Ask an accountant: Substantial presence test

Francesca Giroux, CGA
For the Lakeside Leader

For those snowbirds that travel to the United States for a significant portion of each year, there are a few things to keep in mind regarding US tax for Canadian residents. An individual is deemed to have a “substantial presence” in the US if they have spent at least 31 days there during the year, and the result of a prescribed formula (presented below) for presence in the US is equal to or greater than 183 days, the formula is as follows:

The sum of the days spent in the US in 2018, plus one-third of the number of days spent there in 2017, plus one-sixth of the number of days spent in the US in 2016.

As a result of this formula, individuals who regularly spend four months a year in the US will be considered a resident and as such are required to complete the Internal Revenue Service (IRS) closer connection statement (Form 8840). This form is required to be filed before June 15 of the following year. Even if you have no income from US sources this form must be filed in order to avoid reporting worldwide income (i.e. including Canadian employment earnings or pension income) on a US tax return. If you have certain types of US-source income and are required to file a US federal tax return, the filing deadline for Form 8840 is April 15 if you have employment income that is subject to the US withholding tax, or October 15 if a filing extension has been granted.

It is important to be diligent regarding the counting of the number of days spent in the US in 2015. If an individual spends more than 183 days in the US in 2018 alone they would fail to qualify for the Form 8840 Closer Connection Exemption discussed in the previous paragraph. Starting on June 30th of this year both US and Canadian border services will collect data and passport information when visitors exit and enter the US at all border crossings. While the US taxation rules regarding Canadian citizens have not changed, the additional collection of information will result in definitive data as opposed to relying on visitors to self-report the number of days spent in the US. It is also important to note that an individual must file Form 8840 on time in order to apply for the closer connection exemption in subsequent years. In addition to the tax consequences listed above, there are other residency issues. In order to be deemed a resident of Canada in the US, individuals need to avoid staying in the US more than 180 days in any rolling 12-month period. The consequences for violating this rule is being considered “unlawfully present” in the US and a bar on entry into the US for three years.

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Information provided is of a general nature. As each individual or company’s situation is unique, you may wish to consult with your CPA for information specific to your own needs.

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