may sound, Form 8840 has to be filed with the IRS by June 15 in the year following the year in which the substantial presence test is met. If James doesn’t file on time, he may not be eligible to claim the closer connection exception and may be treated as a U.S. resident. As well, he could also face other penalties.


If James spent 183 days or more in the US then he cannot complete Form 8840, however, James may still be able to avoid being considered a U.S. resident under the Canada – U.S. Tax Treaty. To avail himself of what is commonly known as the ‘tie breaker’ rule under the treaty, James will have to fill out IRS Form 8833, “Treaty-Based Return Position Disclosure.” The disclosure required in this case is much more rigorous and complicated than on the ‘Closer Connection’ form. In fact, James would be well advised to seek out a tax expert who specializes in this area. Like the ‘Closer Connection’ form, the ‘Treaty Position’ form must be filed with the IRS by June 15 in the year following. Failure to file on time could make James ineligible to claim the treaty position and he might then be treated as a U.S. resident. And again, other penalties could be assessed.

As you and your clients are no doubt aware, there have been numerous stories in recent months about the efforts of the IRS to have delinquent U.S. tax filers get their returns up to date. Against the backdrop of U.S. deficit and public debt woes, the IRS naturally is seeking to expand tax revenues wherever possible. That makes it imperative that your clients stay within the residency rules.


It’s very likely that there are many James’ in your client lists. As an advisor, you can be of great assistance by making them aware of U.S. residency requirements for tax purposes and, above all, explaining them to ensure that they don’t inadvertently fall offside. Once they understand the potential pitfalls, they’ll be grateful that they’ve avoided a US tax filing, or worse, a US tax liability.

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