Snowbirds beware: dodging Canadian weather does not allow you to escape taxes!
Did you know that more than half a million Canadians still flee south of the border to escape our harsh winter, leaving the rest of us behind to wallow in self-pity.
Yet one thing snowbirds can’t escape is tax season. Snowbirds need to approach tax season with extra TLC, as they can be subject to several tax rules and requirements that other Canadians don’t have to worry about – and there can be major penalties for filing inaccurately.
As Canadian residents, the Canada Revenue Agency taxes snowbirds as if they never left the country, but depending on the circumstances things can get complicated.
Here are top tax season tips for those who spend winter in the U.S.:
Don’t overstay your welcome: Many snowbirds are aware that if more than 183 days is spent in the U.S. the IRS may tax you. However, what many don’t realize is how these 183 days are calculated – it’s not as straightforward as it seems! Every day spent within one year counts as one day, that’s simple. However, every day spent in the U.S. the previous year also counts as one-third of a day, and every day spent the year before that counts as one-sixth of a day. Therefore, those that plan to spend each winter down south can only bask in the sun for 120 days per year every three years. If snowbirds stay for more time than that, Uncle Sam could come a knockin’!
Keep Canada #1: Those that get carried away and surpass 183 days a year in the U.S. might still be able to get out of handing over cash to the IRS. They’ll have to prove that they maintain a closer connection to Canada (which can include an active business, a permanent residence, family ties, voter registration, etc.) to possibly be exempt from paying U.S. taxes.
Homebuyer’s beware: Many snowbirds may be tempted to buy property down south, but keep in mind that will increase tax complexity tenfold. For example, those that rent out their owned property in the U.S. when they’re not using it will have to pay a 30 per cent withholding tax on any U.S. rental income. Yikes!
Know Your Assets: Canadians who have foreign investments, including stocks, bonds and real estate valued at over $100,000 at any point within the year will have to report them on Form T1135, a foreign income verification statement. Keep in mind this includes property that’s rented to others while back in Canada, as then it’s considered primarily a rental property over a personal use property as well as any investments that are held in a U.S. brokerage account, even if the investment is with a company that’s Canadian.
The bottom line is, it’s always a great idea to get professional advice from a Canadian tax expert as the rules can be tough to navigate and the penalties are not worth the risk.
Still have questions? A U.S. / Canadian tax expert at H&R Block can answer any tax questions you may have. Find an office near you.