Canadian residents spending time in the United States may be considered as US residents for income tax purposes and be required to complete certain US tax filings. Canadians who exceed a specific number of days in a single year or over a period of three years are required to file a US tax return or provide other documentation in order to avoid paying US taxes on worldwide income.
If you visit the US regularly, you may fall into one of these categories:
1. You are present in the US for at least 183 days in a current year. If so, you are automatically classified as a US resident and are required to file a US income tax return. You may be able to avoid being taxed in the US on your worldwide income. If you are eligible and wish to claim a treaty tie-breaker under the Canada-US Income Tax treaty, you can file a non-resident income tax return on Form 1040NR with an attached treaty tie-breaker election. Unfortunately, the treaty tie-breaker only provides an exception for US income tax liability on a worldwide basis. It does not protect from any other tax implication imposed by the US Internal Revenue Code. For instance, if you are a shareholder of a Canadian corporation, you would be treated as a US shareholder of a foreign corporation for US tax purposes and thus would be required to file a lengthy disclosure with regards to such corporation; or if you have financial accounts in Canada, you would be required to disclose the details of such accounts including maximum balances during the year to the US Treasury.
2. Your presence in the US in the current year is over 31 days but less than 183 days and your presence in the US equals or exceeds 183 days under the following formula: 100% of days spent in the US in the current year plus one-third of the prior-year US days, plus one-sixth of the second-preceding-year US days. If this category is met, you are classified as a US resident alien and are required to file a US income tax return unless you can demonstrate that you have a tax home in Canada and you have closer connection to Canada.
You can generally establish that your tax home is in Canada by showing that your principal place of business or employment and/or abode is located in Canada. The tax home must be in existence for the entire taxable year. Your close connection to Canada is made by weighing your contacts with the US against those in Canada. Such contacts include:
Regular or principal permanent home
Automobiles, personal belongings (furniture, clothing, jewellery, etc.)
Social, cultural, religious and political organizations
Banks with which an individual conducts routine personal banking activities
Registration to vote
The country indicated on forms and documents
If you meet the 183 day formula over a three year period but believe that you also meet the closer connection exception, you must file a statement with the IRS on Form 8840, Closer Connection Exception Statement for Aliens, by June 15 of the following year. A closer connection statement must be filed for each year for which the exception is claimed. If you fail to file a timely statement for a closer connection exception, you may lose the benefit of the exception and thus be taxed by the US on your worldwide income.
3. Your presence in the US in the current year is under 31 days. If this is your situation, you will be categorized as a non-US resident and not be required to file a US tax return unless you have certain US source income for which adequate source withholdings have not been made or you are engaged in US trade or business, e.g., generating rental or employment income in the US.
If you met one of the first two criteria, or require more information with regards to your days present in the US, we at Bazar McBean LLP would be happy to assist you.
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