Alert snowbirds to new border rules

THE CANADIAN AND U.S. governments soon will be sharing information regarding the number of days their respective citizens are spending in each other’s country. That may have serious U.S. tax and other implications for Canadian snowbirds who visit the U.S. for long periods of time but who don’t track the number of days they spend there.

Canadian financial advisors should make their snowbird clients aware that overextending their stay in the U.S. could result in their becoming U.S. tax residents.

An overextended stay also could raise questions and delays when crossing the border, and in some cases, even result in your clients being prevented from entering the U.S. altogether.

“If you’re not keeping track, or you’re fudging the number of days,” says Terry Ritchie, director of cross-border wealth services with Cardinal Point Wealth Management Inc. in Toronto, “you’re compromising all the good things you want to go down there for.”

Starting June 30, both U.S. and Canadian border services will collect biographical data – including name, date of birth, nationality and passport information – when visitors enter and exit at all border crossings. The new rules are part of the Entry-Exit Initiative, which began as a pilot project in 2012.

Prior to this change, such information was gathered only when individuals entered a country. The initiative is part of the larger Perimeter Security and Competitiveness Action Plan announced by Canada and the U.S. in 2011.

The new initiative generally does not represent any change in existing U.S. tax rules; snowbirds who spend significant periods of time in the U.S. have long risked exposing themselves to the U.S. tax regime. But the new initiative does mean that the U.S. and Canada now will have definitive data regarding residency, as opposed to relying on visitors to self-report.

“Someone is going to be aware of the number of days [an individual spends visiting the U.S.], even if you aren’t,” says Christine Perry, a lawyer with Keel Cottrelle LLP in Toronto who specializes in cross-border tax law.

The number of days spent in the U.S. is the key element in the U.S. “substantial presence” test (SPT); if a snowbird meets the SPT, he or she may be considered a U.S. resident and thus be liable for U.S. income and gift taxes.

The SPT formula involves: adding the number of days the individual spends in the U.S. in the current year to one-third of the number of days so spent in the previous year and to one-sixth of the number of days so spent in the year before that.

If the sum of the SPT is greater than 183, and if the individual has spent at least 31 days in the U.S. in the current year, he or she will be considered a U.S. resident for tax purposes.

Days commuting to the U.S. for work from a Canadian residence, as well as a few other specific exceptions, aren’t counted in the SPT.

Snowbirds who meet the SPT may be able to avoid the obligation to file a U.S. tax return by annually filing U.S. Internal Revenue Service (IRS) Form 8840 to apply for a “closer connection” exemption, thus declaring that they have a primary economic, tax and family connection to another tax jurisdiction. The due date for submitting this form is June 15 of the following year. (April 15 if the individual earned employment income in the U.S.)

If your client remains in the U.S. for more than 183 days in one year, or did not file a Form 8840 on time, he or she can no longer apply for the closer connection exemption.

Instead, your client can apply for relief from double taxation under the Canada-U.S. tax treaty by filing IRS Form 1040NR -the U.S. non-resident alien tax return – and IRS Form 8833, a treaty-based return position disclosure. However, applying for relief under the tax treaty is a complicated and tricky process that also may involve a higher risk of being audited. Filing a Form 8840 on time and not overstaying is the preferable option.

In fact, under the terms of the new Entry-Exit Initiative, overstaying may result in your client paying an even higher price. Canadian snowbirds who remain in the U.S. beyond 180 days in any rolling 12-month period may be considered “unlawfully present,” and barred from entry into the U.S. for three years. If your client has been unlawfully present in the U.S. for more than 365 days, the ban extends to 10 years.

“It’s pretty draconian,” says Ian Morris, a lawyer specializing in international taxation with Morris Kepes Winters LLP in Toronto. “I’m sure there’s a good number of [snowbirds] today running up against that six-month provision.”

The implications of overstaying in the U.S. are not limited to those imposed by the U.S. government; the Canadian government now will also have data on how many days a Canadian spends in the U.S. under the Entry-Exit Initiative.

A Canadian who doesn’t meet Canadian residency requirements may jeopardize his or her eligibility for health-care services in his or her home province, as well as access to other social benefits. Such an individual also may be subject to a departure tax on the deemed disposition of most assets.

It’s more important than ever for Canadian snowbirds to track their days, file IRS Form 8830 if necessary and generally be aware of the U.S. immigration rules as they affect the time those individuals are allowed to be in the U.S.

“It’s an information-sharing world now,” Perry says. “The stuff you used to be able to get away with – or kind of take a ‘hope for the best’ approach – you can’t do anymore.”