My summer vacation in Europe is coming to a close and, after consuming more than my fair share of gelato, I wanted to share one particular memory with you. Two weeks ago, I granted my wife one wish and took her to the Ferrari Museum in Maranello, Italy. (Curiously, I was with my Mom in Germany three years ago and she was just begging me to take her to the BMW factory and museum – what’s with these ladies?)

As a long-time Formula 1 fan and car lover, I was as excited as a small child at Christmas. So many beautiful and important cars – this was much art gallery as it was a museum. One of the exhibits that really struck me, were all the Championship Formula 1 cars that were driven by Michael Schumacher.

Here I am with one of them:

I must confess – it was a bittersweet moment. On one hand, I was so happy to be next to a car I had watched on television, and surrounded by some of the most incredible cars on earth. And yet, I was also saddened by my thoughts of what has happened to its driver.

You may know that Michael experienced a very severe brain injury while skiing with his family in late 2013. In December of that year, he was placed in a coma for over a year and his injuries have been described in the press as “traumatic”. From what I have read in the press, there is very little expectation for a recovery.

He has experienced unparalleled success and amassed immense wealth while exposing himself to catastrophic risk driving racing cars at breakneck speeds for over three decades. And nearly everything was taken from him during his retirement while skiing down a hill with his children.

Michael and I are about the same age, and perhaps this is one of the reasons I have always been a fan. He lived a life I could only dream of – and while I am admiring his incredible career and amazing cars, he lies in a hospital bed in his home in Switzerland.

As a seven time World Champion, five of which came driving for Ferrari, Michael Schumacher was not only one of the most successful drivers of all time, he is also perhaps the wealthiest, with a fortune estimated to be over $500 million US.

Today, it is estimated that his care since his accident cost over $10 million and currently costs almost $100,000 per week.

Life has movement. Things happen. Even the rich and famous are not exempt.

So, along with coming home rested, I’m also coming back with a renewed sense of what’s important and what I’m working for. We must prepare for all that life has to offer: to really enjoy and celebrate when things go well, and make sure we have solid plans in place for the times they don’t.

Andrea, Pedro, Nick and I are completely committed to ensuring you and your family has both. As always, thank you for your continued trust and confidence. We’re grateful for our relationship. And stay tuned – we have a lot of things in store for you this fall!

Have you been appointed Executor of someone’s will?

Note from Coleman Wealth: We work with a network of Canada’s wealth planning experts, and are fortunate to have connected with Executor Duties on Demand. This company simplifies the estate administration process and makes sure all of your duties are covered. Their team is comprised of chartered accountants, tax specialists and trust lawyers, who will ensure you have the right information and that you are correctly fulfilling your executor responsibilities.

We thank Mich’le Follows for providing us with this blog post. To set up a consultation at no cost, please email us at coleman.wealth@raymondjames.ca or visit www.executordutiesondemand.com.

Many people agree to be the estate trustee (a.k.a. executor or executrix) of a family member’s estate without realizing how large a responsibility they have taken on. In addition to the risk of personal liability and the possibility of legal action for inappropriate handling of the estate, there are over 400 time-consuming tasks that need to be performed to complete your responsibilities (depending on the size of the estate and the nature of the assets and liabilities).

Let’s look at the one of the biggest questions that we get from clients:

What is the risk that I am taking on in accepting the role of being an Executor?

An Executor/Executrix has been given the fiduciary responsibility of managing someone else’s affairs, after that person has passed away. They are expected to handle all of the assets and liabilities with due care and in a responsible manner. They need to determine firstly, what their responsibilities are, and then execute them in such a manner as to not cause any unnecessary monetary losses to the beneficiaries of the estate. If it is determined that certain losses to the estate such as late filing penalties, or the sale of assets well below the fair market value of the asset, could have been prevented, the executor could be accused of fraud or negligence. In addition to having to repay any compensation that they may have taken as an executor, he/she could have to use their personal funds to compensate for their actions. Also, if the executor distributes the estate prematurely, they could have to personally compensate the creditors or other beneficiaries for this misjudgment. The executor’s fiduciary responsibility is to remain honest, avoid any conflict of interest, communicate fully with the beneficiaries, and administer the assets and liabilities as timely and as accurately as possible – in a way that any careful, intelligent person would look after their own affairs. If the estate is insolvent (i.e. its debts are greater than the assets available to settle them), the executor should seek legal counsel immediately. If handled properly, the executor is not responsible to personally cover the liabilities of a bankrupt estate.

