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Concerns for snowbirds during COVID-19: Tax

Tuesday, July 07, 2020 @ 1:56 PM | By Oliver Branch, Azam Rajan and Aasim Hirji

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For most snowbirds, the border closures, executive proclamations, contradictory news stories and rarely decipherable guidance from government agencies have created a fair amount of confusion. Who may travel? What happens if you are stuck in the United States as a visitor?

Who are snowbirds?

“Snowbirds” are Canadian citizens and residents who flock annually to warmer U.S. climates to avoid Canadian winter weather. By most estimates, as many as 500,000 Canadian citizens and residents make the journey south each year. Indeed, snowbirds make up one of the largest investor groups in U.S. residential properties, accounting for nearly 20 per cent of all foreign home purchasers in the United States and contributing over US$7 billion in real estate purchases annually.

Tax perspective: How long may snowbirds be in U.S. each year?

Unlike the U.S. immigration rules, American tax law doesn’t mandate the length of time a snowbird can legally stay in the country. Tax residency and the requirement to file U.S. tax returns are based on whether the snowbird meets the “substantial presence test,” or is otherwise a U.S. person.This test applies if the snowbird has spent at least 31 days in the United States during the current calendar year.

The snowbird will generally be considered to be substantially present and a tax resident if a special formula results in 183 days or more over a rolling three-year period. In this formula, days of presence in the second preceding year count for one-sixth; days in the preceding year count for one-third; and days in the current year count fully. As a practical matter, to know the total days for the “current” year usually requires counting those days with hindsight after the “current” year has ended on Dec. 31.

Importantly, presence in the United States during any portion of a day, no matter how brief, generally counts as a day of presence. One exception that can come into play for snowbirds is for presence at a U.S. airport merely for a connecting flight with a destination outside the United States.

There is an exception to substantial presence that often applies to snowbirds who are not present in the current year for more than 182 days and who maintain a closer connection to Canada. Unlike the treaty tiebreaker rules discussed below, the closer connection exception is provided by U.S. domestic tax law itself and requires a tax home outside the United States (i.e., Canada), such as a regular place of business or regular place of abode in a real and substantial sense.

Other important factors include where you spend the majority of your time, where your belongings are located, business and social connections, the residence of immediate family members, investment and bank accounts, driver’s licence, voting history, etc.

To claim the closer connection exception, the snowbird must file Form 8840, Closer Connection Exception Statement for Aliens, with the IRS. The form is generally due by June 15 of the following calendar year for which it is reporting. Although there are certain categories of individuals, i.e., students, who are exempt from the substantial presence test, it is unlikely that a snowbird would fit into any of these categories.

If the snowbird spends 183 days or more in the current year in the United States, the closer connection exception is not available. However, the so-called tiebreaker rules of the Canada-U.S. Tax Treaty (the Tie Breaker Test) — contained in Article IV:2 — may prevent that snowbird from being treated as a U.S. tax resident. The snowbird will continue to be considered a Canadian tax resident as long as he or she has a permanent home available in Canada but not the U.S.

If the snowbird has a permanent home in both countries and the centre of vital interests remains in Canada, the snowbird’s tax residence will continue to be Canada. The centre of vital interests means a preponderance of the “building blocks of life” similar to the factors mentioned above used to determine a closer connection. If that factor is inconclusive and the snowbird has a habitual abode in both counties, citizenship will break the tie.

To invoke the protection of the Tax Treaty, the snowbird must file with the Internal Revenue Service (IRS) Form 1040NR and attach to it Form 8833, the form for disclosing a treaty-based return position. The tax return is generally due by June 15 of the following calendar year (with an extension to Oct. 15 available).

While Canadians enjoy certain privileges regarding admission to the U.S., snowbirds should be aware of the immigration and tax requirements and implications of their annual travel to the U.S. and work with immigration and tax professionals to develop strategic planning to address their specific needs.

Additional tax considerations for snowbirds during COVID-19

Existing U.S. tax law allowed individuals who became ill in the U.S. and could not travel to exclude days when they were receiving treatment for the illness. In recognition of the difficulties posed by the COVID-19 pandemic, the IRS broadened this exclusion to include all individuals who could not leave the U.S. Specifically, this one-time policy change allows snowbirds to exclude the days spent in the U.S. from Feb. 1 to April 1 up to 60 days for purposes of the substantial presence test.

The IRS published Revenue Procedure 2020-20 which provides that eligible individuals who are not required to file a U.S. income tax return are also not required to file Form 8843 to claim the COVID-19 Medical Condition Travel Exception, but those individuals should retain all relevant records to support reliance on the Revenue Procedure and be prepared to produce these records if requested by the IRS.

An individual is taxed on their worldwide income in Canada if they are a “resident” of Canada for tax purposes. If an individual is a Canadian citizen, but not a “resident” of Canada (for tax purposes), they would not be subject to tax on their worldwide income in Canada.

If a Canadian tax resident was spending a significant time outside Canada, there may be the chance that the individual has purposefully or inadvertently “departed” Canada for tax purposes. This may occur by virtue of a second country (such as the U.S.) finding that an individual is a tax resident of that country, and the Tie Breaker Test ties the individual residency to that country.

Fortunately, with the above mentioned U.S. relief with respect to becoming a tax resident, individuals who are stuck in the U.S. and not able to return to Canada due to COVID-19 should be prevented from “departing” Canada from a tax perspective as they will not become a tax resident of the U.S. This is due to the U.S. not counting the days spent in the U.S. towards their substantial presence test, which may have otherwise found the individual to be subject to tax on their worldwide income in the U.S.

For non-Canadian tax residents who are currently in Canada, much like the U.S., the Canada Revenue Agency (CRA) announced that where individuals remain in Canada solely due to travel restrictions, this would not in and of itself cause the person to become a tax resident of Canada. The CRA will also not consider the days in which the non-resident individuals were present in Canada towards the deemed residency threshold, which would otherwise deem an individual to be resident in Canada if they spent more than 183 days in Canada during a calendar year. This is all contingent on the individual’s intent and factual return to their country of residence upon travel restrictions being lifted.

This is part two of a two-part series. Read part one: Concerns for snowbirds during COVID-19: Immigration.

Oliver Branch is a U.S. immigration lawyer at Moody’s Tax Law LLP, providing legal advice in all areas of U.S. immigration law and related global mobility services. Azam Rajan is director of U.S. tax law and co-leader of the U.S. tax practice group at Moody’s Tax Law. His specialization is in U.S. inbound issues, including cross-border transactions and expansions. Aasim Hirji is a Canadian tax lawyer at Moody’s Tax Law. His areas of expertise include corporate tax, corporate reorganizations, international tax planning and estate planning.

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