THE GLOBE AND MAIL: Snowbirds need to consider these tax, immigration rules before heading south for the winter
Carson was featured in The Globe and Mail discussing the tax and immigration rules Snowbirds should consider before heading south for the winter. CLICK HERE to visit The Globe and Mail website and read.
Travel by Canadians to the United States has declined compared with last year, and some snowbirds are considering alternative destinations or shorter stays – particularly if they don’t own U.S. property.
But wherever snowbirds choose to escape the Canadian winter, they need to be aware of the tax and immigration rules.
Many Canadian advisors are most familiar with U.S. legislation, which uses the “substantial presence” test to determine whether a Canadian snowbird is considered a U.S. tax resident and required to declare – and potentially pay taxes on – worldwide income in a U.S. tax return.
The substantial presence test is met if a person has spent 31 days or more in the U.S. in the current year and 183 days or more in the past three years using the following calculation: (1 x days in U.S. in current year) + (1/3 x days in U.S. one year earlier) + (1/6 x days in U.S. two years earlier). Even partial days spent in the U.S. count toward this total.
A snowbird who meets the substantial presence test may file Form 8840 with the Internal Revenue Service (IRS) to request an exception by demonstrating they have a closer connection to Canada and should not be considered a U.S. tax resident. Without this exception, they must report worldwide income to the IRS. However, under the Canada–U.S. Tax Treaty, they may claim foreign tax credits in Canada for U.S. taxes paid.
Carson Hamill, associate portfolio manager with Snowbirds Wealth Management at Raymond James Ltd. in Coquitlam, B.C., says snowbirds should keep detailed logs of all their U.S. visits.
He also notes that some states have their own taxes, so it’s essential to check the rules for a client’s specific destination.
Renting out U.S. property
A snowbird who owns a vacation home in the U.S. may be tempted to rent out the property. However, that will result in U.S.-sourced income and make it necessary to consider the IRS’s income withholding rules, Mr. Hamill says.
Form W-8 BEN identifies a snowbird’s “foreign status” and has the potential to reduce income withheld to rates set in the Canada–U.S. Tax Treaty. Without it, a default 30 per cent withholding rate applies to U.S.-sourced fixed, determinable, annual or periodic income, including rental income. The treaty may reduce that rate to zero if the snowbird reports the rental income on a U.S. tax return.
Note that rental income may be taxed differently if it is “effectively connected” with a U.S. trade or business, a claim made on Form W-8 ECI. In that case, rental income on a U.S. property will be taxed at graduated rates rather than a fixed 30 per cent when the snowbird files a U.S. tax return.
To reconcile withheld taxes, Mr. Hamill says non-residents with U.S. income may file Form 1040-NR, while those who are considered U.S. tax residents may file Form 1040.
Sunny destinations beyond the U.S.
Mr. Hamill says several clients are thinking twice about spending their winters in the U.S.
“Interest is growing in other warm locations, such as the Caribbean, Mexico [Cabo, especially], and Southern Europe,” he says. “Some snowbirds are also shortening their stays in the U.S. or splitting time between multiple destinations.”
The Bahamas and Cayman Islands are popular for Canadian snowbirds looking to buy property abroad because they’re “tax-free destinations,” says Michael Pereira, partner, cross-border tax, KPMG LLP and KPMG Family Office. That said, like other countries, those destinations have immigration laws that may restrict the length of stay.
“Europe tends to be a bit more complex, both from an income tax perspective and an immigration perspective,” Mr. Pereira says. “I wouldn’t say there’s one particular country that necessarily allows easy entry and easy ownership of property, [and] different countries have different rules about ownership of real estate by non-residents.”
Anna Golan-Reznick, certified financial planner with Objective Financial Partners Inc. in London, Ont., says snowbirds who own a vacation home in the U.S. are generally taking a “wait-and-see approach” and haven’t yet changed their plans.
On the other hand, she says, some clients who don’t have U.S. property are considering other winter destinations, such as Mexico, Costa Rica, Panama, the Dominican Republic, Spain and Portugal.
“It’s not only political instability,” she says, pointing to the weak Canadian dollar as another factor. Snowbirds are “trying to see where they can get better value.”
Ms. Golan-Reznick says snowbirds should seek tailored advice to avoid accidentally becoming a tax resident of any country they’re visiting.
Even though she works regularly with Canadians moving abroad and moving back home, she draws on the expertise of specialists, including cross-border tax accountants with a deep understanding of the rules, who can interpret tax treaties in the context of a particular client’s situation.
Next Steps
If you are planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email our team at Snowbirds Wealth Management, as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have an integrated team in your corner.
About Snowbirds Wealth Management
Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focused on the cross-border market. Together with Dean Moro and Carson Hamill, associate financial advisors with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.
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