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.
This 183 rule is like the FBAR. Watch out when they’ll start enforcing it with a vengeance.
The question is is this really enforceable?
How can they prove the physical presence test?
What kind of document does a Canadian need to provide when they buy real-estate in the US?
Do they need a US SSN? Are they really traceable?
And would the USG really go after the people that actually bring business in the US.
It would only take a couple of bad cases in the press for that kind of tourism to dry down.
I would hope that they’re sane enough not to enforce laws that actually would be detrimental to the US.
Believe it or not, tax treaties override the definition of resident for tax purposes. If a Canadian resident (who is not a US citizen) satisfies the US substantial presence test, but is still considered a resident of Canada and not the US according to the “tie breaker” rules of the tax treaty (due to closer ties to Canada), the US cannot tax this person’s Canadian income. Actually, that’s the whole point of a tax treaty. The person would file form 1040NR, perhaps with form 8833, and Canadian income would be exempt. (Technically, the tie breakers are also available for those with a green card, but the US may consider that the person has abandoned US permanent residence, and thus cancel the green card, if the person files form 1040NR instead of form 1040.)
However, the tax treaty simply prevents double taxation, not double reporting. The person would still be required to file US tax forms, information forms, FBAR, and would be subject to FATCA. Totally pointless, because the person could not possibly evade taxes with foreign bank accounts as the person’s foreign income would not be taxed by the US in the first place, but US tax laws and regulations aren’t exactly logical.
Ops, wrong link. This is the correct link about tax treaties.
If I’m doing the 3 year limit calculation correctly (x+x/3+x/6) then people who want to spend the same number of days a year in the USA are actually looking at a maximum of 121 days per year (wouldn’t push it to 122 because that cuts it too close), not the 183 days that many people believe. That’s 4 months not 6 months. It doesn’t affect us (we won’t go there) however I have tried to warn some snowbirds too but only to the point of saying PLEASE check carefully about how many days you can be away. They could soon make your border crossing data available to the IRS so it just doesn’t make sense to risk overstaying in the USA.
Em, it actually is quite easy to stay 182 days without getting into trouble. One merely is supposed to file 8840 “Closer Connection Exception Statement For Aliens.”
So you all correct. The realtor, your friends and you. If one knows the rules, it is doable. Just don’t try to work on your own house. Be extra careful if you want to rent it to your friends and be prepared for some BS paperwork.
I read the questions for the “Closer Connection Exception Statement For Aliens” and frankly I wouldn’t want to answer them. Just my opinion. I simply won’t go to the USA and haven’t been there for over 15 years. Canada falls miles short of Utopia but the USA has turned into Mordor. I saw it happening years ago. Just my opinion again. However, I would never discourage anyone wanting to escape a Canadian winter from doing whatever they need to do to get to warmth and sunshine.
The impression my friend got from her realtor is that she can stay in the US for 183 days, no problem. No mention of invasive paperwork having to prove year after year that she and her husband have a closer connection to Canada. Not knowing could have dire consequences but then it’s up to the individual to educate themselves before making such an investment. What’s the issue with working on one’s own house?
@Em, I’ve read 120 days, no problem. Just make sure you keep tabs on those cross-border shopping trips because they add up too. There is a big difference between 4 and 6 months, especially if someone has an allergy to Canada’s cold weather and paperwork.
there is a bill in congress to create snowbird visa for retired Canadians
the above link discusses some of the tax issues with getting one
BB You are not allowed to ‘work’ So for example you could change a lightbulb or mow the lawn but don’t do any serious DIY work and above all don’t have any tools in your car when you cross the order.
Exactly what I was thinking. SCHUMER! If that doesn’t raise alarm bells it should. That article was written a year ago so I wonder what became of that proposed legislation.
I just heard from my Canadian friend who bought the property in the US. She said that they were at the consulate the other day and were told that the extended stay proposal of 240 days isn’t going to happen.
here’s more info from the same web page for snowbirds. Buyer beware! you are about to lose your privacy if you stay too long!
“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.”
I wonder how long it will/does take for the IRS to “catch up” to an unwitting snowbird who has met the substantial presence test in any given year. I don’t have any idea how the IRS catches up with them now. I suspect many aren’t caught, and that’s why the misinformation about time limits continues to circulate among our travellers to the south. We may begin to hear some stories about Canadians getting their goose cooked by the IRS when Canada and the US begin to share more information at the border. Many Canadians only return to Canada in May, not leaving very much time for glacial speed moving IRS to inform the Canadian that they met the substantial presence test in the year before. Of course, ignorance of the law is NO EXCUSE! Chris is right, it’s a lot like FBAR, and like FBAR can get really ugly.
I agree, bubblebustin and downtherabbithole, about things likely eventually catching up to the snowbirds.
We have next door neighbours who live in Arizona for five or six months of each year. Besides their playing of American ‘patriotic’ music in their backyards during the Calgary summer when they reside here (instead of in the privacy of their own home and not within their neighbour’s, namely me!, earshot), they are deaf to the compliance responsibilities they may one day face when the US catches up to them.
The music is motivation enough to become a whistle-blower! 😉
Right, bubblebustin! From my point of view and that aspect, talk about bad neighbours! I’m sure others think they’re just kooky.
You might real friendly-like one day ask them how hard it is to fill out a Form 8840 for the IRS when you stay more than 120 days in the States.
Calgary411, was it “God Bless The USA” by Lee Greenwood, that would be grounds for reporting them to the IRS and bringing down the hammer. 😛
Lee Greenwood’s “God Bless the USA” qualifies. I know you can imagine my censored listening thoughts, just icing on the cake.
The new candian passport with the chip starts in July. Anyone who has to renew their passport will have ? get one of these chip passports. The chip ? will contain info to be shared cross border with the US as and will ? be used to record your crossings to the US and other countries.
The Canadian government said they were going to start tracking all exits in order to combat those trying to cheat on our permanent residency rules.
Another way to sock it to the snowbirds and cross-border shoppers. I especially like the first paragraph:
“The United States is exploring how to save money on security by charging a toll to Canadians crossing the border by ground – a possible new traveller’s tax that immediately raised fierce opposition from political and business leaders in both countries.”
How can adding another step onto the border crossing process “save” money, unless of course they mean that charging Canadians to enter the US will result in fewer crossings! America, your desperation is showing.