Escaping the early winter? Be aware of potential US tax implications of the substantial presence test

Substantial Presence Test

It certainly feels like winter has hit us early this year in Alberta.  Calgary has received more snow in October in over a hundred years and it was all in the first 2 days of the month! For those of you who head south for the winter and you are thinking that you might leave early this year, be aware that there may be potential U.S. tax filing implications.  If you spend more than 183 days in the U.S. in any one calendar year, you will be considered a U.S. resident for tax purposes and will be required to file a U.S. tax return. However, the U.S. also has a test called the “Substantial Presence Test” that takes into consideration the time you have spent in the US over the last three (3) years. The criteria of this test are as follows:

You must be physically present in the U.S. on at least:

1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
   • All the days you were present in the current year, and
   • 1/3 of the days you were present in the first year before the current year, and
   • 1/6 of the days you were present in the second year before the current year.

For example:

You were physically present in the U.S. on 120 days in each of the years 2015, 2016, and 2017. To determine if you meet the substantial presence test for 2014, count the full 120 days of presence in 2017, 40 days in 2016 (1/3 of 120), and 20 days in 2015 (1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2017. However, if you decide to head south early by a couple months (60 days), this could result in you being considered a resident either this year or next year due to the substantial presence test calculation.

Closer Connection Exemption Statement for Aliens

The good news is that there is an exemption statement that can be filed with the U.S. Internal Revenue Service (IRS) called the Closer Connection Exemption Statement for Aliens (IRS Form 8840).  To avoid U.S. taxation, this form needs to be filed annually with the IRS. 

The form, in essence, acknowledges that you met or exceeded the “substantial presence test” BUT you are not going to be filing a U.S. income tax return due to the fact that you maintain “a closer connection” to a foreign country, such as Canada, where you will be paying annual income tax.

You will be considered to have a “closer connection” with a country other than the U.S. based on the location of:

• Your permanent home
• Your family
• Your personal belongings, such as cars, furniture, clothing, and jewelry
• Your current social, political, cultural, or religious affiliations
• Your business activities (other than those that constitute your tax home)
• The jurisdiction in which you hold a driver’s license
• The jurisdiction in which you vote

It does not matter whether your permanent home is a house, an apartment, or a furnished room. It also does not matter whether you rent or own it. It is important, however, that your home is available at all times, continuously, and not solely for short stays.

Canadians should pro-actively complete and file a new Form 8840 each year with the IRS. This is a positive acknowledgment that you are entering the U.S. each year as a “temporary visitor for pleasure” and are complying with U.S. tax laws. A photocopy of each year’s completed form should also be carried, when crossing the border into the U.S. the following year, to indicate that you are entering the U.S. as a temporary visitor from Canada.

Contact us for more information

Please contact us if you need more information or to confirm whether you may be deemed to be a U.S. resident by the substantial presence test and need to file Form 8840.