It is important to note that lack of expertise is not considered a viable excuse for the mishandling of an estate. Executors are expected to seek the help of lawyers, accountants, investors and other professionals to ensure that they are administering the estate properly – and in all cases, complete and accurate documentation is a must.

Being an executor is both an honor and a huge responsibility. If you have been asked to be an executor, you have been personally chosen as the best person available to administer the affairs of a person once they are gone. Be smart, be honest and be responsible, and seek assistance if you need it, and you will safely execute your duties with minimal risk and exposure.

This discussion is for general information only and is not intended to provide legal or any other advice. Executor Duties on Demand Inc. accepts no responsibility for any losses related to reliance on information contained herein.

Bill Yourself First

George and Angie Noble are a happy, successful couple. George is an executive at a large real estate firm, and Angie is a psychologist. They are in their late 40s, have 3 kids, and are enjoying the riches of life. They own a nice home in Rosedale (the mortgage is finally paid off), take several trips with the kids each year, and have a penchant for foreign cars. Combined, they earn over $400,000 per year ‘ a nice income!

The Nobles have worked hard over the years to get to where they are. Spending most of their 30’s just getting by, raising their kids and aggressively trying to pay down a large mortgage, they are now at a point where they want to enjoy their success. George loves cars, and Angie loves travelling. But, the more money that they make, the more they spend. This is not unique to the Nobles; this is common and we see it with many clients.

They have one main problem that naturally, they won’t be able to resolve. When you get used to a larger lifestyle, this becomes your new norm. There’s nothing wrong with this, but often the result is that there’s no balance between an increase in spending and an increase in savings. If you’re spending more now, you’ll likely want to keep up that lifestyle when you retire. And selling the house to help fund retirement (the proverbial ‘Retirement Nest Egg’) isn’t so common place anymore.

George and Angie are saving some money, but not a lot. It’s usually done ad hoc, when a bonus comes in, or when there’s some extra money sitting in the bank. They save about $20,000/year into RRSPs combined. Their total RRSPs today total about $200,000, and they have no other savings or pensions. At a 6% growth rate, this will amount to about $1 million by age 60. Doesn’t sound bad, but when you consider that they’re spending about $180,000 per year in today’s dollars’ well, let’s just say we hope that Walmart will be hiring. And that all of the monetary stimulus that’s been cycled into the economy won’t drive inflation up too much…

How did George and Angie have the discipline to pay down the mortgage so aggressively, yet lack the structure to make any regular savings that will go to help preserve their lifestyle at retirement? Easy.

People hate debt. People pay bills

You’ve probably heard the expression, Pay Yourself First. Well, doesn’t that sound like fun! Making regular savings can almost sound discretionary, at best. There’s always somewhere else that money could go – and often, it’s a lot more fun. But what if you ‘Bill’ yourself first?

Here’s how to do it. At the beginning of each year, take out a loan and invest that money (where you invest it, we can chat about!). Every month, you’re going to want to pay down that loan, because you hate paying the interest on it. So, structured like a mortgage payment, you pay down a portion of that loan every month. It’s one of your regular bills. By the end of the year, the loan is paid off completely. And then you do it again next year! In the meantime, that investment has been growing all year, and you’ve been earning compound growth on that money from January on.

Believe me; it’s a lot easier than you think. You’ll start to look at that loan with the same feeling of loathing as you do any other debt. And paying it down will become a priority! Suddenly, you’ve made looking after your future important again.

So for the Nobles and any other couple who struggles to save ‘enough’ ‘ consider this strategy. You may not be a natural born saver, but anyone who’s had a mortgage, student loan, line of credit, or credit card knows how to pay down debt.

Bill yourself first.

