Dual residency: Canadians in the US

By Carey Singer and Brenda Lowey

Privately Speaking   -   Tax Insights   -   Deloitte Canada

 Most Canadians have been filing Tax returns since their late teens or early 20s.  Increasingly however, Canadians who spend several months each year in the U.S. may have U.S. Tax return filing requirements even if they earn no income there.

 Under the substantial-presence test, you may be deemed to be a U.S. resident for a calendar year if you were physically present in the U.S. on at least:

  • 31 days during the current year; and,
  • over the last three years (including the current year) you were present there for at least 183 days, calculated using a weighting formula.

 Closer-Connection Exception and Filing Requirements

An exception is available to a non-U.S. citizen and non green-card holder with a Tax home in Canada, provided that no steps have been taken to apply for permanent residency status. The exception is achieved by filing a closer-connection statement (form 8840) by June 15 of each calendar year. Typically, the statement will indicate that there is a permanent residence in Canada, the individual pays Canadian Tax, and has other ties to Canada such as driver’s license, church membership, investments, and voter registration.

Even if the individual fails to qualify for the closer connection exception, a Canada-U.S. Tax Treaty exemption may be available.

 Tax Treaty Exemption

Canadians relying on the Treaty to claim Canadian residency, and who meet the substantial presence test or spend over 183 days in the U.S., need to be aware of U.S. information filing requirements related to their Canadian or foreign corporations or Canadian trusts. Although their Tax liability will be computed as that of a non-resident alien, this individual will continue to be treated as a U.S. resident for other purposes of the U.S. Internal Revenue Code. For example, if this person owns shares in a Canadian or non-U.S. company, certain complex U.S. filings may be required. In the case of a failure to file this information return, the IRS is empowered to impose a $10,000 penalty with respect to each such failure. If the dual resident is the grantor of a trust with U.S. beneficiaries, there are additional pitfalls and filing requirements, with non-compliance penalties that could be as much as 35% of the value of the assets in the trust.

 Canadians who are deciding whether to use the closer connection exception or the provisions applicable to dual residents under the Treaty, should seek specific U.S. Tax advice, as there are a range of Tax issues and filing requirements that need to be considered. For example, if a Canadian qualifies for the closer connection exception and files form 8840, they will be treated as a non-resident alien for all U.S. income taxation purposes.

 All Canadians who spend significant time in the U.S. need to invest effort each year ensuring they comply with that country’s tax-filing requirements. The penalty for ignorance may be surprisingly expensive.