Snowbirds should prepare a statement for their financial services firms clarifying they're not U.S. residents

By Rudy Mezzetta | November 2015

YOUR SNOWBIRD CLIENTS can bypass a compliance burden associated with a tax- related information-sharing deal signed by Canada and the U.S. If such clients sign documents attesting that they visit the U.S. on a temporary basis only and are not U.S. citizens or residents for tax purposes, this burden can be averted.

"This way, clients are not continuously triggering the system for the financial [services] institution to reach out to them to recertify [as not being U.S. tax residents]," says Andrea Taylor, managing director with the Investment Industry Association of Canada in Toronto.

If a Canadian bank or other financial services institution has a client with U.S. "indicia" - including a U.S. address, a U.S. telephone number or standing instructions to transfer funds to a U.S. bank account - that financial services firm must contact the client to ask for certification that he or she is not a U.S. citizen or tax resident.

However, if the client provides that certification and also certifies that any U.S. address, telephone number or standing instructions to transfer funds to a U.S. account is arising only in the context of temporary visits to the U.S., then that client will not have to certify again for another seven years.

"[Clients] can provide a statement that says, 'I'm resident in Canada. Any of these indicia that you found are related to my vacations or temporary visits to the U.S. I'm not a U.S. resident, but if my status changes, I'll update you'," says Christine Perry, lawyer with Keel Cottrelle LLP in Toronto, who specializes in cross-border tax law. "Those are the key elements that have to be included in [that statement], and once [clients] provide that, they get a seven-year holiday so they don't have to keep recertifying every year."

Information about U.S. citizen or tax-resident clients who have accounts with Canadian financial services firms is collected and sent to the Canada Revenue Agency to be exchanged with the U.S. Internal Revenue Service (IRS) as part of an intergovernmental agreement (IGA) signed by the two countries in 2014. The IGA is part of the implementation of the U.S. Foreign Account Tax Compliance Act (FATCA), a law passed in the 2010 meant to help fight international tax evasion.

Many Canadians visit the U.S. every year for extended periods of time, including snowbirds on holiday and students studying at U.S. universities. Sometimes, these individuals might change their U.S. address or telephone number. Such a change of information could trigger a Canadian bank to flag the account as needing certification under the IGA. The statement recommended by Perry and provided by the snowbird or student would negate the need for such recertification.

"If I'm going to a different university residence in the U.S. next year," Taylor says, "and a new address pops up in my file, the Canadian financial [services] institution just looks at that certification and says, 'The client let us know they're a student or a snowbird and we don't have to get another certification from them because we have this on file already'."

Of course, snowbirds who spend a significant amount of time in the U.S. every year might become residents of the U.S. for tax purposes and thus will not be able to certify themselves with their Canadian bank as not being a U.S. tax resident. Instead, U.S. citizens and tax residents have to certify themselves to their Canadian bank with a U.S. Form W-9 - a request for a U.S. taxpayer identification number and certification.

The key determinant of whether a snowbird is a U.S. tax resident is if he or she meets the U.S. substantial presence test (SPT), which involves adding the number of days spent in the U.S. in the current year to one-third the number of days spent in the previous year to one-sixth the number of days spent in the year before that. If the total number is higher than 183, and if the snowbird has spent at least 31 days in the U.S. in the current year, that snowbird will be considered a U.S. tax resident.

Canadian snowbirds who meet the SPT still may be able to avoid being considered U.S. tax residents if they apply for a "closer connection exemption" (if they spent fewer than 183 days in the U.S. during that year) or, failing that, by applying for an exemption under the Canada/U.S. tax treaty. There also is a closer connection exemption available for students studying in the U.S. who otherwise would meet the SPT.

The U.S. bases its tax system on citizenship and residency rather than just on residency, meaning that U.S. taxpayers must file a U.S. tax return and meet all other tax-filing obligations no matter where they live in the world.

Individuals in Canada who also are U.S. citizens or U.S. tax residents, but who have not been compliant with their U.S. tax-filing obligations, may find themselves caught in the IGA reporting regime, Perry says. Failure to provide certification when requested to do so by a Canadian bank will obligate the bank to report an individual's account to the CRA.

Clients who are tempted to certify falsely that they are not U.S. tax residents could put themselves in the precarious position of being considered "wilfully non-compliant" should the IRS find out, potentially disqualifying themselves from certain amnesty programs.

"Many clients often come to me through a bank, or an advisor even before the bank has contacted them," says Perry, who adds that there various voluntary disclosure programs available for U.S. tax residents that should allow them to catch up with their U.S. tax-filing obligations while avoiding penalties.

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