Representative case study

When borrowing to invest you will need to ensure that you have adequate financial resources to meet your loan obligations. Investments (such as mutual funds) in your RRSP and/or TFSA are not guaranteed, their values change frequently and past performance may not be repeated. Regardless of the performance or the value of your investments held in your RRSP and/or TFSA, you will be required to meet your loan obligation in full.

US Citizens in Canada: Tax-Efficient Estate Planning Through Wills

Note from Coleman Wealth: We work with a network of Canada’s best cross border experts, and are fortunate to have partnered with Altro Levy LLP, a boutique law firm providing sophisticated cross border tax, estate planning and real estate legal services with offices across Canada and the United States. This blog was co-authored by David Altro, D.D.N, J.D, L.L.L, and Jonah Speigelman, M.A, J.D, partners at Altro Levy. David has worked with a number of our clients who have cross border legal issues and is known as a thought leader in this complex area of law. We thank Altro Levy for providing us with this blog post. To set up an introduction, please email us at coleman.wealth@raymondjames.ca.

There are over one million American citizens who currently call Canada home. It has been our pleasure to work with some of the many Americans living in Canada over the past several years, helping them achieve their estate planning goals. Such clients require specialized care as they are subject to a unique set of legal and taxation challenges since the US is the only Western nation which taxes its citizens regardless of their country of residence. Americans in Canada are therefore subject to two sets of laws: the US Internal Revenue Code (the ‘IRC’) and the Income Tax Act of Canada (the ‘ITA’).

However, the Canada-US Tax Treaty (the ‘Treaty’) affords many benefits to Americans living in Canada, such as providing foreign tax credits that can offset the impact of being subject to two different tax codes, preventing double taxation in many situations. However, without careful planning, it is possible to miss out on the Treaty’s benefits.

One area that requires particular attention is will and estate planning, which is discussed in detail in the book, Americans Living in Canada: Smile, the IRS is Watching You, by Davd A. Altro and Jonah Z. Spiegelman. Both US and Canadian tax principles need to be incorporated into the wills of US citizens living in Canada in order to ensure that assets are distributed in a tax-advantageous way on both sides of the border upon death. Canadian laws surrounding the treatment of capital gains tax upon death must be considered, as well as US estate tax laws.

US Estate Tax

Upon death, the Internal Revenue Service has jurisdiction to impose an estate tax on the fair market value (‘FMV’) of all assets owned by a US citizen, regardless of where the assets are located or where the person lived; however, not all US citizens are subject to US estate tax due to a number of available exemptions, deductions and credits. Deductions available under the IRC can reduce the amount of a US citizen’s taxable estate, thereby decreasing the portion of the estate that will be subject to tax (‘taxable estate’).

Under current law, for example, there is an unlimited deduction available for gifts made to a surviving spouse as long as he or she is a US citizen. However, gifts must be made carefully in order to ensure that the surviving spouse qualifies for this deduction. It is also important to note that if the surviving spouse is not a US citizen (a ‘mixed marriage’), this unlimited spousal deduction is not available.

The first $1 million of taxable estate is subject to graduated rates, with the remainder taxed at 40%. This results in the determination of what is called the ‘tentative tax.’ This would be the tax payable by the estate if no credits were available to offset that tax.

Fortunately, for many estates, the unified credit will offset all or a portion of this tentative tax. The unified credit can be applied against tax imposed on lifetime gifts and/or bequests in one’s estate.

For 2015, the credit amount is $2,117,800, sufficient to offset $5.43 million in taxable transfers. To the extent that unified credits are used against taxable gifts, they will be unavailable for use against that person’s estate tax liability.

In addition to a person’s own unified credits, a surviving US citizen spouse is now able to use the unused unified credits that were available to that person’s most recently deceased spouse (‘portability’). Like the unlimited spousal deduction, portability does not apply to mixed marriages.

US Estate Tax for Canadians

Canadian citizens and residents are only exposed to US estate tax if they pass away owning US assets with an FMV over $60,000 USD and their worldwide estate is valued to be greater than $5.43 million USD. (The $5.43 million USD exemption is current for 2015 and may change in coming years.) However, if a Canadian is exposed to the estate tax, the tax will only be levied on the value of the deceased’s US-situated assets, not on his or her worldwide estate, and he or she may also qualify for a credit under the Treaty. (For more information on this, please see David A. Altro’s book, Owning U.S. Property the Canadian Way, Third Edition).

