For Canadians traveling regularly down south to the States, take heed, the IRS is watching you. Do you know how many days you have spent in the U.S. this year? The last three years? Be careful, you could be subject to U.S. taxes on your worldwide income and assets!
The Substantial Presence Test and U.S. Non-Resident Aliens
Have you inadvertently subjected yourself to U.S. taxes? Many Canadians improperly think that if you spend less than 50% of the year in the States you are safe, but this is not fully accurate. To know for certain, consider the Internal Revenue Service’s Substantial Presence Test (also referred to as the “SPT”). According to this test, you are considered a U.S. resident for tax purposes if you were physically present in the United States in two instances:
- You were physically present in the United States for 183 days in a single year; OR
- You were physically present in the United States for at least: 31 days during 2018; AND 183 days during the period 2018, 2017, and 2016, counting all the days of physical presence in 2018 but only 1/3 the number of days of presence in 2017 and only 1/6 the number of days in 2016. Note, that a day counts as any calendar day and not a full 24-hour period.
Ex.: John spent 120 days in the United States in each of the past three years. John’s Substantial Presence Test is calculated as follows:
2017: 40 (120/3)
2016: 20 (120/6)
Here, John is not considered a U.S. resident for tax purposes because although he was in the U.S. more than 31 days in 2018, his three-year total is below the 183-day threshold. He is a nonresident alien and therefore not required to file a U.S. tax return to declare his worldwide assets and income.
If you have spent time in the United States and want to know if you meet the Substantial Presence Test, we invite you to use our Substantial Presence Test Calculator at the following link: https://levysalis.com/calculators/
Are you within the threshold? If not, there are still options!
Exception No. 1 – Closer Connection to a Foreign Country
Even if you meet the Substantial Presence Test, you can still be treated as a nonresident alien if you:
- Are present in the United States for less than 183 days during the year;
- Maintain a tax home in a foreign country during the year; and
- Have a closer connection during the year to one foreign country in which you have a tax home than to the United States.
If you meet all three criteria, you qualify for the closer connection exception and can file Form 8840, Closer Connection Statement for Aliens, to avoid being treated as a U.S. tax resident.
Ex.: Ali spent 180 days in the United States in each of the past three years. Ali’s Substantial Presence Test is calculated as follows:
2017: 60 (180/3)
2016: 30 (180/6)
Here, Ali is considered a U.S. resident for tax purposes because she was in the United States more than 31 days in 2018 and her three-year total is below the 183-day threshold. However, Ali will qualify for the closer connection exemption as she was below the 183-day threshold for 2018, maintained a tax home in Canada during the entire year, AND she has a closer connection to Canada than the United States for 2018.
Questions for determining a closer connection include, but are not limited to:
- Where your principal permanent home is located;
- Where your family lives;
- Where your car(s) are located and registered;
- Where you keep your belongings;
- Were your banking and financial accounts are located;
- Where your drivers license(s) was/were issued;
- Where you are registered to vote; and
- Where you are covered by a government health plan.
If you qualify, you must file your Form 8840 with the Internal Revenue Service (IRS) on or before June 15th.
Exception No. 2 – The Canada-U.S. Tax Treaty
If you spent more than 183 days in the United States and do not qualify under the closer connection exemption, your last lifeline is the Canada-U.S. Tax Treaty. But be warned, this is the most difficult to apply for and be approved under as each is handled on a case by case basis. Form 8833 lays out the grounds for claiming a tax treaty and must be filed along with a 1040NR, U.S. Nonresident Alien Income Tax Return, by June 15th.
Whether you are under the 183-day threshold, qualify under the closer connection exemption or claim a non-resident position under the Canada-U.S. Tax Treaty, make sure to document your travels and days spent in the United States, plan accordingly, and file your forms on or before the June 15th deadline in order to properly avoid issues with the IRS.
If you wish to discuss your particular U.S. tax filing exposure, if any, we invite you to discuss this with one of our experienced cross border tax and estate planning practitioners.
The comments offered in this article are meant to be general in nature and are not intended to provide legal advice regarding any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate for your circumstances.
About the author
Stephen A. Simon is an Associate at Levy Salis LLP, and a member of the Texas Bar and Quebec Foreign Legal Advisor. Mr. Simon’s practice is focused on the settlement of estates in the United States and Canada, US tax law, and US estate planning for both Canadians and Americans living in Canada.