Owning property in the U.S. adds a considerable layer of complexity to financial planning for snowbirds.The Globe and Mail
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Every spring, thousands of Canadian snowbirds return home from warm, sunny places in the United States where they’ve spent the winter months. However, many aren’t aware of the tax repercussions that may come with living abroad for part of the year.
“Whenever someone spends a significant amount of time in the U.S., there’s a risk they can become subject to U.S. [income] taxes,” says Noreen Marchand, partner and national leader of cross-border personal tax services with Grant Thornton LLP in Toronto.
Specifically, a snowbird who meets the “substantial presence test” is considered a U.S. resident and subject to U.S. income tax on worldwide income. To meet the test, the person must have spent 31 days or more in the U.S. in the current year and 183 days or more in the last three years using the following calculation: (1 x days in U.S. in current year) + (1/3 x days in U.S. one year earlier) + (1/6 x days in U.S. two years earlier).
As a rule of thumb, snowbirds who stay in the U.S. no longer than 120 days every year won’t meet the mathematical requirements of the substantial presence test, Ms. Marchand says. However, those who do meet the test must file taxes in the U.S. unless they submit Form 8840 and demonstrate successfully that they’re more closely connected to Canada.
To be eligible to file this form, snowbirds must have spent fewer than 183 days in the U.S. in the current year and be able to demonstrate close ties to Canada based on factors such as having a permanent home, family, personal belongings, income and government documents issued in Canada.
Those who have spent 183 or more days in the U.S. in the current year, and who therefore automatically meet the substantial presence test, may be able to apply for the Canada-U.S. income tax treaty “tie-breaker rules” to avoid being considered a U.S. resident for tax purposes. But approval isn’t a sure thing and that may not help with state tax requirements, says John Waters, vice-president and director of tax consulting services with BMO Private Wealth in Toronto.
“You don’t want to go down to these exceptions, because that entails filing something with the [U.S. Internal Revenue Service (IRS)], [them] having you in their system, the headaches, the timeframes, the costs of hiring an accountant and all those sorts of things,” Mr. Waters says. “You just want to watch those days up front and not slip beyond approximately 120 days a year.”
Buying U.S. real estate
Owning property in the U.S. adds a considerable layer of complexity to snowbirds’ financial planning.
Snowbirds who rent out their property (after all, they’re likely only in the U.S. for part of the year) must report and pay U.S. taxes on rental income, says Mark Feigenbaum, partner with KPMG in Canada in Vaughan, Ont. Unless an election is filed, the renter must pay 30 per cent of the rent to the IRS as withholding tax. Snowbird landlords must also report this rental income in Canada, but they’ll get a credit for U.S. taxes paid.
“Keep track of all your expenses. You also get depreciation on your property as an expense,” Mr. Feigenbaum says. However, there may also be state tax and snowbird landlords may have to charge sales tax on rent in some locations.
Non-residents who sell a property must pay U.S. taxes on any gain, reduced by upgrades to the property, so it’s important to track major repairs and improvements.
“The IRS wants [15 per cent] tax withholding up front out of the proceeds, and then you are required in any case to file a one-time non-resident tax return for that year,” says Carol Sadler, who established and leads Achen Henderson LLP Chartered Professional Accountants’ U.S. and cross-border taxation group in Calgary. She adds that some states charge taxes on property sales as well.
Snowbirds likely have to report that gain in Canada, too, she says. “You’ll get a credit for all your U.S. taxes, so you’re not double-taxed, but the question may be: How much more Canadian taxes are there?”
Estate tax on U.S. property
On the owner’s death, unless U.S. property passes to a surviving spouse, there will be both Canadian taxes on the capital gain resulting from the deemed disposition of U.S. property on death and U.S. estate and gift tax on the entire fair market value if the Canadian owner had U.S. assets of more than US$60,000 and worldwide assets above an exclusion amount in the year of death. In 2024, the exclusion amount is US$13.61-million, but it’s scheduled to “sunset” back to US$5-million (adjusted for inflation since 2017) at the end of 2025. Whether that happens depends in part on the U.S. election this year.
The estate tax amount may sound like a high threshold, but Ms. Marchand says snowbirds must prorate it based on the value of their U.S. assets divided by their worldwide assets. If only 10 per cent of a snowbird’s worldwide assets on death are in the U.S., they can access 10 per cent of the exclusion amount.
“Typical Canadian snowbirds have lots of value in their investment accounts, their Canadian real estate, where their primary home is. They may own a private company that has lots of value,” she says. All that reduces the exclusion amount available to them.
Meanwhile, real estate prices have been rising in many places, pushing some snowbird property owners closer to exceeding the exclusion amount.
“Over the past several years, we’re seeing more and more Canadian snowbirds who are investing in popular destination spots in Florida, where the value of real estate is very, very high. It’s not unheard of that someone would have a $1-million or $2-million property, [and based on assets outside the U.S.] they may end up having to pay estate tax if they die owning the real estate,” Ms. Marchand says.
The bottom line for snowbirds is that it’s important to track days spent in the U.S. carefully to stay on the right side of the rules governing who is a U.S. resident for tax purposes, Mr. Waters says. It’s also critical to evaluate the pros and cons before buying U.S. real estate, and consider structures such as Canadian trusts, partnerships or corporations to manage the potential tax burden.
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