Depending on the number of days that Canadians or other international visitors spend in the United States, they can be deemed to be US tax residents under the Substantial Presence Test and therefore subject to US tax on their worldwide income. The Substantial Presence Test counts the number of days that a foreigner (e.g. a Canadian) spends in the current year and the two (2) previous years and depending on the total number of days spent in those years, the foreigner is either a US tax resident or not a US tax resident.
Due to the COVID-19 outbreak, many Canadians and other international visitors are potentially unable to return home for medical reasons, inability to schedule flights home or for other reasons. In recognition of these travel restrictions, the Internal Revenue Service (the “IRS”) has announced the “COVID-19 Emergency Disruption” which allows certain foreigners stranded in the United States to exclude up to 60 days from the calculation of the Substantial Presence Test. These 60 days can mean the difference between being subject to US tax and not being subject to US tax.
For an understanding of how Canadians can become US tax residents solely by spending time in the United States and the impact of the IRS COVID-19 relief for these persons, this article first outlines the Substantial Presence Test and its application, and then identifies key points of the COVID-19 relief for Canadians.
The Substantial Presence Test
Have you inadvertently subjected yourself to US taxes? Many Canadians think that if they spend less than 50% of the year in the United States they are not US tax residents, but this statement is not accurate. To know for certain, the Substantial Presence Test must be applied. Under this test, a Canadian is considered a US tax resident if he or she is physically present in the United States:
- For 183 days in a single year; OR
- For at least 31 days in the current year AND if he or she is deemed to have been physically present for 183 days based on the sum of:
- All the days in the current year the Canadian was physically present in the United States
- 1/3 of the days in the immediately preceding year the Canadian was physically present in the United States
- 1/6 of the days in the second immediately preceding year the Canadian was physically present in the United States
In calculating days under the Substantial Presence Test, all calendar days count and a portion of a day spent in the United States (e.g. an hour) counts as a full day of physical presence. Under this test, if a Canadian spends 120 days a year for three (3) years, he will not be a US tax resident because he will be below the 183-day threshold. This statement is evidenced by the calculations below:
2017: 40 (120/3)
2016: 20 (120/6)
This individual is a nonresident alien for US tax purposes and therefore not subject to US tax on his worldwide 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 a Canadian triggers US tax residency under the Substantial Presence Test, he or she can still be treated as nonresident alien for US tax purposes provided he or she meets the criteria of the Closer Connection Exception:
- The individual was present in the United States for less than 183 days during the current year;
- The individual maintains tax residency in a foreign country during the year; and
- The individual has a closer connection during the year to the foreign country of which he or she is a tax resident than to the United States.
Factors for determining whether an individual has a closer connection to one country rather than the United States include, but are not limited to:
- The location of the individual’s principal residence
- The location of the individual’s family
- The location of the individual’s car(s) and the country in which they are registered
- The location of the individual’s assets
If an individual triggers the Substantial Presence Test yet qualifies for the Closer Connection Exception, he or she must file Form 8840, Closer Connection Exception for Aliens, with the IRS on or before June 15th.
Exception No. 2 – The Canada-U.S. Tax Treaty
Canadians who spend more than 183 days in a year in the United States will trigger US tax residency under the Substantial Presence Test and do not qualify for the Closer Connection Exception to be exempt from US tax residency. In such cases, their last option for being exempt from US tax on their worldwide income is a residency position based on the Canada-US 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. Taking a position of Canadian tax residency in such a case requires filing a US tax return for non-residents (Form 1040NR) along with Form 8833, Treaty-Based Return Disclosure Under Section 6114 or 7701(b), by June 15th. A qualified cross border accountant should be retained for the preparation of this type of US tax filing.
All Canadians who frequently travel to the United States should document the days that they spend in the United States to determine if they are potentially US tax residents under the Substantial Presence Test. We invite all Canadians who frequently travel to the United States to use the Substantial Presence Test calculator on our website to make this determination. This calculator can be directly accessed through the following link:
If a Canadian triggers US tax residency under the Substantial Presence Test, then depending on the days spent in the United States, he or she can claim that he or she is solely a tax resident of Canada under the Closer Connection Exception or a Canada-US Treaty based residency position. Claiming either exception requires filing US tax forms with the IRS by June 15th.
IRS COVID-19 Relief for Canadians and Other International Visitors Stranded in the United States
The IRS has issued Revenue Procedure 2020-20 which stipulates that certain individuals who intended to leave the United States may exclude 60 calendar days of physical presence in the United States from the application of the Substantial Presence Test for 2020. This exclusion is the “COVID-19 Emergency Travel Disruption”.
This 60-day period for the COVID-19 Emergency Travel Disruption starts on or after February 1, 2020 and on or before April 1, 2020. This disruption covers the following categories of travel disruptions:
- Severe restrictions in movement, including those imposed by government order
- Disruptions in transportation such as cancelled flights
- Shelter-in-place orders, quarantines and border closures
- Feeling unsafe to travel due to recommendations of social distancing and limiting exposure to public spaces
To qualify for the 60-day exclusion allowed under the COVID-19 Emergency Travel Disruption, an individual must cumulatively meet the following criteria:
- Not be a US tax resident for 2019
- Not hold a Green Card in 2020
- Be physically present in the United States on each of the 60 days excluded from the Substantial Presence Test
- Not otherwise be US tax resident in 2020 under the Substantial Presence Test due to days of physical presence in the United States which are outside of the excluded 60-day period
The COVID-19 Emergency Travel Disruption is one of a number of measures that the IRS has instituted in response to the COVID-19 outbreak. Depending on the development of the situation, the IRS may adopt additional measures, certain of which may apply to Canadians who live in the United States or frequently travel to the United States.
If you wish to discuss your particular US tax filing exposure, if any, we invite you to discuss this with one of our experienced cross border tax 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
Shlomi Steve Levy is a Partner of Levy Salis LLP and is a member of the Quebec Bar, the Law Society of Ontario (L3), the Society of Trust and Estate Practitioners, and the Canadian Bar Association.
Sergei Titorenko is an Associate at Levy Salis LLP and a member of the Quebec Bar. He devotes his practice to US and Canadian tax and estate planning, Canadians doing business in the United States, Americans living in Canada, US real estate transactions for Canadians, and cryptocurrency transactions.