Traveling to the U.S. for extended periods of time - Snowbird Calculations Part 2

Here is an example from our associates at Shea, Nerland, Calnan:

Mr. and Mrs. Sunshine are residents of Canada and have a winter home in Florida.  For the past several years Mr. and Mrs. Sunshine have spent a portion of the winter months in Florida and also some time in the US during other parts of the year.

In 2008, Mr. and Mrs. Sunshine spent 3 months (91 days) in Florida during the winter and an additional 3 weeks (21 days) in the summer.  In 2009, Mr. and Mrs. Sunshine spent 4 months (122 days) in Florida during the winter and a further 2 weeks (14 days) in May.  In 2010, Mr. and Mrs. Sunshine spent 6 weeks (42 days) traveling in the US and another 11 weeks (77 days) at their home in Florida.

Based on the above, the “substantial presence” test would be applied as follows:

Years                  # of days in US                    Multiplier                    Formula Days
2008                       112                             1/6                          18.66
2009                       136                             1/3                          45.33
2010                       119                             1                             119.00
                                                                                              183.00

Mr. and Mrs. Sunshine will therefore be deemed to have been in the US for 183 days during the current year and will meet the Substantial Presence Test.  Although this will effectively result in their being classified as resident aliens, they may be able to use an exception to avoid being liable for US income taxes on their worldwide income.

Even if you find yourself at 183 days or higher you may be able to avoid having to file a U.S. tax return and being double taxed by filing a Close Connections Form (8840) with the IRS.  You must prove that you have a closer connection to Canada by demonstrating that all your ties really are to Canada.  They will look at things like the address of your permanent home, belongings, vehicles, license, businesses, banking relationships and where your income comes from.

So if you are traveling to the U.S. regularly, make these calculations in advance and do your best to stay under the 183 days!  As we continue on this Cross Border series we will begin to move into investing, acquiring and selling real estate and doing business in the U.S. so watch for the next blogs!

Traveling to the U.S. for extended periods of time - Snowbird Calculations Part 1

Traveling across the border for a few weeks is one thing, but staying there for longer periods of time could bring unwanted heat from the IRS.  We are not talking about retirement in the U.S. as that is completely different and would most likely require becoming a U.S. citizen and filing tax returns (1040) with the IRS each year.

Most people are escaping the cold in Canada when they go.  There are many “Snowbirds” that spend their winters in the U.S.  The key to avoid having to report to the IRS is the 183 day rule, also known as the “Substantial Presence Test”.  The more years in a row you travel to the U.S. the more complicated this becomes.

If you do not travel to the U.S. every year then it can be a simple calculation.  If you only travel their for an extended period of time once then simply keep your stay under 183 days and you are fine.  However if you travel to the U.S. each year then there is a 2 and 3 year calculation that you must go by.  If you are across the border 2 years in a row, then you take the current year’s total days in the U.S. plus 1/3 of the prior year’s days in the U.S. and the total of these must be less than 183.  If you are across the border for 3 years in a row, then take the current year’s days in the U.S., plus 1/3 of the prior year’s days, plus 1/6 of the days from 2 years prior and this must equal less than 183.  Here is a chart to understand this:

Year 1 (This yr):       1 day = 1 day

          Year 2 (1 yr ago):    1 day = 1/3 day

          Year 3 (2 yrs ago):   1 day = 1/6 day

I will be discussing this in detail and will be giving an example on my next blog.  Please check back for part 2!

Cross Border Brings Complications Part 2

Another issue that can arise is when couples split and one moves to the U.S. while the other stays in Canada.  It is imperative to do an inventory of all your assets, liabilities, income and expenses before the move happens as there are many tax considerations in moving to the U.S.  Of course, you should always know your assets, liabilities, income and expenses at any given time for many purposes!  Always keep in mind that if you are leaving Canada you will most likely have tax consequences.  For example, many assets that you owned while living in Canada can incur tax when you leave.  CRA can tax you as if you sold the asset, even though you want to keep the asset.  This is a disposition or departure tax that can arise on many assets that you own and want to keep when you leave Canada.  Of course, if you plan ahead you can avoid the majority of taxes.  As always, the more you plan in advance the better your chances of eliminating taxes!

There are many other considerations.  For example, your will that you created with a lawyer here in Canada may not be valid in the U.S because the wording isn’t consistent with the laws of a state. Another consideration is that if you spend too much time in the U.S., even if you are just visiting, you may need to file appropriate filings to the IRS. There are other considerations on investing across border as there are many different rules depending on what type of investment it is.

Much planning is needed for any cross border situation.  The more you plan in advance, the better off you are.  Kustom Design does not specialize in cross border, however we work with other firms who do specialize in this area and we do have some knowledge in this area from these strategic alliances.  Keep in mind that things are changing rapidly, thus it is necessary to be connected to professionals that are focused in this area.  Kustom Design is always current in Canadian tax knowledge and we are in alliance with other firms that stay current in cross border knowledge. 

In the next blogs we will go into some basics of traveling, investing and doing business in the U.S. Whether you are a Canadian thinking about leaving Canada, or you are from the U.S. or another country and have recently come to Canada, don’t hesitate to contact us on your questions or comments!

