Canadians who wish to reside in the U.S. for the winter months or those who travel on business or employment in the U.S., should be aware of the U.S. residency rules. If you fall into these rules, you could be resident for U.S. income tax purposes and therefore be subject to U.S. tax on your world income unless you file the appropriate forms for exemptions.
Like U.S. citizens, green card holders are considered lawful permanent residents of the U.S. and must file annual federal personal income tax returns U.S. 1040. However those that do not have a green card may fall into what is called the “Substantial Presence Test”.
You are considered a U.S. resident if you meet the substantial presence test for a particular taxation year. You meet the test if you were present in the U.S. for at least 31 days in the current year, and a total of 183 days during the current year and the preceding 2 years. You take the days in the current year, add one-third of the days in the preceding year and one-sixth of the days in the second preceding year. Generally staying 120 days each year will put you over the 183 day formulae cap. You exclude days from commuting to work to the United States, regularly from a residence in Canada (or Mexico); days in which you are in the United States for less than 24 hours when you are in transit between two places outside the United State or days in which you are presence for days you are presence because of a medical condition that arose while you were in the United States.
If you meet the substantial presence test, but were present in the U.S., fewer than 183 days in the current taxation year, you must file IRS Form 8840 to claim a closer connection to a foreign country. In this regard, you establish through a series of questions that you had a closer connection to one country in which you had a tax home than to the U.S. The form due June 15th, may be filed without a tax return if a tax return is not required. It may be late-file however you must show evidence that you took reasonable actions to become aware of the requirements and steps to comply with those requirements.
If you are not eligible to file Form 8840 because you were present in the U.S. in the current year for a period of 183 days, you must look to the Canada/U.S. Tax Treaty on the tie-breaker rules with respect to residency in Article IV to support your case for non-residency status for U.S. tax purposes.
A treaty-based return IRS Form 8833 must be filed to support an Article IV position. With 183 or more days in the calendar year in the U.S., you are deemed a U.S. resident. For Canada, if the treaty says you are a resident of the U.S., you are deemed not be a resident for tax purposes for Canada per subsection 250(5) of the Income Tax Act. This however could cause adverse Canadian income tax implications as our departure rules would have application.
Note that except for IRS Form 8938 on specific foreign and financial asset reporting and IRS Form 8621 (“for PFICs), the treaty does not exempt you from filing U.S. information returns if your are resident under the IRS Code. Forms such as FBARs (FINCEN114) and, IRS 5471 could catch the unwary. These information returns carry significant penalties for not complying, regardless of your income.
U.S. forms are available on the IRS website (at http://www.irs.ustreas.gov/pub).
Contact your professional advisor prior to implementing any of the outlined strategies
Pursuant to Internal Revenue Service Circular 230, we hereby inform you that the advice or information set forth herein with respect to U.S. federal tax issues was not intended or written to be used, and cannot be used, by you or any taxpayer, for the purpose of avoiding any penalties that may be imposed on you or any other person under the Internal Revenue Code.