Canadian Snowbirds – Resident or Non-Resident Taxation

Beginning June 30, 2014, both Canada and the US will be finalizing the “Entry/Exit Initiative” of the Perimeter Security and Economic Competitiveness Action Plan in which both countries will provide information of people entering and exiting the respective country when passing the border.

What this means to Canadian citizens:

Canadians will need to be more aware of the length of their stay in the U.S. and understand the tax and legal consequences that will arise if one does not.

Five major Penalties will result if a Canadian citizen stays in the U.S. for more than 180 days in a 12 rolling month period:

1. A Canadian visitor will be banned from entering the US under the “unlawful presence” rules, if they remain in the US for more than 180 days. A 3 year ban will result if a Canadian visitor is unlawfully present for more than 180 days, but less 365 days. A 10 year ban will result if unlawfully present for more than 365 days.
2. Canadian visitors will be deemed a US resident and therefore be subject to US taxes on their worldwide income, instead of being subject to the income solely made while in the US.
3. The heirs of the “unlawfully present” will be subject to US estate tax on Fair market value of worldwide assets at death.
4. Canadian residents who remain in the US too long, and are deemed a US. resident, may end up with an additional Canadian tax liability they didn’t see coming. Canadian residents who switch residency are deemed to have disposed of their assets, and if a gain has transpired, it will be subject to Canadian tax on their worldwide income from those gains.
5. Canadian residents are entitled to participate in provincial health services, but once residency has changed from that specific province, the entitlement to receive the provincial healthcare is then lost.

In discussing the term Resident and related taxation issues for Canadians for “fly south” for the winter, it is important to recognize the distinction between immigration and tax law.  Although they may both use the term resident, they may have different meanings.  Keeping things in perspective, the wrong tax decision may simply cost you money, while running afoul of the immigration law may have the authorities telling you to “go home and don’t come back.”  This discussion will deal with only the income tax issues relating to residency.

The US income tax distinction between a resident and a non-resident may be significant.  A US resident is taxed on his or her world-wide income, while a non-resident is taxed only on his or her US source income (with certain exceptions).

Under the US Internal Revenue Code, an alien person (one who is not a US Citizen) will be resident alien for US Tax purposes if he or she meets the substantial presence test.  If the person is present in the US for more than 183 days, he or she will be considered a resident.  In determining the 183 day test, one adds the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year.  If one is a resident of both Canada and the US under their respective laws, the Canada-US Income Tax Treaty contains a series of tie breaker provisions to determine in which country one is a tax resident. The Treaty provisions are not automatic—one must actively claim the benefits of the Treaty.  The relevant Treaty section provides:

Where … an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

Even if a person would be considered a US resident by meeting the substantial presence test, he or she could be treated as a non-resident by claiming the provisions of the Treaty.

The Canada-US Income Tax Treaty is an agreement between the two federal governments—it is not necessarily binding on the several states.  Arizona has an income tax which taxes the world-wide income of its residents.  The general definition of a resident of Arizona is different from the federal definition, but basically has nine-month physical presence test. The basis of the Arizona income tax is the US Internal Revenue Code, which Arizona has adopted by reference in Arizona Revised Statute 43-105. Section 894(a) of the US Internal Revenue Code provides:

The provisions of this title (The Internal Revenue Code) shall be applied to any taxpayer with due regard to any treaty obligation of the United States which applies to such taxpayer.

As Arizona has adopted the Internal Revenue Code, and has not excluded Section 894 from its adoption, income excluded from US taxation under the Canada-US Income Tax Treaty should also be excluded from Arizona taxation.

It is necessary to file a US Income Tax Return to claim the benefits of the treaty, and if one meets the Arizona residency requirement, one should also file an Arizona income tax return, with its starting point the Adjusted Gross Income from the federal return.

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