The mornings are colder and the leaves are turning, which means it’s almost time for Canada’s snowbirds to take flight for warmer climates.
According to a 2023 snowbirdadvisor.ca report, 85 per cent of the more than 1 million Canadians who spend their winters abroad settle in the United States.
If your destination is the U.S., it’s important to know that Uncle Sam is watching.
‘Substantial presence’ formula
It’s been a decade since the implementation of an information sharing agreement between Canada and the United States aimed at collecting untapped tax revenue from Canadians who spend a significant amount of time in the U.S.
Since the tax-pact was penned in 2014, a growing number of Canadians have been blindsided by unexpected tax bills, penalties, or worse from the Internal Revenue Service (IRS).
The tax treaty attempts to determine which side of the border Canadians fall on for tax purposes through a complicated “substantial presence” formula put forward for the IRS. If snowbirds spend more than 182 days in the U.S. based on a three-year rolling average, they can be taxed as U.S. citizens.
Any number of days less than 183 makes Canadians not “substantially present” in the U.S. and not obliged to pay taxes.
Consequences can be costly
If you spend too much time in the U.S. without proper immigration status, you’re considered to be an illegal alien. If you’re caught, you could be permanently banned from the country.
Other unwanted consequences from both sides of the border could include:
- Being deemed a U.S. resident and subject to U.S. tax on income from any country
- A departure tax from the CRA. If a Canadian is no longer considered a resident, they are deemed to have disposed of all their assets and must pay tax on any gains from those assets
- Loss of provincial health care
- If you die you could be subject to U.S. estate tax
Those who fall under the IRS 183-day count and are deemed not “substantially present” would not be obliged to pay U.S. tax but they must file a “Closer Connection Exemption Statement” (form 8840) with the IRS to establish they are more closely connected to Canada.
Snowbirds who aren’t sure where they land on the tax divide should consider speaking with a qualified tax professional.
Target on rental income
Approximately one half of Canadian snowbirds in the U.S. own real estate, according to the snowbirdadvisor.ca report.
The information sharing agreement was likely prompted by an influx of Canadians buying U.S. rental properties in the wake of the 2008 real estate crash when high oil prices pushed the buying power of the Canadian dollar to over US$1.10.
There is no precise figure on how much property rental income is generated by Canadians in the U.S., but the treaty gives the IRS the means to find out.
Uncle Sam is watching
Many Canadians are unaware that the IRS has access to their personal information including the location of their permanent home, family members, driver’s license and business activities. Personal information available to U.S. tax authorities also includes where they vote, as well as social, political, cultural or religious affiliations.
In 2016, Canada’s Privacy Commissioner – who provides advice for individuals about protecting personal information under the Federal Privacy Act – expressed concern. The privacy watchdog recommended that the CRA notify impacted individuals when and why their data is provided to the IRS.
Under the Privacy Act, general consent is required for the disclosure of personal information but also includes exemptions that allow for disclosures of personal information without consent.
The Privacy Commissioner says Canadians can also contact the CRA directly to find out what information has been shared with U.S. authorities.