Snowbirds, beware of tax liabilities in the U.S.

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Vinay Khosla, M.Acc., CPA, CA, Tax Partner, Bateman MacKay LLP
Vinay Khosla, M.Acc., CPA, CA, Tax Partner, Bateman MacKay LLP

Snowbirds who spend a significant amount of time in the United States or own investments, including real estate in the U.S., should be aware of your potential US tax liability.

The U.S. wants your money and they have incredible powers to make this happen. That was the message when Vinay Khosla spoke to a group of investors in Oakville last week.

Khosla is an Oakville resident and a tax partner at the accounting firm Bateman MacKay with offices in Burlington and Mississauga. He has many years of advising Canadians on cross-border tax issues.

There have always been fairly strict rules governing the U.S. government’s ability to tax Canadians. Now there is a change in how those rules are enforced.

The Canada/U.S. Border Entry/Exit Initiative (established June 30, 2014) effectively means that “big brother” is watching. Canadians’ entry to and exit from the United Sates is monitored.

When you have your passport scanned that information is collected so the U.S. government knows exactly how long you have been in their country. Partial days count as one day so that three-hour shopping trip to Buffalo counts as one full day.

One test of having a “Substantial Presence” in the U.S. is the number of days a year you are visiting. If you are over 183 days in one year you are deemed to be there long enough to potentially be required to pay U.S. income taxes.

It can be a little more complicated. There is a formula that covers three-year periods so the previous two years of days in the United States are included in this year’s total number of days.

Khosla said you can be in the U.S. up to 120 days a year on an ongoing basis to be onside with the substantial presence calculation.

If you have a ‘substantial presence’ based on the formula, you have until June 15 of the following year to complete and submit a form proving you have closer connections to Canada.

Closer connections to Canada are based on several factors, including the country of your home, where your family lives and club memberships.

Many high net worth Canadians own property and other assets in the United States that can prove costly to their estate. If your worldwide estate is above the current U.S. Estate Tax Exemption of $5.43-million (U.S.) then you may be liable for estate taxes.

U.S. estate tax is 40 per cent of what is referred to as U.S. situs property. Common forms of U.S. situs property are real estate in the United States and U.S. company stocks. Do not get U.S. estate tax confused with the Canadian tax laws, which tax an estate on the capital gain of an asset.

For example, If you own a U.S. property with a value of $1- million and your estate was subject to U.S. estate tax, the tax on that property would be $400,000.

If you also own Microsoft shares through your Canadian investment account the estate tax is 40 per cent of the value of that stock. Again the tax is on the value of the stock and not just the gain as is the case in Canada.

The U.S. and Canadian governments cooperate and if you find yourself in a position of owing U.S. tax that tax liability might be collected by the Canadian Revenue Agency.

We understand the U.S. government is the most efficient country in the world at collecting taxes from foreigners. Khosla said the U.S. tax collection body has no problem collecting as much tax as they can from Canadians who cannot vote their politicians out of power.  

Our recommendation to all Canadians who have ties to the United States either as a result of extensive travel, ownership of U.S. property and other assets, be aware of your U.S. potential tax liability.

We suggest you consult a qualified tax accountant who has knowledge of cross-border Canadian-U.S. tax issues. Better to be sure you are not liable and if there is a tax liability then be aware of your obligations and seek guidance on how to minimize those U.S. tax obligations.

To listen to Khosla’s presentation, click here.