Under U.S. domestic tax law, the substantial presence test (“SPT”) is used to determine an individual’s residency status in the U.S. This is a computation completed each taxation year as follows:
+ all of the days in the current year
+ 1/3 of the days in the first preceding year
+ 1/6 of the days in the second preceding year
= Total
Where this total exceeds 183 days and the individual spent more than 30 days in the U.S. in the current taxation year, an individual is considered to have met the SPT and is considered a U.S. resident for income tax purposes. As a precaution, a taxpayer can ensure that they do not meet the SPT by not spending, on average, greater than 122 days in the US in any taxation year.
If an individual exceeds 183 days in any given taxation year, he will also be considered a U.S. resident for income tax purposes for that year. If this is the case, a tax advisor should be consulted to determine the appropriate filing requirements.
Where an individual meets the SPT, it is possible, however, that they may fall under the “Closer Connection Exception”, if all of the following criteria are met:
- The individual is physically present in the U.S. for less than 183 days in the current taxation year;
- The individual can establish that during the current taxation year, he had a tax home in a foreign country; and
- The individual can establish that he had a closer connection to a foreign country in which he had a tax home, than to the U.S.
The IRS considers you to have a closer connection to a foreign country if you have maintained more significant contacts with Canada than with the U.S. Factors considered include the location of the following:
- principal permanent home during the year;
- family;
- personal belongings;
- financial accounts;
- business activities; and
- memberships.
In order to claim the closer connection exception, the individual must file IRS Form 8840 Closer Connection Exception Statement for Aliens by June 15th of the following year (April 15th if the individual received wages subject to U.S. withholding).
Where an individual does not file Form 8840 by the applicable deadline, he will be considered to be a U.S. resident alien for income tax purposes. If this is the case, a tax advisor should be consulted.
For a those individuals who either exceed 183 days in a taxation year or fail to file Form 8840 by the due date, the Canada-U.S. Income Tax Convention generally will assist in the determination of residency status and deem the individual to be resident of one of the countries for income tax purposes. Generally, this will eliminate any double taxation issues. Individuals in this situation generally have a very complex tax situation and should consult your local MNP Tax advisor.