Too much time in the sun could give you a taxburn

Okay, taxburn is not a real word … but it could be a real pain.

For generations, many senior Canadians have escaped northern winters by spending time in the sunbelt of the United States. As hospitable as our southern neighbours may be, if you overstay your allotted time you could find yourself in hot water.

That could mean being required to leave, being denied future entry, and being liable to
US income tax – or at least being required to file a US tax return – for the time you were there.

How long can you stay?

You may have heard the popular misconception that you can stay up to half a year in the US without tax consequences. While adequate as a guide for planning your seasonal apparel, if you get it wrong you could have some costly and complicated tax compliance ahead. Another variation is that you can stay in the US up to 182 days in a year; though this appears more precise, it too is misleading.

The substantial presence test

The starting point is whether you were physically in the US for at least 31 days in the current/calendar year, bearing in mind that a day is counted if you are present any time during the day. If so, then 182 days is the next critical marker, but not simply in reference to the current year (though that does matter if you need Canada-US Treaty relief, as noted further on), but whether you exceed that count in the three-part “substantial presence test” formula:

• • Days in the current calendar year, plus
  • 1/3 of the days in the first year before the current year, plus
  • 1/6 of the days in the second year before the current year

In round figures, you will be onside if you consistently spend less than 120 days in the US annually, calculated as 120 + 40 [120/3] + 20 [120/6] =180. This is sometimes expressed as being about four months, but again be careful with such rules of thumb. Even two more days a year would take you to 122 days, causing you to fail the test within three years. That would be the case for example, if you make travel plans based on full calendar months, returning the last day of any month from June to January … and sometimes March, depending on when a leap year falls.

Excepted days and individuals

Fortunately, there are exceptions:

• • Commuting from a Canadian or Mexican residence to a US workplace, if one is a regular commuter
  • When in-transit for less than 24 hours when travelling between two places outside the US
  • Crew of a foreign vessel that is in US territory
  • When one is unable to leave the US due to a medical condition that developed while in the US
  • Exempt individuals, such as foreign government employees, professional athletes participating in charitable events, and certain temporary teachers, trainees and students

Who’s watching?

At one time, individuals tracked and self-reported their days. Crossing records may have existed to verify or disprove arrival and departure, but there was no automatic/systematic oversight.

Today, the Canada Border Service Agency (CBSA) and US Customs and Border Protection (USCBP) agency track all individuals crossing the border, with relevant reciprocal data being shared between the agencies. Official records can be obtained from CBSA and USCBP through their respective ‘freedom of information’ request processes.

The USCBP also has an online quick-check service to see a screen view of an individual’s crossings over the preceding 10 years. Though not official, this can assist someone whose own records are incomplete, and is concerned about exposure to the substantial presence test. Further research may be undertaken as needed.

What if you exceed your days?

There are two categories of individuals presumptively subject to US income tax:

• • US citizens wherever they reside in the world, and
  • “Resident aliens”, being foreigners who are resident in the US

If you fail the substantial presence test, the US considers you to be a resident alien, potentially exposing you to US income tax on your worldwide income.

Relief under US domestic law

Most people can claim a closer connection to Canada to avoid that US liability. To do so, you must file IRS Form 8840 – Closer Connection Exception Statement for Aliens. In it you must confirm personal details “under penalty of perjury”, including the location of:

• • Your permanent home
  • Your family
  • Your personal belongings, such as cars, furniture, clothing, and jewelry
  • Your current social, political, cultural, or religious affiliations
  • Your business activities
  • The jurisdiction in which you hold a driver’s license
  • The jurisdiction in which you vote, and
  • Charitable organizations to which you contribute

Ideally the statement disclosure will be sufficient, but the IRS may demand supporting evidence, such as ownership records for your principal residence in Canada, your provincial driver’s licence or other official documents.

Relief under the Canada-US Treaty

The process may be more challenging if you exceed 182 days in a single calendar year. In that case, you will need to follow the procedure laid out in the Canada-US treaty. That can be more complicated and costly, and the IRS has more discretion to deny you in such cases, so it is best to steer clear of that if you can.