I occasionally cross paths with someone in my neighbourhood who loves to golf in the Palm Springs area. For the last couple of years she and her husband have been checking out the real estate down there. In the course of our conversations, I told her about our trials and tribulations in our effort to get square with the IRS, and she seemed grasp the gravity of it all. A few weeks ago, she told my husband and me about a house they were negotiating on in the Palm Springs area, what a bargain they were getting and were quite excited about being able to spend half the year there. I suggested that before they get too deep in that they seriously look into how long they can stay down there before they are considered to be US persons for tax purposes. I also mentioned that the realtors down there may not necessarily know about these matters. The next day I sent her an email that covered the Substantial Presence Test. Apparently that email was ignored, because last night when we ran into this couple again, they were happy to announce to us that they had in fact finalized the purchase of the house and are looking forward to spending “half the year there”.
As difficult as it was to rain on their parade, I had to flat out tell them they were wrong and then listened as both of them insisted that the 183 days per year stands because “we know hundreds of Canadians down there who stay that long”, “our realtor says it’s so”, and “Canadians down there really are a boon to the economy, why would the US government want to dissuade us from spending time there?”, and mumbled something about how the tax treaty protects them. I let my iphone be the decider. I brought up and showed my friend a web page that described in detail how the Substantial Presence Test works:
“The IRS considers non-residents to be U.S. residents for tax purposes if they meet the substantial presence test. A non-resident who was physically present in the United States for a total of 183 days during a calendar year clearly meets this test and will be taxed as a US resident.
A non-resident who has spent more than thirty days in the United States during a calendar year will be deemed to have a substantial presence in the US if the sum of the following calculation of the cumulative number of days spent in the US over a three-year period equals 183 or more:
- The number of days spent in the US during the current year, plus
- One third the number of days spent in the US during the previous year, plus
- One sixth of the number of days spent in the US the year before that
The IRS considers you to be present in the United States on any day that you are physically present in the country at any time during the day.”
I know now how I must have looked when I experienced my “OMG moment”, because her face turned white. “Surely we must qualify for an exemption”, she said. “Not unless you’re e a professional athlete or diplomat”, was my response. Still not believing me, she immediately texted someone (presumably her Canadian realtor friend who sells real estate in Palm Springs) and told me that the person at the end of the text line wrote “it’s 183 days”. She next took my suggestion to ask her advisor about the ‘substantial presence test’. Response: dead silence. I can only imagine the chain reaction of OMG moments in sunny California right now.
Moral of the story is: “If a million people do a stupid thing, it is still a stupid thing”.
We owe it to our Canadian snowbird friends to tell them about their potential tax obligations to the IRS when being seduced by those bargain real estate deals in the US. Being a Canadian real estate investor does not entitle you to special treatment. Advisor.ca has a very good web page on the Substantial Presence Test, the difficulties in establishing a “Closer Connection”, and Tax Treaty’s “Tie Breaker” rules.