So many Canadians like to spend their winters in the U.S. that we have a name for them: snowbirds. If you’re a snowbird or aspire to be one, beware of U.S. tax law. If you’re not careful, the IRS will treat you as a nonresident alien subject to U.S. income taxes. Fortunately, there are ways to avoid this fate.
Be careful of taking people’s word on these tax rules. I’ve heard so many contradictory explanations of the rules that I decided to dig through the IRS website to find the truth. The main things you need to understand are the Substantial Presence Test and the exception to this test called the Conditions for a Closer Connection to a Foreign Country. It’s also important to know that if you wish to assert a closer connection to Canada, you have to file Form 8840. On page 3 of this form it says “If you do not timely file Form 8840, you will not be eligible to claim the closer connection exception and may be treated as a U.S. resident.”
I’ll summarize the highlights of the relevant rules, but there are exceptions. For example, the rules are different if you have a green card or have applied for one. You should read and understand the information at the 3 links above.
The rules mainly hinge on how many days you spend in the U.S. each year. Some days don’t count, such as “Days you are unable to leave the United States because of a medical condition that develops while you are in the United States.” See the Substantial Presence Test for a full list of the days that don’t count.
Substantial Presence Test Highlights
To figure out whether you meet this test, you need to know how many days you spent in the U.S. this year and each of the previous 2 years.
If in the current year you spent less than 31 days in the U.S., then congratulations, you don’t meet the test. Otherwise, you have to do the following calculation:
(days this year) + (1/3 of days last year) + (1/6 of days the year before last)
If this adds up to 183 days or more, then unfortunately you meet this test. This is the part that few people seem to believe. They’re sceptical that the rules actually involve a calculation like this.
If you stay longer than 121 days (about 4 months) in the U.S. year after year, then you’re going to meet this substantial presence test.
Conditions for a Closer Connection to a Foreign Country
All is not lost if you meet the substantial presence test. You may qualify for an exception based on having a closer connection to a foreign country and still avoid having to pay U.S. income taxes. The main criteria for getting this exception are that you stayed less than 183 days in the U.S. and you really do have a closer connection to another country. However, you have to file Form 8840 or you may give up your eligibility for this exception.
Form 8840 asks many questions all aimed at determining to which country you have the strongest connection. It’s not obvious what answers the IRS considers acceptable for getting the exception.
For most Canadians who spend roughly the same length of time in the U.S. each year, you can avoid paying U.S. income taxes by staying at most 121 days (about 4 months) each year, and you may be able to extend this to 182 days (about 6 months) if you file for an exception with Form 8840 each year and the IRS accepts your exception.