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Competitive Edge Blog

  • alison28006

Snowbirds and US Taxes!

Snowbirds who spend a lot of time in the U.S. can be liable for major taxes.

As a result of an information-sharing agreement between the US Internal Revenue Service and Canada almost a decade ago, a growing number of Canadians have been hit with unexpected US tax bills, penalties, and occasionally worse.

The agreement was passed in 2014 to collect untapped tax revenue from Canadians who spend extended time in the U.S. by enacting the Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act.

Since the Canada Revenue Agency (CRA) and the IRS have cozied up, many cross-border finance specialists advise that many “tax specialists” and accountants on either side of the border don't possess the qualifications to properly file taxes on behalf of their cross-border clients.

A lot of people who use accountants assume that their accountant knows everything that’s going on, but in reality anybody can call themselves a tax person. Just like doctors don’t do everything, accountants generally specialize in certain areas, this is because the Canada Tax Act is over 3200 pages long plus more for the rules, regulations and interpretations, while the IRS Tax Code is over 6800 pages long plus more for their rules, regulations and interpretations, nevermind the individual state tax acts.

Through a complex "substantial presence" formula, the tax agreement attempts to determine Canadians' tax status. Snowbirds can be taxed in the USA if they spend more than 182 days in the U.S. based on a three-year rolling average.

There is a myth that the 183 days resets every year, this is not the case. Snowbirds should on average only spend about 4 months a year in the US, to prevent falling victim to USA taxes.

In the current year, you would count 100 percent of your days, in the previous year, you counted your days at one-third, and in the second previous year, you counted the days at one-sixth. In the United States, Canadians are not considered to be "substantially present" if they have less than 183 days based on this rolling average.

In the US, if you spend too much time without proper immigration status, you may be considered illegal, and if caught, you can also be permanently banned.

There can also be other unwanted consequences from both sides such as:

  • Having U.S. tax implications on your income from anywhere in the world.

  • The Canadian Revenue Agency may impose a departure tax if a resident ceases to be considered a resident of canada for tax purposes, and pay taxes on any gains on the deemed disposition of their assets.

  • Losing provincial health care.

Tax problems could result in you paying more taxes in the U.S. than in Canada; more importantly, if you die, you could face U.S. estate/inheritance taxes.

This tax agreement has affected many clients with cross-border connections, who have learned the lesson the hard way when selling or transferring assets/properties.

During the 2008 real estate crash, when high oil prices pushed the Canadian dollar to more than the US dollar, Canadians started buying US rental properties. Many people bought around then, whether it was in Arizona or Florida, which is why the CRA works closely with the IRS; it relates to rental income. If a snowbird doesn't intend to rent out their property, no information should be shared.

Before you end up paying any taxes or dealing with the consequences, you should consult a tax professional to understand the implications before you travel to the States for an extended period.

Until next time,

Christine Walters

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