Tax-Efficient Estate Planning Through Wills: Mixed Marriages

The estate planning for a married couple’s wills depends on whether one or both spouses are US citizens. In a mixed marriage, the wills of each spouse will be very different.

Consider Jerry, a US citizen married to Deanna, a non-US, Canadian citizen. Jerry and Deanna’s combined estate is $10 million, virtually all of which is held in joint names. Jerry has never made taxable gifts. The couple has three Canadian citizen children.

Jerry’s Will

Jerry wants to ensure that any Canadian capital gains tax on death is deferred if he dies first, and he also wants to ensure that he pays no US estate tax whether he dies first or second.

As the first to die, to defer Canadian tax, assets with unrealized capital gains have to pass either directly to Deanna or to a spousal trust for her exclusive benefit during her life.

If Jerry’s assets are valued at $5 million, no US estate tax would be due, as his unified credit would be sufficient to cancel it out. Moreover, under the Treaty, when a US citizen is married to a Canadian citizen and the US citizen passes away first, he or she is able to use the Canadian citizen spouse’s unified credit to offset US estate tax. In this situation, if Jerry were to pass away in 2015, before Deanna, there is therefore a total of $10.86 million in unified credits available. If Jerry’s assets were valued at $8 million, then he still wouldn’t have any estate tax due because of the availability of Deanna’s credit.

However, a well drafted will must take into account the possibility that Jerry’s estate will have grown above the exemption amount available under the Treaty by the time he passes away. (It is possible that the exemption amount may be reduced by new legislation effective in the year of his death.)

To ensure that no tax is payable on Jerry’s death as first to die, the will should allow the executor the option to apply a Qualified Domestic Trust (‘QDoT’). A QDoT is similar to the Canadian concept of a spousal trust, except that any distribution of capital from the trust is subject to deferred estate taxation at the rate that would have applied had no QDoT been formed.

However, the QDoT will only be necessary if Jerry’s estate exceeds the amount of his and Deanna’s combined credits available under the Treaty. If Jerry dies in 2015 with $8 million of assets, as in the example above, it is preferable to use his $5.43 million credit and most of Deanna’s $5.43 million credit in order to cancel out the tax due rather than to defer tax using the QDoT: cancelling tax, rather than deferring it, is always the goal.

It is still good estate planning to include a requirement in Jerry’s will that the QDoT is an option. Since a QDoT is complicated, its terms and conditions should be carefully drafted into the will. Given the uncertainty surrounding whether or not estate tax will apply, and the rate at which it will apply when a will is probated, good estate plans always make the QDoT election optional. Furthermore, the executor should seek advice from a cross-border tax advisor due to the complexity of issues.

Deanna’s Will

Since Deanna is not a US citizen, she does not need the same type of US estate tax planning. Unless Jerry and Deanna have US-situated assets, she will not be subject to US estate tax at all. As such, Deanna’s will has two primary objectives:

To defer Canadian capital gains tax at death if she passes away first. This will be achieved with an exclusive spousal trust for Jerry, with a remainder interest for the kids upon his subsequent death.
To shelter the assets within that spousal trust from US estate taxation upon Jerry’s passing by drafting the trust with special US tax provisions.

Tax-Efficient Estate Planning Through Wills: Two US Citizen Spouses

If both spouses are US citizens living in Canada, they will be subject to the same tax rules on death; as such, their cross border wills are likely to be mirror images of each other.

From a Canadian perspective, it remains advantageous to defer capital gains tax on death until the second spouse passes away through the use of a spousal trust, which should be drafted to ensure that it qualifies for the deduction from the taxable estate of the deceased spouse on the US side.

The objective is to defer the death tax on the same assets in both Canada and the US until the second spouse passes away. Under the Treaty, such taxes can offset each other, limiting the amount payable on second to die.

Tax-efficient estate planning for US citizens in Canada is a complex endeavor that raises a variety of issues. Each couple’s situation is unique, so each couple’s wills must be unique, too. The ultimate objective of cross-border wills is not only to save clients time and money, but to bring peace of mind to US citizens and their heirs.

