This winter Canada’s snowbirds not only have concerns about their health and travel restrictions, but also their tax situations. Kim Parlee talks with Chris Gandhu, a High Net Worth Planner at TD Wealth, about what could happen if you stay south of the border for an extended period.
- Well, being a Canadian snowbird during a pandemic has gotten a bit more complicated. Not only are there obvious health concerns, travel concerns, but there could be tax concerns as well. Chris Gandhu is a high net worth planner at TD Wealth. He joins me now. Chris, always great to have you with us. Can we start with this situation.
Let's say that you're a Canadian. You're already down South, and some of these folks have been down South for a number of months already. We've heard stories of people not wanting to come back having to deal with the fact they might have to stay in a hotel for a couple of weeks and the cost to come with that. But you're saying that's something that people need to think about because there may be some tax implications to do with that.
- Right. Hi, Kim. Yes, but before we get into tax, I guess I'll simply that we should all be heeding the advice of the health authorities, of course. But having said that, the most recent guidance is that when Canadians are returning home, they're expected to have a negative COVID test and, of course, they will be subject to some sort of a quarantine or isolation at a hotel. And not only is this an inconvenience, it can also be expensive. And because of that, some of the rumblings are that perhaps some snowbirds will in fact choose to stay in the US longer. Not a bad idea to wait it out except that if you spend too much time in the US, that may lead to a tax surprise.
And what would that be?
- Right, well, the US under its domestic legislation, Kim, has what they called a substantial presence test or the day's test. So if you spend a requisite amount of time in the US, then you're deemed to be a US tax resident. Now, this is, in fact, not a unique rule. Almost every country out there has it.
Canada does as well. We call it soldiering. So if you spend more than half a year in Canada, you're deemed to be a Canadian tax resident.
What is unique about the US substantial presence test is that it's a bit convoluted. They not only look at the days you've spent in the US in the current year, but also the previous two years. And each of those years sort of has a weighted formula attached to it.
So in fact, in my opinion, because we were looking at an aggregation of days from three years, it's easier to meet the substantial presence test in the US. And when we have a test that's easy to meet and perhaps snowbirds that are motivated to stay in the US longer, I think this is sort of a tax surprise waiting in the wings.
- Can you talk a bit about what that means. Go ahead.
- Sorry, Kim, there's just one thing I wanted to add here since we are on the substantial presence test topic, last year, of course, many, many Canadians were stranded abroad because of COVID's onset, and for 2020, the IRS did issue a one-time exemption of two months. So those Canadians that were in the US for February and March of 2020, as long as they file appropriate forms, do not need to count those days towards a substantial presence test, but no such guidance for 2021 yet.
Yet, hopefully we get something that might come out and give a little more leeway. But let me ask you, Chris, what are the consequences if a Canadian does stay too long in the States and they are deemed an American for tax purposes? What does that mean?
- Well, exactly what it sounds like. You now have an obligation to file a tax return with IRS, report your worldwide income to the IRS, and, of course, if there's tax, you pay that tax. That does not mean that you don't have a Canadian obligation anymore. You're still a Canadian tax resident.
So you've got to repeat all of that with the CRA. So what we really have is a situation of dual compliance, and based on your circumstances, maybe even double tax. What may surprise you, Kim, is that there are many Canadian snowbirds that, in fact, do fail the substantial presence test regularly.
So it's not be all end all. If you happen to have a viewer that finds themselves in this situation, there is recourse. The most obvious thing to do is to go to something, it's called a closer connection exception statement. It's IRS form 8840.
As long as you file this on time, so take the proactive step of completing it, filing it, what you're really disclosing on this form is taking a position why, despite the US legislation, you have a closer connection to Canada and you should be deemed as a Canadian tax resident, not a US tax resident? It'll work except if you actually happen to spend more than half a year or more than 183 days in the US. In that case, you're not eligible to file this form, and then your only recourse is to use the provisions of the Canada-US tax treaty.
And I can tell you from experience, you're going to have to hire very specialized professional. That's expensive. And this whole process is time consuming. So hopefully it doesn't come to that.
- Chris, I've only got about 45 seconds left. I do want to touch on one thing. I also understand that I've heard that snowbirds with property in the United States are also under scrutiny from the CRA at the same time.
- Yeah, just a few months ago, in summer of 2020, CRA announced a new audit initiative where they're looking at Canadians that have entered into US real property transactions and looking for noncompliance there. And if you have any viewers that have encountered that, that find themselves in that situation, this is a great time to review your compliance with CRA because the CRA audit is not only unpleasant, it can be expensive in terms of professional fees and interest and perhaps even penalties.
Chris, you are always a font of information. We appreciate your insight. Thanks so much.
- Thank you.