Clark Wealth Management Group - ScotiaMcLeod Fredericton

While the U.S. government is clearly inclined to try to keep taxation of its own citizens at a minimum, they likely don’t feel the same way about Canadians who spend time in the US each year.

If you spend four or more months in the U.S. each year, there are some rules around taxation and residency status that you need to pay close attention to . You may have ignored it in the past but as the U.S. searches for ways to increase tax revenue and bring down its debt, expect to find yourself under greater scrutiny.

As a Canadian who spends part of the year in the U.S., you are already considered by the Americans to be either a resident alien or a non-resident alien for tax purposes. Because resident aliens are taxed by the U.S. on worldwide income and non-resident aliens only on income earned in the U.S., it’s important for you to determine which you are. Which you are is determined primarily by something called a “substantial presence” test.
Here is how it works:
1) If you were in the U.S. for 183 days or more in 2010 you meet the substantial presence test.
2) If you were in the U.S. for less than 31 days in 2010 you do not meet the substantial presence test and are deemed to be a non-resident alien.
3) If you were in the U.S. between 31 and 182 days in 2010, you “may” meet the substantial presence test.
If you were in the U.S. between 31 and 182 days in 2010 (which would include a large number of Canadians), the substantial presence test uses the number of days you were in the U.S. during a 3 year period (i.e. the current year and the two previous years). When counting the days for this test for 2010, the days you spent in the U.S. do not have to be consecutive.
Here is how the 3 year calculation works. Each day you were in the U.S. in 2010 counts as a full day, each day from 2009 counts as one-third of a day, and each day from 2008 counts as one-sixth of a day. If your total is at least 183 days, you have met the substantial presence test and are now a resident alien for 2010. Space doesn’t allow it here but there is an example at the link provided later in the article.
Even if you are determined to be a resident alien and subject to tax in the U.S. on your worldwide income, if you can show that you have a “closer connection” to Canada, you will be moved back into the non-resident category. You are considered to have a closer connection to Canada if you maintain more significant ties to Canada. Some important ties include the location of the following:
1) Your permanent home and business or employer.
2) Your family.
3) Personal belongings like cars, furniture, clothing & jewellery.
4) The political, social or religious organizations you belong to.
5) The jurisdiction where you vote.
6) The jurisdiction that issued your driver’s license.
If you have established that you are a resident alien for tax purposes in the U.S. and you have a closer connection to Canada, you must let the U.S. Internal Revenue Service (IRS) know. You are directed to do that by filing an IRS Form # 8840, “Closer Connection Exception Statement for Aliens”. The form is to be sent directly to the IRS at Austin TX, 73301-0215, USA by June 15, 2011.
You can find out more about this on the Canada Revenue Agency website at http://www.cra-arc.gc.ca/E/pub/tg/p151/p151-10e.pdf but I suggest you speak with your own tax professional to be sure nothing gets missed. Having the IRS chasing you would certainly not add much to an otherwise pleasant time spent in a warmer climate.

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

This article is for information purposes only. It is recommended that individuals consult with their own tax advisor before acting on any information contained in this article.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.