With the weather getting colder, now’s the time for Canadian snowbirds to start preparing to head south of the border for the winter. They need to bring with them a keen awareness of all the potential tax hits they might face.
For starters, proposed legislation in the U.S. could have serious tax consequences for Canadian visitors. Under the current rules, those who spend more than 182 days out of 365 days in the calendar year, or more than 120 days per year on average over a three-year period, may be considered a U.S. resident for tax purposes.
The new JOLT Act, (Jobs Originated through Launching Travel), would allow Canadian retirees to spend up to 240 days each year in the U.S. without a visa. But snowbirds who spend that long in the U.S. may be required to pay U.S. income and estate taxes.
To avoid U.S. taxation, IRS form 8840 (Closer Connection Exemption Statement for Aliens) needs to be filed annually with the U.S. Internal Revenue Service. Not filing it could result in a US$10,000 fine.
There are several other possible tax implications.
Those with a bank account in the U.S. need to know that interest earned on deposits could be subject to taxation. They should complete IRS form W8-BEN (Certificate of Foreign Status) with the U.S. financial institution to avoid possibly having 30 per cent of any interest earned withheld and sent to the IRS.
Tax considerations come into play if you own property in the States, too. If you sell, a withholding tax of 10 per cent of the gross sales price is normally payable under the Foreign Investment in Real Property Tax Act.
A government regulation stipulates that, if you own an American property when you die and your worldwide assets are worth more than US$2million, that property is subject to a 45-per cent estate tax.
“It is entirely possible they [the U.S. government] will also charge beneficiaries of the property a gifting fee,” Laing says. “So owing a U.S. property technically can expose your entire worldwide estate to the U.S. government. That’s shocking to most people.”
One solution to U.S. estate tax is to hold real estate in a Canadian corporation rather than personally, according to the American Chamber of Commerce in Canada (AmCham). Because shares of a Canadian corporation are not considered property within the U.S, no U.S. estate tax will apply.
Another way to reduce exposure to the U.S. estate tax is split interest ownership of the property. According to AmCham, an individual would acquire a life interest in American property under such an arrangement, and his or her children would acquire the remainder interest in the property. Upon the death of the individual, there would be no estate tax on the life interest.
You need to be careful if you want to gift your property to a Canadian relative, says Douglas Gray, president of Canadian Enterprise Development Group Inc. and author of the Canadian Snowbird Guide Everything You Need to Know about Living Part-Time in the USA and Mexico.
“Gifting to Canadian relative is very complex in terms of strategy,” Gray says. “You want to be aware of Canadian and U.S. [tax] impacts so you don’t get a multiple hit.
If you own a place and plan on renting it out, that comes with a big tax hit as well.
“You either need to forgo an immediate 30 per cent withholding tax on all gross revenue and/or you have to have U.S. social security number and file a U.S. tax return,” says Jolene Laing, associate director of global wealth management at ScotiaMcLeod in White Rock, B.C. “That’s one step most people don’t think about.”
Furthermore, in some states—particularly hot ones that Canadians snowbird to—property taxes are significantly higher for those who aren’t permanent residents.
What it all comes down to is knowing the facts to avoid getting fleeced.
“A lot of Canadians who are savvy get tax advice from a U.S. lawyer and a U.S. financial planner, people who are experts in cross-border taxes,” Gray says. “If you don’t structure things properly, you could end up having to pay tax in both countries. There are U.S. and Canadian federal taxes and state taxes. Everything is in the fine print.”