More misinformation has been spread about the issue of snowbirds having to pay U.S. taxes than about any other cross-border issue entertained by Canadian media. You need to get it right.
The question of how long you are allowed to stay in the U.S. as a visitor (under the deemed B2 visa), and if and when you may become a resident for tax-purposes, are two separate issues, regulated by separate rules. Their purposes, however, do overlap.
As I have discussed in previous columns, the B2 visa (a virtual category, not a real piece of paper) allows you to stay in the U.S. for up to six months in any 12-month period so long as you satisfy the scrutiny of the Customs and Border Protection agent. That six months or 182 days can be in one continuous stretch or an accumulation of shorter trips. Keep that separate.
Whether or not you have to pay taxes to Uncle Sam depends on other factors, not just the six months.
The Substantial Presence Test
If you stay in the U.S. for lengthy periods, year after year, you may well be taxable in the eyes of the IRS, which applies the following “Substantial Presence Test” to determine if you are. But don’t panic, because there is a legal way to avoid the consequences. And note that the reference below is to your presence during any “calendar year,” not any 12-month period as allowed under the B2 visa. Different rules.
The IRS website states the following with respect to the Substantial Presence Test:
“You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:
- 1. 31 days during the current year, and
- 2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.”
Example: If you were physically present in the United States on 120 days in each of the years 2012, 2013, and 2014, count the full 120 days of presence in 2014; 40 days in 2013 (1/3 of 120); and 20 days in 2012 (1/6 of 120). Since the total for the three-year period is 180 days, you are NOT considered a resident under the substantial presence test for 2014.
But go to a total of 183 days or more for the three-year period, and you are a resident for tax purposes. That means you would ordinarily be required to file a tax return with the IRS. However, you can avoid that legally by completing IRS Form 8840, known as the Closer Connection Exception Statement for Aliens. The form is not complicated—it asks questions that establish you are a Canadian tax-paying permanent resident and you have closer social, economic, and family ties to Canada than to any other country. In effect, that is your real home.
You must fill out and submit this form every year. But it’s not that complicated. And the form gives you the formula for counting your days over the three-year period (as I have illustrated above). It’s what savvy snowbirds have been doing for years—not to mention a perfect way to challenge yourself to count your days as you go, accurately. You will need to do that from now on. You must assume that every border crossing is recorded. And remember: any part of a day you are in the U.S., even if it’s for just an hour, is considered one whole day. There are exceptions for in-transit travel (such as if you are boarding a cruise), but we’ll deal with those exigencies another time.
Oh yes, you probably have seen media or other references saying that if you stay in the U.S. over 180 days you will be taxable, the implication being that if you are prepared to pay taxes you can stay in the U.S. indefinitely as a visitor. No. Not true.
As a visitor on the B2 visa you have six months in any 12-month period. If you stay longer without specific permission then you are an overstay and, as such, can be barred from re-entering the U.S. for years (or forever). If you want to be a legal permanent resident, you must get a Green Card, a family, marriage, or other visa allowing you to stay. Getting into the U.S. legally is not easy. Simply saying you are willing to pay taxes is not enough.