Heading south for the winter is a common way for many Canadians to spend their retirement years. Those who have already been at it a while may even recall a time when all that was needed to cross the border was a driver’s licence and a smile.
Well, the times they are a-changing, and not just because a passport is now a must.
It has long been the case that overstaying one’s time south of the 49th could lead to tax and other complications in both countries. Despite this concern, snowbirds may have flown under the radar, as cross-border tracking historically relies – at least in part – upon self-reporting. Soon enough, it appears that will no longer be the case.
Canada-US entry/exit initiative
In 2011 as part of a broader program addressing mutual border security and economic flows, Prime Minister Harper and President Obama agreed to explore the feasibility of exchanging border crossing data. One country’s entry data would effectively serve as the other’s exit data, assisting in monitoring periods of admission, immigration qualification and other policy needs.
A pilot project to test the technology began in 2012, tracking non-citizen movements at four land ports of entry in British Columbia/Washington State and Ontario/New York. This was extended in 2013 to all major land border crossings, though again not applying to either country’s citizens.
The collected data covers first name, middle name, last name, date of birth, nationality, gender, and document type, number and country of issuance. In addition to the biographic information, the date, time and port of entry is also shared.
The next phase is to extend coverage to citizens, and to add airports. However, due to concerns expressed by our federal privacy commissioner, the planned July 1, 2014 launch was delayed pending legislative and regulatory amendments. Once these requirements are satisfied and the next phase is implemented, authorities in both countries will know which side of the border snowbirds may be on, and for how long – and all in real time.
Tax implications
US income tax reporting
The US taxes its citizens and residents on their worldwide income. Snowbirds found to have exceeded their allowed time in the US could be exposed to taxation as US residents.
It is a common misconception that US tax reporting obligations arise only after a person has hit 183 days in the US. In fact, the “substantial presence test” applies once a person exceeds 31 days in a current year, and has been resident for 183 days total according to the formula:
- All days in the current calendar year, plus
- One-third of the days in the preceding calendar year, plus
- One-sixth of the days in the 2nd preceding calendar year
That comes out to a maximum of about 4 months a year, or a consistent average of 121 days to be just below the limit. As a part-day is considered a full-day in this calculation, careful attention should be paid to travel days, and potentially even time of day for those cutting it really fine.
Those who meet the substantial presence test but have been present less than 183 days in the current year may file IRS Form 8840 “Closer Connection Exception Statement for Aliens”. This allows the person to claim non-resident status (and therefore no US reporting obligation) if another jurisdiction is proven as home.
If the person has exceeded 183 days in the current year, a nil non-resident 1040NR return may be filed, attaching Form 8833 to claim Canada-US treaty benefits. Further information filing requirements may apply, despite making these timely filings.
Generally these forms will be due June 15 the year following the taxation year.
US estate tax
The definition of US resident is different (and more complicated) for estate tax purposes from what it is for income tax purposes. Regardless, the more robust entry/exit reporting will potentially expose estates of snowbirds to estate tax scrutiny, to the potential detriment of heirs.
Canadian taxes
Less likely, but not outside the realm of possibility, is the potential that the Canada Revenue Agency will deem the snowbird to have become a non-resident. This would give rise to departure related taxes based on the deemed disposition of capital assets (with some exceptions). While not entirely determinative, day count is an important factor in this analysis.
Lengthy US travel bans
Beyond privacy and tax concerns, the new entry/exit initiative could expose snowbirds to the “unlawful presence” rules under US immigration laws.
A 3-year travel ban is imposed on someone who exceeds 180 days of unlawful presence, or a 10-year ban if the offending time exceeds a year. This is not limited to calendar years, and multiple periods of unlawful presence could be added together.
For snowbirds who had planned a life of leisure in sunnier climes during their golden years, this could leave them with anything but a smile on their faces.