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At MNP, a question we often hear from clients is “Are there tax implications to spending a large amount of time in the United States?” The answer is yes.
It may be common knowledge that U.S. citizens and green card holders residing in the United States are subject to income taxes on their worldwide income. Perhaps less well known is the fact that U.S. citizens residing outside of the country remain subject to tax on their worldwide income in the U.S. Still fewer people realize that even a Canadian resident who is not a U.S. citizen or green card holder, having no U.S.-sourced income, can be subject to U.S. income tax on their worldwide income if they have been deemed to be a resident alien because they had a substantial presence in the United States. This is relevant even if that presence does not equal or exceed 183 days during the year.
The Internal Revenue Service (IRS) determines whether or not an individual has a substantial presence based on a mathematical calculation of the number of days he or she was physically present in the U.S. over a three-year period. For the 2013 year, for example, two tests must be met: the first is that he or she was present for a total of at least 31 days in 2013. The second is that he or she was present for a total of at least 183 days during the past three years (2013, 2012 and 2011). This second test is met by calculating all of the days spent in the U.S. in 2013, one-third of the days spent in the U.S. in 2012 and one-sixth of the days spent there in 2011.
Fortunately, not every moment spent in the U.S. qualifies as a day to be counted towards substantial presence. For certain Canadian professionals who reside in Canada but who commute to a work location just over the border, days spent in the U.S. related to their job are not included in the calculation. Partial days an individual spends in the U.S. in transit to another country also do not qualify, nor do any days they were unable to leave the U.S. for medical reasons. Time spent in the U.S. as a teacher, trainee, student, crew member of a foreign vessel or as a professional athlete engaged in a charitable sports event is also exempt from being considered for the substantial presence test (U.S. form 8843 will, however, need to be completed).
If, having completed this calculation based on the last three years, it is determined that an individual spent more than 182 cumulative days in the United States, the Canadian resident will be considered an American resident and will thus be subject to income tax on his or her worldwide income. People should however hold off on sending a cheque to the American government, as the 8840 Closer Connection Exception Statement for Aliens (Form 8840) could be of use.
Thanks to Form 8840, the Canadian resident may still be able to retain his or her non-resident alien status—and avoid being required to file a U.S. income tax return—even if he or she meets the substantial presence test for a calendar year. To be eligible, three basic standards need to be met. The individual must have been present in the United States for fewer than 183 days during the calendar year, have a tax home in Canada and be able to establish that he or she had a closer connection to Canada than to the United States during the year.
An individual’s tax home is considered to be his or her main place of business, employment or post of duty. If none of these apply, the tax home will be the place where he lives the majority of time.
As for the closer connection analysis, the IRS will base its decision on the answers to the questions asked in Form 8840. Essentially, the form will determine where an individual’s main personal and work activities take place by considering factors such as:
If a Canadian resident meets the closer connection exception to the substantial presence test, they would normally file the IRS’s Form 8840 by June 15 of each year to establish the claim to non-residency by virtue of that exception.
Contrary to what many people fear, filing such a form will not flag an individual for any special attention by the IRS. It is futile to try and stay off the IRS’s radar—if the IRS decides to find someone, it will do so. It has many different resources to accomplish this. The strongest arguments in favour of filing, however, are not purely financial; there are a number of consequences that could result if you are considered a U.S. resident.
Related Topics:U.S. Tax; IRS
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