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Background
Resident Status Under U.S. Tax Law
Canada-US Tax Treaty Protection
It is important
for Canadian visitors in the U.S.
to be aware of their U.S. tax filing requirements.
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The U.S. imposes its income tax on foreigners under two separate regimes:
one for resident foreigners and the other for nonresident foreigners. In
general, nonresidents are taxed only on their income from U.S. sources, but
residents are taxed (as are U.S. citizens) on their worldwide income.
Worldwide income means income arising anyplace in the world (including
Canada, the U.S. or third countries). Even though Canadians visiting the
U.S. are typically subject to Canadian income tax on their worldwide income
(because Canadian tax authorities consider them resident in Canada), U.S.
tax laws consider certain long-term visitors to be resident in the U.S. as
well. Such individuals are referred to as “dual resident taxpayers.” Many
Canadian winter visitors have filed the annual Internal Revenue Service
(“IRS”) Form 8840 “Closer Connection Exception Statement for Aliens” and
probably most have been uncomfortable doing so (however, less so since 2006
because IRS has revised the form to omit questions about social, religious,
political and charitable issues). Although not evident in the form’s
instructions, individuals qualifying under the Canada-U.S. tax treaty as tax
residents of Canada may consider not filing that form; however, this
alternative has pitfalls so it is recommended that an experienced tax
adviser be consulted with your particular situation in mind.
Resident Status Under
U.S. Tax Law
Under U.S. tax law, a Canadian is treated as a resident of the U.S. if: 1)
he meets either the “Green Card Test” or 2) the “Substantial Presence Test.”
1. Green Card Test - An individual is a resident
of the U.S. under this test if, under immigration rules, he or she is a
lawful permanent resident of the U.S. at any time during the calendar year.
Individuals generally have this status if they have entered the U.S. with an
alien registration card (also known as a “greencard”).
2. Substantial Presence Test - An individual is
a resident under this test if physically present in the U.S. at least 31
days during the current calendar year and 183 or more days during the
current and two prior calendar years computed under a “weighted presence
formula” (i.e., counting each whole or partial day in the current year as
one day, each whole or partial day in the first prior year as 1/3rd of a
day, and each whole or partial day in the second prior year as 1/6th of a
day). A foreign visitor spending on average four months and two
days a year in the U.S. during a
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Resident Status
Under U.S. Tax Law (continued)
three year period is considered a U.S. tax resident under
this test.
Closer Connection Exception - An individual is not treated
as a U.S. resident under the substantial presence test if he is present in
the U.S. fewer than 183 days in the current year, has a “tax home” in Canada
and has a “closer connection” to Canada than to the U.S. An individual
cannot assert this exception if he has or intends to apply for a greencard.
Even if the requirements of this exception are met, the individual must
also timely file a Form 8840 with the IRS. For an individual with a closer
connection to Canada, filing Form 8840 merely avoids the “penalty” of not
being allowed to assert the exemption (properly filled out it indicates, but
does not prove, existence of the closer connection). For an individual
without a closer connection to Canada, or with a closer connection to Canada
and one other foreign country, filing does not provide any protection at
all. Once the IRS receives the Form 8840 it is stamped and returned to the
individual. IRS says it does not keep record of forms having been filed so
it is important to keep the returned copy in a safe place (for at least
three years, but preferably forever) since the burden of proving timely
filing is on the taxpayer.
Canada-US Tax Treaty Protection Taxes
It is very important to note that the tax
treaty provisions override or modify U.S. (and Canadian) tax laws. Thus,
even though a long term Canadian visitor may be considered a U.S. resident
under U.S. tax law, dual resident status may be avoided by invoking the
treaty. The treaty mandates that a dual resident taxpayer be treated as
resident in only one, not both, countries under the “tie-breaker” rule set
forth in Article IV.2. which provides that: the individual is deemed a
resident of the country in which he has a “permanent home;” if he has a
permanent home in both or neither, he is a resident of the country in which
he has his “center of vital interests;” if he has his center of vital
interests in both or neither, he is a resident of the country in which he
has his “habitual abode;” if he has his habitual abode in both or neither,
he is a resident of the country of which he is a citizen;” and finally, if
he is a citizen of both or neither, he is a resident of the country as
agreed to by U.S. and Canadian tax authorities. Form 8833 Required - Even
though this alternative may avoid having to rely on timely filing Form 8840,
the IRS requires timely filing of Form 8833 “Treaty-Based Return Position.”
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