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CROSS-BORDER TAX IMPLICATIONS

Tax issues can be very confusing to many Canadians. When you also live in the United States part-time and own property or other investments there, it can become quite complex. That is because you can be affected by the tax laws of both countries. In the United States, for example, you could be liable under certain circumstances for income tax, capital gains tax, estate tax, and gift tax. If you are a Snowbird (seasonal resident of the U.S.) or have recreational property in the U.S. you need to obtain advice on the U.S. and Canadian tax implications and filing requirements in both countries.

Do U.S. tax laws apply to you?

Even though you are a Canadian citizen and are only living in the United States part-time, you could still be subject to U.S. taxation. Even if you are not required to pay U.S. tax, you could be subject to various U.S. filing requirements. Changes to the Canada/U.S. tax treaty have been beneficial to most Canadians. Since changes can occur at any time, and because there are filing deadlines and penalties for non-compliance, make sure you receive current professional tax advice.

Here is a general overview:

Resident vs. non-resident alien tax status

If you are a Canadian resident who spends part of the year in the United States, the IRS considers you a resident alien or a non-resident alien for tax purposes. It is important to know into which category you fall, since there are considerable tax implications. For example, resident aliens are generally taxed in the United States on income from all sources throughout the world, including, of course, Canadian income. Non-resident aliens are generally taxed only on income from U.S. sources, and not all non-resident aliens have to file, as will be discussed shortly.

Resident alien under the substantial presence test

The IRS considers you a resident alien of the United States if you meet the substantial presence test. Here is a brief overview of the implications of the time you have spent in the United States:

If you were in the United States for 183 days or more in the current year, you meet the substantial presence test and are considered a resident alien of the United States.
If you were in the United States for between 31 and 182 days in the current year, you may meet the substantial presence test.
If you were in the United States for less than 31 days in the current year, you don’t meet the substantial presence test, and are considered a non-resident alien of the United States.

The substantial presence test uses the number of days you have spent in the United States over the last three years, including the current year, to determine your tax residency status. Here is the formula to do your own calculation. If you regularly spend over four months (122 days) a year in the United States, and you have done so for the past three years, you would be a U.S. tax resident under the substantial presence test and therefore don’t need to do the following calculation.

Each day in U.S. in the current year counts as a full day (no. of days x 1) =_______
PLUS
Number of days in U.S. in the preceding year counts as one-third of a day (no. of days x 1/3) =_______
PLUS
Number of days in U.S. in the second preceding year counts as one-sixth of a day (no. of days x 1/6) =_______
Total number of days =_______

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