Key Tax Considerations for Canadian Snowbirds in the U.S. – When to track days on a rolling calendar basis versus a calendar year basis

 

Emma Raivia, CPA

As Canadian individuals venture into the United States for leisure or business, understanding the tax implications is crucial. The U.S. tax system can be intricate, especially for those spending considerable time across the border. Here are some key aspects that Canadian snowbirds must know to ensure compliance and avoid unnecessary complications. 

Days in the US – Rolling Calendar Basis: When an employee of a Canadian entity performs services for the company while in the US for a period aggregating 183 days or more in any twelve-month period, and, during that period, more than 50 percent of the gross active business revenues consists of income derived from the services performed in the US, there is a filing requirement for federal purposes. A filing requirement can also arise if an employee in the US provides services for an aggregate of 183 days in any twelve-month period with respect to the same or connected project for customers who are either residents of the US or who maintain a permanent establishment in the US and the services are provided in respect of that permanent establishment. There are additional scenarios in which an employee’s presence in the US will create a filing obligation for the foreign entity regardless of the days in the US. This is when: 

• The Canadian entity maintains an office or fixed place of business in the US through which business is wholly or partly carried on. While this is somewhat of a grey area in the tax law but it does include an office in a vacation home.  
• Another activity that creates a permanent establishment is if an employee can and does habitually exercise the authority to conclude contracts on behalf of the foreign company while in the US. 

Days in the US – Calendar year tracking: A foreign individual is concerned with tracking their days on a calendar year basis for their personal filing obligation exposure. 

 

Understanding the Substantial Presence Test 

The U.S. uses the Substantial Presence Test to determine if a foreign individual is considered a U.S. resident for tax purposes. This determination is based on the specific number of days spent in the U.S. within a given year. Understanding this test is crucial for effective tax planning and compliance. 

• The substantial presence test is met when you have been in the U.S. for: 

1. 1. 31 to 183 days in current year, and 
   2. More than 183 days in 3-year look-back calculation 
   3. Current year – minimum of 31 days present in the US 
   4. Prior year – days in the US is multiplied by 1/3  
   5. Two years prior – days in the US in multiplied by 1/6 

• If the sum of these items is 183 or more, the substantial presence test is met  

Filing Form 8840: If you meet the test but have no US sourced income, Form 8840 is the sole filing requirement. If you also earned US sourced income, a US non-resident tax return (Form 1040NR) and form 8840 is required.  

Filing Form 8833: If you exceed 183-days in the US, you must file Form 8833 to claim a closer connection to Canada. These forms are critical tools in managing your tax obligations and should be filed diligently to avoid penalties and ensure proper tax treatment. 

State-Specific Conside: The items noted above are in regard to federal filings. Be aware that each U.S. state has its own tax laws. Some states, like California, do not recognize federal tax treaties, which can impact your filing requirements and tax liabilities. 

As a snowbird, understanding these nuances is vital. Engaging with a tax professional well-versed in U.S. federal and state tax laws is recommended to navigate these complexities effectively. 

 

The Importance of Professional Advice 

The intricacies of U.S. tax laws for Canadian snowbirds cannot be understated. From understanding the Substantial Presence Test to managing US sourced income and state-specific tax laws, the landscape is fraught with challenges that require diligent planning and professional guidance. As a Canadian business owner or retiree spending time in the U.S., it’s crucial to stay informed and seek expert advice to ensure compliance and optimize your tax position. Remember, each situation is unique, and tailored advice is key to navigating these waters successfully. 

 As you navigate the complexities of U.S. taxation, remember that seasoned professionals’ advice can make a significant difference. Emma Raivio, a seasoned tax expert specializing in international and cross-border tax issues, and the VSH team are here to assist you. 

Whether you’re a Canadian business owner exploring expansion in the U.S. or a retiree seeking to enjoy your time across the border without tax worries, our expertise is your asset. We offer personalized consultation and compliance services, ensuring your tax affairs are in order and optimized for your unique situation. 

Don’t let tax complexities overshadow your business goals or personal enjoyment in the U.S. Contact Emma and the VSH team today for comprehensive guidance and peace of mind. We’re committed to helping you navigate the tax landscape with confidence and ease.