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Snowbirds,too much time in the sun could give you a taxburn

Snowbirds, too much time in the sun could give you a taxburn

Okay, taxburn is not a real word … but it could be a real pain.

For generations, many retired Canadians have escaped northern winters by spending time in the sunbelt of the United States. As hospitable as our southern neighbours may be, if you overstay your allotted time you could find yourself in hot water.

That could mean being required to leave, being denied entry in future, and being liable to U.S. income tax for the time you were there. That’s what I mean by taxburn.

How long can you stay?

You may have heard it suggested that you can stay up to half a year without a concern. That’s incorrect, and could get you into tax trouble if you use it as your guide.

The main test is whether you exceed 182 days (which is where the half-year reference likely originates) under the three-part formula for what is known as the substantial presence test:

  • Days in the current year, plus
  • 1/3 of the days the year before, plus
  • 1/6 of the days two years back.

To make it even more challenging, the test applies to any 12-month period that ends in the current year, not just for the calendar year itself. As a rough estimate, let’s say you stay for the exact same four months every year, or 120 days. Using the formula, that would be 120 + 40 + 20 for a total of 180, just shy of the 182 day limit.

But what if you broke it into one or two month stretches at differing times from year to year, or you threw in the odd day-trip. You can see how people can run into problems. It’s hard enough to figure out how much time you’re allowed. You then have to keep very careful track of the past, so as not to put yourself in jeopardy in future.

What if you exceed your days?

If you have exceeded your days, the U.S. considers you to be a “resident alien”, potentially exposing you to U.S. income tax on your worldwide income. Don’t panic.

Most people in that position will be able to claim a closer connection to Canada to avoid that U.S. liability. Usually it’s sufficient to file the appropriate declaration form with the U.S. Internal Revenue Service. Be aware though that sometimes the IRS will request additional evidence, such as proof of a principal residence in Canada, a provincial driver’s licence or other indicators.

However, if you exceed 182 days in the current year alone, you will need to apply for relief under the Canada-U.S. treaty. That can be more complicated and costly, and the IRS has more discretion to deny you in such cases, so it is best to steer clear of that if you can.

Relief on the horizon?

For those who feel 4 months is just not enough southern exposure, you may be interested in a bill introduced in the U.S. Congress in the spring of 2017. If passed it would allow some Canadians over age 55 to remain up to 8 months, as long as they own U.S. property or have a long term rental for the period.

Of course, U.S. taxes are only one of a variety of items on the preparation checklist for Snowbirds. Health insurance is another, and as many provinces cease coverage after about 7 months out-of-country, they may have to come home sooner than desired anyway.

Either way, keep your calculator charged and your calendar up-to-date, and enjoy the stay. To learn more contact your Meridian branch today to book an appointment with one of our Wealth Professionals.

Follow Doug on twitter @realtirement