As Expatriations Increase, Potential Relief for “Accidental” U.S. Citizens

As Expatriations Increase, Potential Relief for “Accidental” U.S. Citizens

Note from Coleman Wealth: We work with a network of cross border experts, and are fortunate to have connected with the law partners at Hodgson & Russ LLP. Alice Joseffer, a partner at Hodgson & Russ is also the contributor of the post below. Alice offers her clients a full range of tax services and has been practicing for more than 30 years. She focuses her practice on successfully resolving U.S. federal tax controversies and advising U.S. and foreign clients on international tax issues. We thank Alice for allowing us to republish one of her blog posts from February, 2015. The original post can be found at www.smarterwaytocross.com/2015/02/25/expatriations-accidental-us-citizens-tax/

According to Treasury reports, 3,417 U.S. citizens relinquished their U.S. citizenship in 2014, which is more than the number of expatriations reported in prior years. As required by law, the Treasury publishes a quarterly list of names of individuals who have relinquished their U.S. citizenship. Individuals’ reasons for relinquishing citizenship are not published. London Mayor Boris Johnson, a self-described dual citizen ‘as an accident at birth’ has reportedly announced his intent to renounce his U.S. citizenship to prove his commitment to Britain. Perhaps his recent dispute with the IRS over tax on the sale of his home in London factored into his decision. Some accidental U.S. citizens have never entered the United States and simply see no reason to retain U.S. citizenship.

The reason for expatriation may be very significant for U.S. immigration reasons. Under U.S. immigration laws, any former U.S. citizen who officially renounces his or her U.S. citizenship and who is determined to have renounced for the purpose of U.S. tax avoidance may be denied entry into the United States. This provision was included as an amendment (the Reed Amendment) to immigration legislation that was enacted in 1996. There are a variety of other immigration and tax issues that should be considered carefully by an individual before initiating the expatriation process.

How does one become an accidental U.S. citizen? An individual who is born outside of the United States may be a U.S. citizen at birth based on citizenship of a parent. The U.S. laws determining citizenship at birth have varied over the years, so specific facts and applicable law must to be considered for each citizenship determination. But an individual can be a U.S. citizen without taking any affirmative action to become one. In some situations, individuals born in the United States may also consider themselves to be citizens as an accident at birth. Non-U.S. citizen parents may be traveling through the United States when a child is born. Sometimes a baby is born at a U.S. hospital when the baby’s non-U.S. citizen parents live outside the United States but close to a border and, based on medical resources, a U.S. hospital is the place of birth.

Many accidental U.S. citizens are unaware of their U.S. citizenship until an event such as the death of a U.S. citizen parent or an inquiry requires investigation. FATCA, the U.S. regime that requires certain foreign financial institutions to report information about U.S. account holders, has resulted in discovery of U.S. citizenship by some nonresidents.

Why do dual citizens care about their status? Unlike virtually every other country, the United States taxes its citizens on worldwide income. Nonresidents who are not U.S. citizens are required to pay U.S. income tax only on U.S. source income. Although the United States provides certain exemptions and credits for U.S. citizens living outside of the United States, many nonresident dual citizens still pay tax to the United States, including tax on income generated in other countries. Often foreign tax credits do not offset the U.S. tax. London Mayor Johnson was subject to U.S. tax on the sale of his residence. The sale was not subject to tax in the United Kingdom, so there was no foreign tax to credit against the U.S. tax. Further, the 3.8 percent net investment income tax (also known as the unearned income Medicare contribution tax) cannot be offset by foreign tax credits. As a result, nonresident dual citizens who previously owed no U.S. tax because it was offset by foreign tax credits owed tax on their 2013 tax returns, the first year the tax was in effect. Even when no tax is owed, nonresident U.S. citizens have the cost of tax return preparation and record keeping that is different than what is required in their countries of residence.

