The current immigration bill pending before the US Congress contains provisions that will make it easier for Canadians and retirees to obtain non-immigrant status in the US. If the bill becomes law, these people will be able to obtain a “Snowbird Visa,” which will entitle the visa holder to be physically present in the US for a period of 240 days. The Canadian press has been agog with articles and commentary on the virtues of the proposed law, but few have addressed the explosive US tax consequences that might befall those who would obtain one of these visas. We refer to this as the “Snowbird Visa TAX BOMB.”
Here’s why the Snowbird Visa TAX BOMB is a trap for the uninformed: while the proposed legislation would allow the individual to remain in the US for a period of 240 days, the law does not exempt these days for tax purposes. In other words, the “day count” for purposes of the Snowbird Visa is different than the “day count” for tax purposes. As a result the would-be holders of the Snowbird Visa can become subject to US income tax and US estate tax and, therefore, inadvertently light the fuse on the Snowbird Visa TAX BOMB.
Day count for US income tax
The US taxes three classes of individuals on their worldwide income: US citizens, US green card holders, and “US Residents.” Individuals are “resident” in the US based on two relatively straightforward tests.
The first test is the easiest to understand and administer: if an individual is physically present in the US for more than 182 days in the calendar year that person is a resident and therefore subject to US income tax and foreign reporting obligations on worldwide income. It is worth noting that such individual, as a Canadian resident, would also be obligated to file Canadian tax returns and report worldwide income.
For those who are present in the US for more than 182 days in the calendar year the Canada-US Treaty does afford a tiny bit of relief. If the individual can establish that their center of vital interests is in Canada the Treaty will override the 182 day rule and deem him resident of Canada and therefore not subject to tax on worldwide income. However, such individual must still file a US tax return to claim the relief afforded under the Treaty.
However, this is only a pyrrhic victory for the taxpayer because the Treaty relieves the individual only from US tax on worldwide income. The Treaty does not relieve the individual from either the obligation to file all requisite US forms (including the dreaded FBAR) or the obligation to pay potentially ruinous penalties for the failure to file these forms.
The second test is called the “Substantial Presence Test.” It is somewhat more involved and requires applying a mathematical formula to the days present in the US. The formula works like this:
- Start with the number of days present in the US during the current year and, if greater than 30, add 100% of these days and continue to step 2;
- Add 1/3 of the number of days present in the US during the prior year;
- Add 1/6 of the number of days present in the US two years prior.
If the individual spends more than 30 days in the US in the current year, and the sum of those three figures is greater than 182 then the individual is resident in the US for US income tax purposes and therefore subject to tax on worldwide income. If the sum is less than 182 or less, then the individual is not resident for US income tax purposes.
However, this second test (“Substantial Presence Test”) has an important exception. If the individual has a closer connection to Canada and files the US form 8840 with the IRS on or before April 15 (June 15 if he is outside of the US on that date) then he will be deemed to be not resident in the US and therefore exempt from US tax on worldwide income and all US filing obligations.
US estate tax
The US also imposes an estate tax on the value of certain individuals’ worldwide assets owned at death. The individuals subject to the estate tax on worldwide assets are those who are either US citizens or “US Residents.” If the individual is neither a US citizen nor a US resident, only the property that situated in the US will be subject to the US estate tax.
Those who expect consistency and logic in tax law will be disappointed (though probably not surprised) to learn that the test to determine residency for the US estate tax is different than the test to determine residency for US income tax purposes. For estate tax purposes an individual is resident if he: a) lives in the US, even for a brief time; and b) has no definite present (or later) intention to move. The test applied by examining all of the surrounding facts and circumstances.
This fact and intent based test is challenging to apply because facts are messy and change with time. Thus, an individual may not be resident for estate tax purposes in one year but several years later that conclusion may change.
Tax considerations are a factor that should be considered in many of life’s major decisions. The weight to be given to tax, however, is dependent on many factors and is seldom the only consideration. The would-be holders of the Snowbird Visa need to realize that both US and Canadian tax issues will arise if they spend a significant amount of time in the US. Given the magnitude of the tax consequences, individuals need to be wary and avoid accidently lighting the fuse on the Snowbird Visa TAX BOMB.