U.S. tax implications for Canadians working or living abroad

Are you a Canadian resident who travels to the United States frequently? If so, it is important that you are aware of the “Substantial Presence Test”. This assessment is issued by the IRS and is used to establish the tax status of a non-resident. Calculations are based upon the number of days an individual intends to spend time in the U.S. during a three year period. There are specific requirements in order for someone to meet the test. Suppose they do meet it? Then they will be required to pay taxes in Canada as well as the U.S. However, there are four categories that will allow non-residents to be considered “exempt individuals”. To learn more about the requirements to meet the test, in addition to being considered exempt, the Division of Business Affairs provides detailed information.

Not only should individuals be wary about the number of days they spend in the U.S., but even owning property there has tax implications. Here is an article about Canadians owning vacation property in the U.S. Also, it is important that Canadian residents are aware of their foreign tax filing requirements in relation to their employment. Here is an article about tax implications for Canadian employees working abroad.

The Substantial Presence Test Explained

The basic mathematics of the substantial presence test is not difficult to master. Suppose you are trying to figure out whether you are going to be a resident of the United States for the calendar year 2014. In order to figure out whether the U.S. will treat you as resident for income tax purposes, follow these five simple steps:

1. Count the number of days that you were in the United States in 2014.
2. Count the number of days that you were in the United States in 2013. Divide by three.
3. Count the number of days that you were in the United States in 2012. Divide by six.
4. Add the three numbers you wrote down.
5. If the sum of the three numbers is equal to, or greater than 183, the substantial presence test says you will be treated as a U.S. resident for income tax purposes in 2014.

Nevertheless, the calculations can become a little more complicated due to special rules, regulations and exceptions. Learn morea bout these complications on the IRS web page. 

Foreign Residency Example

Let’s use an example to help get a better understanding of the application of tax residency rules involving non-resident visitors to the U.S.

Scenario:

Suppose a man named Robert is a citizen and resident of Canada just prior to his arrival in America. He is an employee of a corporation affiliated with a U.S. corporation. Robert arrived in the U.S. on April 30th 2015 on a L-1 visa to work for the business. He does not intend to leave the U.S. until April 29th 2018. Determine his residency starting date.

Solution:

Date of entry into the U.S.: April 30th 2015

Begin counting 183 days at arrival/entry date: April 30th 2015

Number of non-exempt days in the U.S. (in 2010): 246 days

Current year (2015) days in the U.S.: 246 x 1 = 246 days

Prior year (2013) days in the the U.S.: 0 x 1/3 = 0 days

Therefore, Robert passed the substantial presence test. His residency starting date is April 30th, 2015 (which is the first day he was present in the U.S. during the calendar year in which he passed the test). You can learn more by reading additional examples on tax residency rules.

Closer Connection Exception

Although non-residents may meet the substantial presence test, the closer connection exception statement for aliens can establish a “closer connection” – a greater tie – to the tax home in Canada as opposed to the U.S. Individuals who file this form with the IRS can ultimately avoid being labeled as U.S. resident and avoid filing a U.S. income tax return. If you intend on spending a long time in the U.S in a three year period, then filing this form absolutely applies to you!

The form requires you to fill out four sections and asks for general information like first name, last name, address in country of residence, address in the United States, etc. A “closer connection” is usually based on the location of many aspects such as:

-Your permanent house

-Your family

-Your personal belongings (cars, furniture, clothing)

-The jurisdiction in which you hold a driver’s license

The next time you are planning a trip to the United States, or accepting a temporary job offer – do not forget to consider the potential tax consequences that come along with the duration of your trip!

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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