The rules for determining whether you are required to file a tax return in the U.S. may be surprising to many Canadians that spend time on the U.S. side of the border. In addition to citizenship and residency, the U.S. also imposes taxes based on physical presence. It may be helpful to think about this question in terms of whether someone can be considered a resident or a non-resident of the US for tax purposes (these categories are separate from visa status). This is important because someone who is considered a resident would have the full filing requirements of a U.S. citizen and be taxed on their worldwide income. So, even if they have no income from U.S. sources, they would be taxed on their worldwide income.
Income from U.S. Sources
If you simply own a property in the U.S. for personal purposes, you will not have a filing requirement until you sell it. The sale may create a taxable gain that would need to be reported on a non-resident return. The U.S. requires a 15% withholding tax, known as FIRPTA, that a selling U.S. non-resident Alien (“NRA”) would need to consider. Proactive action can be taken before the sale transaction to potentially reduce or eliminate this tax.
If the property is rented for more than 15 days, an annual return would need to be filed to report the rental income and expenses. Certain elections would also need to be made on the tax filing to avoid a 30% withholding tax on gross rents. Any tax payable in the U.S. may be creditable in Canada.
If a Canadian citizen receives investment income such as interest or dividend income, they will not necessarily have to file a U.S. return except to receive any taxes that were over withheld. Proactive steps can be taken to complete documentation for proper withholding at source to avoid a tax filing. Additionally, if the owner has a direct interest in a partnership, that entity would withhold tax on the “flow through” income, and the Canadian investor would have a U.S. non-resident annual filing requirement to report the income.
Wage income or “dependent personal services” as defined in the U.S./Canada treaty (the “treaty”) are sourced to the country where the services are physically performed. If you are able to spend the winter months in a warm-weather U.S. state and work for your Canadian employer remotely, your wages are likely first taxable by the U.S. unless a position under the treaty can be relied upon. Depending on the nature of your role with your employer and the number of days that you are physically present in the U.S., you may be creating a “Permanent Establishment” or fixed place of business for your Canadian employer, potentially subjecting the company to U.S. corporate income tax. This may apply regardless of whether you meet the substantial presence test for personal tax purposes.
Time Spent in the U.S.
Substantial Presence Test
This is the most straightforward way to determine if someone would be considered a U.S. resident. This test looks at the current year as well as the two years prior. It takes all the days from the current year plus 1/3 of the days in the first prior year and 1/6 of the days from the second prior year. If the total is more than 183 days, the individual would be considered a resident. Each day – even one hour – in the U.S., for dinner, shopping, skiing, a Buffalo Sabres hockey game, vacation, or for business reasons, counts toward your substantial presence test. Essentially, if you spend 121 days or less each year you would not meet this test.
Closer Connection Exemption
If a person meets the substantial presence test but does not meet or exceed 183 days in the current year, they may be able to avoid being considered as a resident if the facts of their personal situation support that they have a closer connection with Canada.
US Canada Treaty Position?
If an individual is physically present in the U.S. for more than 183 days in a given year, they would need to consider the residence article of the treaty to determine their tax filing status. If this is unclear, there are a number of tiebreakers set forth by the treaty.
For questions and additional information, please contact Karl Bader, Tax Associate, or David Lever, CPA, Principal at Tronconi Segarra & Associates. They can be reached at 716. 633.1373 or or , respectively.