When the temperatures drop each year, many Canadians head south for the winter for a few months of bliss to escape the cold weather. While enjoying the sun, it is important that these “snowbirds” are aware of the tax obligations that they may be subject to as a result of time spent outside of Canada, as well as credits they may be eligible to claim.
U.S Tax Residency
Canadians visiting the U.S. for the winter should ensure they are not considered U.S. residents for taxation purposes, and as a result would be subject to the applicable U.S. income tax laws.
There are two tests used to determine whether an individual is a U.S. resident and subject to U.S. income tax laws.
The first test, Substantial Presence Test, is met if an individual is 1) in the U.S. for 31 days during the current year and 2) the sum of the following is equal to 183 days:
- Days spent in the U.S. in the current year
- One-third of the total days spent in the U.S. in the year prior to the current year
- One-sixth of the total days spent in the U.S. two years prior to the current year.
The second test is met if an individual is in the U.S. for more than 183 days in the current year.
If an individual meets the above tests, there are two exceptions available to preclude them from being considered a U.S. tax resident:
First, the closer connection exception, which is available if they spend less than 183 days in the U.S. and have a home in Canada and a ‘closer connection' to Canada.
The second exception is found in the U.S-Canada Income Tax Convention, and uses certain tie-breaker rules set out in the Convention to determine the country in which the individual is resident. Usually, the tie-breaker rules will be used as a last resort, when all other methods of determining an individuals residency status have failed.
Real Estate and Foreign Property
Canadians owning U.S. real estate should also be wary of the tax obligations that may arise as a result, even if they are not considered U.S. residents.
If an individual owns property in the U.S. and earns rental income, they may be subject to U.S. taxes and reporting requirements.
Similarly, it is not uncommon for Canadians temporarily living abroad to rent property they own in Canada to earn extra income while they are away. Canadian renting their homes in Canada while they are abroad should be aware of the requirements under Canadian tax law to report and pay tax on rental income they receive. Canadians should also be cautious of any potential changes in the use of their property, as in certain situations, changing a properties use has strong tax implications (i.e.. Deemed disposition of the property for fair market value).
Furthermore, Canadians must disclose any foreign property they own that has a value of over $100,000 by filing Form T1135, Foreign Income Verification Statement. Even if the individuals pays the amount owing on their foreign income, failure to file the requisite form will result in penalties and interest being levied against them. It should also be = noted that the foreign property in question does not include real estate used for personal purposes.
Claiming Tax Credits
Canadian should also be aware of the tax benefits they can realize as a result of time spent outside of Canada.
Canadians travelling abroad often incur various additional expenses, such as travel insurance or supplemental health insurance. Canadians purchasing travel medical insurance may be able to claim the costs as Medical Expense Tax Credits
Similarly, if you donate to a U.S. charity, and include U.S. income on your Canadian tax return, you can claim a credit for these donations. The amount claimed for donations to U.S. charities cannot exceed 75% of the U.S. income reported on your Canadian tax return.
Conclusion
Travel should be a stress-free experience and not encumbered by worries about potential tax implications. Canadians living away from Canada temporarily should consult with Canadian and foreign tax experts to ensure they are meeting their tax obligations both in Canada and abroad.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.