It can be taxing to be a Snowbird
Canaccord Genuity - Mar 03, 2020
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For those Canadians lucky enough to escape the cold and head to warmer U.S. destinations, be aware of the potential implications. This includes U.S. income tax obligations that may be faced by Canadians who spend considerable time down south. Even if individuals do not have to pay U.S. tax, they may be subject to various U.S. tax filing requirements. Here are some things to consider:
Overstaying your visit - While you may consider yourself to be a resident of Canada, the U.S. may think otherwise. The “substantial presence test” is one of the tests used by the U.S. Internal Revenue Service (IRS) to determine whether an individual is deemed to be a U.S. resident for tax purposes. It is a weighted formula that takes into account the days you are physically present in the U.S. over a three year period. Please see: irs.gov/individuals/international-taxpayers/substantial-presence-test. Qualifying as a U.S. resident for income tax purposes can have consequences, which may include increased compliance costs and potential U.S. filing requirements.
Owning a U.S. proper - Canadians who own and then sell a U.S. property may be liable for U.S. taxes on the capital gain on its disposition and may be required to make certain U.S. filings. Canadians are generally subject to a U.S. withholding tax on the gross proceeds of real property if its sale price exceeds US$300,000 or the property is not acquired for use as a residence. The withholding tax may be reduced in certain circumstances, but this generally requires planning in advance of the sale. As a Canadian resident, you are generally subject to Canadian income tax on worldwide income, which may include any capital gains realized on a U.S. property. However, Canada does provide some relief for U.S. taxes paid in the form of a foreign tax credit.
Renting out your U.S. residence - Generally, Canadians who earn rental income on their U.S. property are subject to a 30 percent withholding tax of which tenants are required to deduct from the gross rent paid and remit to the IRS. If you have expenses associated with the rental property (such as mortgage interest, property taxes, or utilities), you may have a much lower net rental income. As such, you may wish to speak with a cross-border tax advisor about filing a U.S. non-resident tax return and making an election that would allow you to pay tax on the net rental income.
Dying while owning U.S. property - Canadians could be subject to U.S. estate tax on the fair market value of U.S. situs assets held at death, which includes assets such as U.S. real estate or U.S. marketable securities. The current top estate tax rate is 40 percent and the Canada-U.S. Tax Treaty may provide a credit to reduce or eliminate your U.S. estate tax. However, a U.S. estate tax return may need to be filed if U.S. situs assets at death exceed US$60,000. The U.S. estate tax laws change frequently and you should discuss how future changes may impact your estate plan.
Increasing Scrutiny Over Recent Years
It is important to remain in good standing with the U.S. authorities if you travel or own assets across the border. Over recent years, more information continues to be shared between Canadian and U.S. governments. Canadian and U.S. border services now track the movement of citizens as they enter and exit border crossings. The Canada Revenue Agency (CRA) and U.S. IRS also require financial institutions to share financial information by foreign account holders in an attempt to reduce tax evasion.
Be Aware of Other Implications
In addition to the potential tax implications, consider the impact that an extended stay outside of Canada may have on your provincial health coverage. Although the rules vary depending on province of residence, provincial medical coverage may become invalid as a result of extended periods spent out of province. Even if your health care coverage remains valid, remember that health care services received abroad are typically not covered by provincial health care plans, so having adequate private coverage prior to leaving the country is important. Given the broad coverage we have at home, it may be easy to overlook the significant costs associated with healthcare outside of Canada.
There may be other financial implications. As examples, the federal government’s Old Age Security (OAS) benefits may be affected and investment accounts such as the Tax-Free Savings Account may have restrictions. Even your current estate plans, such as power of attorney or will documents, may be affected by your residency status.
Plan Ahead and Seek Advice
If you are a snowbird, own U.S property or spend extended periods of time in the U.S. during any part of the year, be aware of the potential tax, financial or estate planning implications. There may also be ways to help minimize the consequences. Plan ahead and seek cross-border tax and legal advice for your particular situation. If you would like an introduction to someone who can assist, please let us know.