Beware of resident status

These Canadian travellers are subject to the IRS substantial presence test, which applies the famous 183-day rule. This rule stipulates that if you have been in the U.S. for more than 183 days over a three-year period (including short stays of a few hours), you are considered a U.S. resident and may have to pay U.S. income tax. This calculation must be made as soon as you spend more than 30 days in the country.

Yet, this rule is often misunderstood. It is not a matter of adding up the days you have spent south of the border over a three-year period. Rather, the count includes all the days in the current year plus 1/3 of the days spent in the previous year and 1/6 of those in the year before that. As a rule of thumb, if you spend 122 days a year in the U.S. for three years in a row, you will be considered a U.S. tax resident.

Canadians who spend more than 183 days in the U.S. over a three-year period can fill out form 8840 and submit it to the IRS by June 15 of the following year (which is the deadline for submitting their tax returns to U.S. tax authorities). “This form is used to demonstrate to the U.S. government that you maintain much stronger ties with Canada than with the U.S., and are therefore not considered a U.S. resident,” explains Mylène Tétreault.

This form will not help long-term vacationers who have spent more than 183 days in the U.S. in the course of a single year nor those who have begun the process of obtaining permanent resident status (i.e., a green card). Also worth noting is that Canadians who spend the majority of their time in the U.S. will experience the opposite situation. They will have to fill out form NR73 or NR74 in Canada to demonstrate that they maintain stronger ties with the U.S. and that they are no longer tax residents north of the border.

For the most part, snowbirds generally remain Canadian tax residents. Therefore, they must declare all their income to the Canadian tax authorities, including income from activities in the U.S., such as the sale or rental of real estate.

Declaring income to the tax authorities

It is important to note, however, that not being a U.S. resident does not mean you do not have to pay taxes to Uncle Sam. Three years ago, Philippe Jette, Jeneviève Osborne-Fortier, Martin Lalonde and Yves Bouchard founded Snowbird Taxes, a company specializing in the taxation of Canadians who spend long periods of time in the U.S.

“We had noticed that there was a great need for specialized advice with these people, particularly with regard to real estate,” explains CEO Philippe Jette. For example, he advises Canadians who are selling a home in the U.S. which they may have owned for a long time, and others who are buying homes in the U.S. to rent out.

“These people must declare their capital gains in the U.S., where they carry out the transactions, and in Canada, since they remain Canadian tax residents,” says Philippe Jette. This is particularly true of people who own property in the U.S. since the passage of the Foreign Investment in Real Property Tax Act (FIRPTA) in 1980.

“This law provides for a withholding tax of 15% of the sale price when a property is sold,” adds Philippe Jette. “It’s a bit like a tax installment until you file your income tax return.” In certain specific cases, the amount withheld may be as low as 10%.

The way capital gains are taxed differs between the two countries. The American rate is lower (between 0% and 20% of the gain), but applies to the entire profit. In Canada, only half the gain is taxable. Since June 25, 2024, however, the tax rate has risen to 66.7% for gains over $250,000.

No double taxation

Canadians who are not deemed U.S. tax residents must file a 1040-NR non-resident tax return. “They must also provide the U.S. tax authorities with information on their investments, including those held in Canadian registered accounts such as RRSPs, TFSAs and RESPs,” says David Truong, President, National Bank Planning and Benefits.

Furthermore, if a Canadian snowbird is in a relationship with a U.S. citizen, the latter should be wary of certain investments made in Canada, even if he or she has dual citizenship. “Some accounts that are sheltered from Canadian tax are not sheltered from U.S. tax,” notes David Truong. “This is the case for TFSAs, FHSAs and RESPs.” In the case of RESPs, the U.S. government even considers government subsidies as taxable income.

Canada has a tax convention with the United States, as it does with many other countries. “It specifies tax liabilities based on different types of income and rules on the issue of tax residency, since you can’t be a resident of two countries,” explains Mylène Tétreault.

So, the tax convention avoids double taxation. This applies, for example, to taxes on capital gains. A snowbird can apply for federal foreign tax credits by filling out form T2209. “The person won’t pay the same taxes twice,” explains Philippe Jette. “He’ll pay the amount he owes to the U.S., and if that’s less than the amount on his Canadian tax return, he’ll pay the difference.”