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.