Avoid potential tax ramifications in both the U.S. and Canada.
The United States has some mechanical rules for determining if one will be considered a resident for tax purposes.
Two Ways You Could Be a U.S. Resident
First, if you receive a Green Card, you will be granted the privilege of residing permanently in the U.S. as an immigrant. This will continue until either you surrender your Green Card or immigration authorities revoke it. As long as you hold a Green Card, you are required to file U.S. resident tax returns.
The second qualifying condition is if you meet the Substantial Presence Test. This is basically a 183-day of presence in the U.S. test—however, it's cumulative. You are considered a resident if you are physically present in the U.S. for at least 31 days in the current year, and the sum of the days in the current year plus 1/3 of the days physically present during the first preceding year, plus 1/6 of the days present in the second preceding year exceeds 183 days. (There are certain situations that allow an exemption of days for students, those in transit, commuters, and days spent for medical purposes.)
You must file a Form 8840 or Form 8843 and either attach it to your 1040NR or you may file it alone. These forms will exempt a non-U.S. citizen who meets the substantial presence test from being treated as a resident. They cannot be used by a Green Card holder.
There are also Treaty Tie Breaking Rules. Under Article IV of the U.S./Canada Treaty, there are several steps that you can follow to establish that even though you are present in the U.S. for over the required number of days, you actually have a closer connection to Canada. You must file a Form 8833 and disclose your position.
If it is determined that you are a resident of the U.S. for tax purposes, you will be taxed on Worldwide Income, regardless of where it is earned. You will also be required to file any of the Foreign Reporting Forms required of U.S. persons, such as FBARs, and Forms 8938, 5471, 8865, 8621, and 3520, to name a few.
If you are determined to be a non-resident, you are taxed on U.S. Source Income only. However, if you are taking a Treaty Position to be taxed as a non-resident, you are still required to file all of the reporting forms as named above.
Canada also has established consequences for being out of the country for too long. The Entry-Exit Initiative was due to be implemented June 30, 2014. This does not have a temporary stay at the moment. Under the Initiative, travelers will be required to swipe their passports upon entering and leaving each country. Canada and the US will share this information. Both countries remain dedicated to full implementation of the Initiative.
When fully implemented, this Initiative would allow both countries to be able to track, in real-time, the number of days actually spent in each country. All days are counted in this total, including days for work, vacation, and day trips for shopping or entertainment.
Once a Canadian resident loses his resident status, he is deemed to have disposed of his assets, which may generate a large tax bill. They may also risk the loss of the entitlement to Provincial Health Care. The time period out of the country depends on your Province of Residency.
In addition to being deemed a U.S. Resident for Income Tax purposes, a person's estate could also become liable to U.S. Estate tax.
A Word to the Wise
Use extreme caution on counting the number of days of presence in the U.S. Generally, snowbirds should not extend their time past 120 days per year. Under the cumulative test, 120 days consistently will bring you to 180 days over a three year period. You do not want to risk consequences from either country by exceeding this number.
Contact Freed Maxick's International Corporate Tax Services professionals to discuss your specific situation and avoid unexpected tax liabilities, or call to speak with an individual directly at 716.847.2651.View full article
Important Opportunity for U.S. Employers with Employees in Canada
Some employers may benefit by acting before March 1.
(Extended from previous deadline of February 1.)
Under current Canadian law, U.S. employers are required to withhold and remit Canadian income tax for employees who work in Canada, no matter how short the assignment. Withholding is required even though there may be an exemption under the Canada-U.S. Tax Treaty.
There’s good news, though. The Canadian Government has proposed legislation in place (expected to become law in 2016) for a new exception to its withholding rules. Here are the qualifications for the exception:
- The employee working in Canada has to meet the criteria of a tax treaty with Canada to be exempt from income tax in Canada.
- The employee works in Canada for less than 45 days in the calendar year of the payment or for less than 90 days in any 12-month period that includes the time of the payment.
- The employee is employed by a non-resident Canadian employer, e.g. a U.S. employer.
- The employee is not seconded to Canada to work for a Canadian employer.
- The employee is not an economic employee of a Canadian employer.
- The U.S. employer must not carry on business in Canada through a permanent establishment.
- The U.S. employer must be certified by the Canada Revenue Agency (CRA) at the time that the payment is made.
Even though the new rule is not officially law yet, the Canadian Revenue Agency (CRA) released a form, RC 473, that nonresident (U.S.) employers can use to obtain certification. Nonresident (U.S.) employers should file the form with the CRA at least 30 days before the employee begins working in Canada. To be certified effective January 1, 2016, a nonresident employer should file form RC 473 by March 1, 2016. (This is an extension of the February 1 deadline that CRA had previously announced for certification effective January 1, 2016.) If approved, the CRA will inform the nonresident employer by letter. The approval may be granted for up to two years.
The CRA has indicated that if approved, a qualifying nonresident (U.S.) employer must:
- Track and record the number of days a qualifying employee is either working or present in Canada.
- Determine whether the employee is resident in a country with which Canada has a tax treaty (For U.S. employers, a U.S. resident employee is a resident of a country with which Canada has a tax treaty).
- File a Form T4 Summary and Information Return for employees working in Canada (not required for those earning less than C$10,000).
- Obtain a Canadian business number and a program account number if required to remit amounts to the Canadian Government.
- File all applicable Canadian income tax returns for the calendar years in which the employer is certified by CRA.
Are you a Canadian “snowbird” spending winters in the United States? You may not realize it, but you could be considered a U.S. tax resident. If this is the case, the basis on which tax residency is determined is through the IRS “Substantial Presence Test.”
For this purpose, you will be considered a U.S. tax resident if you meet the following requirements:
Physically present in the United States at least 31 days in the current year, and
183 days during the 3 year period that includes the current year and the 2 years immediately before that.
If you fall into this category, don’t panic! There is potential relief available to Canadian citizens that are caught by this Substantial Presence Test:
You are present in the U.S. for fewer than 183 days in the current year.
You maintain a “tax home” in a foreign country during the year.
You have a “closer connection” to the foreign country where your “tax home” is than to the U.S.
Are there exceptions to the rule?
There are exceptions to the substantial presence test. The following are a few examples:
Days you are in the United States for less than 24 hours- when you are in transit between two places outside the United States.
Days you are in the United States as a crew member of a foreign vessel.
Days you can classify “exempt individual.”
The term “exempt individual” does not refer to someone exempt from U.S. taxes, but to anyone that claims exemption from counting days of presence in the United States. For example- a teacher or trainee temporarily in the United States under a “J” or “Q” visa, who substantially complies with the requirements of the visa. For a full list of exemptions and exceptions, please refer to the IRS substantial presence test.
What should you do next?
If you exclude days of presence in the United States because you fall under a special category, you must file Form 8840 (Closer Connection Statement) or Form 8843 (Statement of exempt individuals and individuals with a medical condition).
Freed Maxick International tax practice professionals can help you determine if you qualify as a U.S. tax resident, and assist you with Substantial Presence Test filings. We can navigate the IRS guidelines and minimize potential penalties. Contact us to connect with our experts.