Some nonresident U.S. citizens who are aware of their status have complied with U.S. tax reporting requirements and also requirements to file annual statements reporting their ‘foreign’ accounts (FBARs). For those individuals, it often seems odd to report, as foreign accounts, ordinary personal checking accounts and retirement savings accounts in the countries where they have always lived and worked. Others, who have not been in compliance, have faced the need to come into compliance and potentially onerous penalties. In some situations, IRS disclosure programs have been helpful, but even when disclosure programs are available, they can be burdensome and costly. But unless a U.S. citizen has been in compliance with U.S. tax reporting requirements for the past five years, the individual can not relinquish citizenship without being subject to an expatriate tax regime.

The expatriation tax regime is potentially onerous. If a U.S. citizen relinquishes his or her U.S. citizenship and meets certain tests, the individual is subject to an exit tax and, potentially, additional tax and reporting requirements. Specifically, if the individual a) has an average annual U.S. income tax liability for the previous five years of $160,000 (the 2015 amount, based on an amount adjusted for inflation) (annual tax liability test), b) has a net worth of at least $2,000,000 on the expatriation date (net worth test), or c) fails to certify compliance with all U.S. federal tax obligations for the previous five years, the person is subject to the expatriation regime.

An important exception to the application of the three-part test applies in certain circumstances. An individual is not treated as meeting the annual tax liability and net worth tests (even if the applicable thresholds have been exceeded) if the individual:

Became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen and is taxed as resident of such other country, and
Has been a resident of the United States for not more than 10 taxable years within the 15-taxable year period ending with the taxable year during which the expatriation occurs.
An exception also applies if the individual relinquishes U.S. citizenship before age 18 ‘ and has been a resident of the United States for not more than 10 years before the date of relinquishment.
Under these exceptions, the annual tax liability test and net worth do not apply to many ‘accidental’ citizens. However, they are required to certify compliance with all U.S. federal tax obligations for the previous five years or be subject to the expatriation tax regime.

The administration’s 2016 budget proposes that an individual will not be subject to tax as a U.S. citizen and will not be subject to the expatriate tax if the individual:

1. Was a dual citizen at birth;
2. Has been a citizen of the other country of citizenship at all times;
3. Has not been a resident of the United States since turning 18 ‘; and
4. Has never held a U.S. passport or only held one for the sole purpose of departing from the United States.

Under the proposal, citizens seeking relief must relinquish citizenship within two years of the later of January 1, 2016, or upon learning of their U.S. citizenship. They must also certify under penalties of perjury that they have complied with all U.S. tax obligations that would have applied during the five years preceding the year of expatriation if the individual had been a nonresident alien during that period (i.e., reporting and paying U.S. income tax on U.S. source income, if any). As such, it appears the proposal would modify existing law primarily by eliminating the requirement for five years of tax compliance reporting worldwide income. Of course, at this time the proposal is simply that and until the law changes there is limited relief for dual citizens.

U.S. Taxation of Snowbirds

Note from Coleman Wealth: We work with a network of Canada’s best cross border experts, and are fortunate to have connected with Kevyn Nightingale, a partner with MNP LLP leading the Expatriate Taxation practice. Kevyn has worked with a number of our clients who have cross border legal issues and is known as a thought leader in this complex area of law. We thank Kevyn for allowing us to republish one of his blog posts from December, 2014. To contact Kevyn, please email us at coleman.wealth@raymondjames.ca and we can facilitate an introduction

By now, it is well-known in Canada that U.S. citizens must file U.S. tax returns, no matter where they live. However, the U.S. also taxes people based on residency ‘ the same concept that is used by most of the world’s advanced nations.
The U.S. has some peculiar residency rules and it is surprisingly easy to run afoul of them. Mistakes can be very costly. For clarity, we’re talking about income-tax residency here; the gift and estate taxes use different rules.

Impact of U.S. residency ‘ tax and filing
Residents must file tax returns annually and a host of information returns. Even if there is no U.S. tax, the filing process is usually onerous, intrusive and expensive.

A resident files form 1040, reporting worldwide income (yes, this duplicates the Canadian reporting). The income tax rules are similar to Canada’s. The U.S. offers certain exclusions and foreign tax credits to people abroad, so usually there is no actual tax. However, since the rules aren’t the same, it’s possible to have U.S. tax, even after paying the higher Canadian tax.

