Snowbirds need to consider U.S. tax, medical implications
A million Canadians are migrating to the southern United States for the winter.
Before you cross the border, buy travel medical insurance. Learn how U.S. income tax rules affect you if you stay in the U.S. for more than four months.
Buy travel medical insurance coverage before leaving Canada for an extended stay in the U.S. The average cost of a medical incident in the United States is $26,000. Without travel medical insurance, most Canadian provincial government plans cover only a small fraction of the cost.
Save your receipts because you can count health insurance premiums as medical expenses to be claimed on your income tax return.
Suppose, for example, that you regularly visit Arizona from Nov. 16 to April 15 each year. You average 150 days per year in the U.S. You’re falling into a tax trap because you are a “resident alien” who is subject to U.S. tax on your worldwide income. You exceed the threshold used in the Substantial Presence Test for U.S. income tax purposes.
The Internal Revenue Service (IRS) requires you to add the 150 days you stayed in the U.S. in 2014 plus one-third of the 150 days in 2013 plus onesixth of the 150 days in 2012. When you apply this formula, the result is 225 days, which is considerably more than the 183-day threshold.
The day count is important. Averaging more than 122 days per year in the U.S. makes you a “resident alien.” To avoid the need to file a U.S. income tax return, return to Canada on time.
If you stay longer than, say, 120 days per year, protect yourself from penalties by submitting IRS Form 8840, a Closer Connection Exemption Statement for Aliens, by no later than June 15th each year, to prove you are a Canadian resident.
Diligently keep a log of your day count, whether you travel by land or by air. Include short cross-border shopping trips. Any part of a day counts as a full day. Travellers will soon have to swipe passports both when they enter and when they depart each country. Canada and the U.S. will share this information under the terms of the Entry/Exit Initiative of the Perimeter Security and Economic Competitiveness Action Plan.
When border authorities monitor movements across the border, the IRS will identify Canadians who exceed the residency threshold.
Be proactive. Carry a “border binder” to show border guards that you have a stronger presence in Canada than in the U.S. Show proof that you can support yourself during your stay in the U.S. Show your Canadian bank account statement and 2013 income tax assessment notice. Prove that you will return home to Canada by showing a photocopy of the title to your Canadian residence. Include a copy of your most recent Closer Connection Exemption Statement (form 8840).
The Foreign Account Tax Compliance Act (FATCA) took effect around the world on July 1, 2014. The goal of the U.S. law is to find offshore accounts held by U.S. taxpayers seeking to avoid paying taxes on them.
Under FATCA, Canadian financial institutions must sift through their accounts to look for clients with U.S. connections, including snowbirds who are “resident aliens,” then share that information with the IRS. If you are a snowbird, be ready to show your bank a copy of your most recent Closer Connection Exemption Statement (form 8840).
Suppose you don’t return to Canada until late April. If you expect to file your Canadian tax return after April 30, remember that late filing penalties are only charged when you owe income tax. To ensure you receive a refund, consider remitting extra income tax installments.
Terry McBride, a member of Advocis, works with Raymond James Ltd. (RJL). The views of the author do not necessarily reflect those of Raymond James Ltd. (RJL). Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.
