Important US Tax Residence Rules For Canadians

We have compiled several important US Tax Residence rules that every Canadian should know and understand when visiting the United States or even stay in the country for an extended period of time. In order to protect yourself from expensive penalties, it is important to stay informed and avoid unpleasant surprises. 

Although it may seem confusing at first, don’t fear! We’ll help you understand many of the ins-and-outs of these sometimes-complicated tax laws. 

Immigration Rules and the Substantial Presence Test

One of the most basic rules to follow are the U.S. Immigration laws. Essentially, they claim that any Canadian resident cannot spend more than 182 days in the United States per year. If you spend more time in the states, then you risk being banned from the United States. This is important to understand because the amount of time you spend in the U.S. dictates whether or not you will be subject to tax payments to the IRS. 

One way that you can quickly check to see if you owe any taxes is by completing the Substantial Presence Test. The Substantial Presence Test is basically a short form which will help determine the number of days you spend in America. Simply put, the formula requires you to:

• Add the total number of days you spent in the United States during the current calendar year
• Plus 1/3 of the number of days spent in the states from your last calendar year
• Then, add 1/6 of the days from the year prior to the last year in the U.S. 

Then, once you have these totals, if they surpass 183 days, you would be considered as a U.S. resident for taxing purposes. Once you become U.S. resident for tax purposes then extensive reporting requirement of U.S. person will be appliable to you. However, if you want to double check and ensure that you have calculated all of your totals correctly, there are a number of online resources. One such is the Substantial Presence Test Calculator which will help you check your numbers. This online calculator makes it much easier to review these numbers!

In short, the Substantial Presence Test is an extremely-influential indicator of whether you will owe taxes to the United States. Any Canadian who spends a substantial amount of time in the united states should complete this simple test in order to avoid unpleasant surprises and costly penalties. 

Form 8840 and the Closer Connection Exemption 

In the event that you find yourself exceeding the threshold set by the Substantial Presence Test, there are still several exemptions available that may allow you to not pay U.S. taxes. One such is Form 8840 and the Closer Connection Exemption. Form 8840 may sound complex, but it is actually a valuable way to save some of your hard-earned money. Similarly, the Closer Connection Exemption is the exemption given to Canadians who have applied for tax savings via Form 8840. They work together, hand-in-hand, to protect your precious savings!

Essentially, Form 8840 allows Canadian citizens to stay in the U.S for up to 182 days each calendar year without being considered a resident. 

Form 8840 asks questions which will look to note whether you have more economic and personal ties to Canada and fewer to the U.S. This basically shows that while you spend time in America, you spend more money in Canada. Once you file this form with the IRS, you may be granted the Closer Connection Exemption. 

Overall, there are a number of rules that every Canadian snowbird should recognize and understand when they live in the United States. By proactively searching for information, you can protect yourself from costly consequences. 

A must read for anyone working in US or working for a US company then following are a must read: Canadian residents providing self-employed personal services in the US, Canadian Employed in US by Canadian Company. Learn about US Canada Tax Treaty.

Do you have unique issues or concerns not discussed in this blog? If you have a complicated situation and are in need on consultation then, please contact us by email or phone.