Cross Border Brings Complications, Part 1

Many people never do anything out of Canada so they don’t have to be concerned with the complications of planning cross border.  However, there are many people that spend time in the U.S. and in other countries, invest across border, do business across border, and more.  Many people just get caught in the moment and move forward without seeking professional guidance.  If you are traveling out of the country for any extended time, investing across border or doing business across the border there are key details you must know.  The key point that I want to make here is that whenever you are doing anything cross border, it is imperative to see a professional or multiple professionals that can help to ensure you plan for any tax and reporting consequences that you may have to deal with.  For this blog and the next (parts 1 & 2), we will be mostly talk about cross border in the sense of Canadians dealing and traveling to the U.S. and as always the details in the blogs are date sensitive to the current dates that the blogs are written on.

To start with, let’s talk about some of the main issues that seem to arise when dealing and traveling cross border.  If you or your spouse have dual citizenship or have assets in the U.S. you most likely will have to file a U.S. tax return.  Many don’t file and it can catch up with them later down the road.  Many people just deal with the tax authority where they currently live, CRA in Canada the IRS in the U.S., and many people don’t even understand that there is a tax treaty between Canada and U.S. that determines how many things work for cross border assets, transactions, traveling and more!  Many people get double taxed by not understanding what the treaty offers.  For example the IRS tends to tax capital gains made on RRSPs if the holder is residing in the U.S. Worse, if the holder returns to Canada and discharges the RRSP, the holder gets no tax credit for tax already paid in the U.S. However, in a situation like this, it is possible to defer taxes by invoking the Canada/U.S. Treaty to stop the double taxation. The Canada/U.S. Treaty has been revised multiple times since its 1980 inception and will continue to evolve.  The Treaty can override sections of the Canadian and U.S. Tax Acts to help ensure double taxation doesn’t happen.

In Response to "BoC rejects Gold as Currency"

Read article, "BoC rejects Gold as Currency" -- http://www.kustomdesign.ca/

Governor Mark Carney of the Bank of Canada stated that “gold has no role to play in the international monetary system,” following a speech on financial reform in Geneva.  If gold has no role to play, why are all the central banks flocking to gold right now?  Why has China ramped up it’s gold reserves dramatically over the last few years? Because Gold has always been there and has always played a role in every financial system that stood over time.  Every time gold has been taken away from the backing of a currency, we end up with a Fiat Monetary System that never lasts over 100 years before crashing!

In another article in the Gazette we find that Robert Zoellick, president of the World Bank, tried to offer an alternative to the present conflict-plagued monetary system in which gold could be used as a reference point for market expectations for inflation and future currency values. Now this makes more sense as gold brings stability to a financial system. 

Read more: http://www.montrealgazette.com/business/fp/Carney+rejects+return+gold/3803098/story.html#ixzz14q01v5Za

Since we can see that currency that is not backed by something of value such as gold always crashes, why would we now want a global monetary system that is not backed by something of absolute value???

Donating Stocks to avoid capital gains while getting a donation credit

Giving should always be part of your financial and tax plan.  When you give you receive, and although that should never be the motivation of giving, it is an important fact.  Many people have realized that donating to charities can save significant tax savings.  Donating can save taxpayers hundreds of thousands of dollars in taxes by giving strategically. 

Giving stocks is not new, however over the last few years the rules are different in that their used to be a capital gain triggered when you donated a stock.  Now when you donate qualified stocks to a registered Canadian charity there is no capital gain triggered, yet you still receive the full donation credit for the value of the stock.

This can be particularly beneficial in the case of Flow Through and Super Flow Through Shares that have been acquired, considering there was already tax benefits for acquiring the Flow Throughs in the first place!  Although it is typically better to donate personally, many would ask what to do if they have stocks owned by a corporation.  In that case you could still donate the stock and receive a tax deduction for your corporation (instead of a tax credit) and the corporation would not trigger a capital gain.  This would also free up room in your capital dividend account to issue yourself or other shareholders tax free dividends.

BC talking about scrapping the HST

On the surface, or so it might appear from Premier Campbell’s televised speech to the province last week, the government is comfortable letting the public decide whether to scrap the HST.  This is quite rare as most governments don’t allow the general public to vote on tax policies, never mind the option of scrapping the HST! 

However at the same time BC is looking at a 15% personal income tax cut, which could make BC have one of the lowest, if not the lowest personal tax rate in the country.  Many people are complaining about the HST and there is a referendum on it next fall.  It looks as if the government is hoping that the personal tax savings will help people forget about the HST. 

The main issue with scrapping the HST is that BC may have to pay back over $1 Billion to the Federal Government.  This would mean that the tax cuts that they are proposing would be offset in the future by tax increases to pay the debt to the Federal Government.

In my opinion taxation in Canada should be one or the other: a consumption tax (such as the GST or HST) or income tax.  I don’t think we should have both.  Even though we at Kustom Design make our income off reporting peoples’ and corporations’ tax returns, I would suggest that the consumption tax would be the better method, thus simplifying everything for everyone!