Residency definition
There are two ways a person can be resident:
1) A green card holder (also known as a lawful permanent resident, under immigration law) is deemed to be a resident, no matter where he or she lives.
Many people think that once the card expires, the status also expires. In order for a green card to cease to be valid, it must be voluntarily relinquished or retracted by a court. As a result, there are quite a few Canadians who think their status has expired, but are mistaken.
2) A person who spends a lot of time in the U.S. is also a resident. This determination is called the Substantial Presence Test and is the test most Canadian snowbirds need to be concerned about.
Substantial Presence Test (SPT)
Under domestic law, an individual who spends at least 31 days physically present in the U.S. in a year and meets this formula, is considered a resident:
Days in the U.S. in the current year +
1/3 days in the U.S. in the prior year +
1/6 days in the U.S. in the 2nd prior year
? 183
Any portion of a day is a day.
A person who spends 122 days per year in the United States for three years running will meet this test for year three.

Governments are tracking days
In the past, the IRS largely relied on individuals’ representations of their time in the United States. While it has always been possible for the IRS to glean the necessary information from border-crossing records, it was not practicable to do so on a mass basis.

The U.S. government is now tracking the number of days Canadians (among others) spend south of our border. Any individual can find out the government’s record of their number of days on the Department of Homeland Security’s website.

Exempt individuals Some days in the U.S. don’t count: Those for someone on foreign government-related business, a teacher or trainee, a student or a professional athlete competing in a charitable sports event.

The important exclusion here for snowbirds is for someone whose medical condition prevents them from leaving the country.
Form 8843 must be filed on a timely basis. This phrase, in most cases, means by June 15 of the following year. The due date can be extended, but late filing almost always means the form will not be accepted and the days will not be excluded.

Closer Connection Exception (CCE)
A Canadian who meets the SPT may be able to avoid U.S. residency by filing form 8840. To do this, one must meet several criteria:
1) Have a ‘tax home’ (usually the place one works) and a closer connection to Canada, based on their facts and circumstances;
2) Be physically present in the U.S. for under 183 days in the current year; and,
3) File form 8840 to indicate this connection on a timely basis.

An individual who meets the SPT, but does not file this form is deemed to be a U.S. resident under U.S. domestic law.
Again, late filing means the form will not be accepted and the individual will not be eligible for the CCE.

Treaty residency ‘ a last resort
Just about every snowbird will have a tax home in and closer connection to Canada. But it’s not uncommon to see people exceed the 183-day threshold (even if that causes them to be offside for immigration purposes as well). And many people are unaware of form 8840, so they can’t use the CCE.

It is still possible, even for these people, to avoid residency by filing a U.S. return with a treaty disclosure. The treaty contains tiebreaker rules, allowing a snowbird to be taxed as a resident of only Canada.

The tiebreaker tests are applied in order. If one rule breaks the tie, then the subsequent tests are ignored. If a test results in a tie, the subsequent one is examined. An individual is a resident of the one country where they have:
1) A permanent home available to him / her;
2) A closer connection (similar to the Canadian domestic law residency test); 3) An habitual abode; or,
4) Citizenship.

The treaty overrides domestic law. Assuming Canadian residency, the individual files form 1040NR (not form 1040), along with form 8833. There is a $1,000 penalty for failing to file this form. If the individual has no U.S.-source income, there will be no U.S. tax.

Supplementary filing required anyway
A person who uses the treaty to be taxed as a U.S. non-resident is still considered a resident for most filing purposes. The IRS doesn’t have easy access to the same information about potential foreign (say, Canadian) payors of income, so it demands the individual taxpayers provide the data. For example:

Foreign Bank Accounts (FinCen 114)
Specified Foreign Financial Assets (8938) News flash: The IRS has withdrawn this requirement for 2014 and subsequent returns
Foreign Corporations (5471)
Foreign Partnerships (8865)
Foreign Trusts (3520/A)
These forms require disclosure of quite a bit of information many people would rather keep private. It goes without saying that preparation of these forms is time-consuming and therefore expensive.

Bottom line ‘ watch how many days you spend in the United States!

To learn more about taxation considerations for snowbirds, contact Kevyn Nightingale, CPA, CA, CPA (IL) at kevyn.nightingale@mnp.ca or 416.515.3881