Canadian Snowbirds Who Spend Too Much Time in the US May Become US Tax Residents. All US Tax Residents Must Disclose Their Non-US Bank Accounts, or Face Possible Draconian Penalties.

January 31, 2012
By Michael Brooks on January 31, 2012 11:47 AM |

We've discussed previously how, if the Canadian visitor to Palm Springs is not careful, he or she can inadvertently find themselves subject to US taxation on income earned anywhere in the world (worldwide income). In any calendar year in which a foreign citizen stays in the US over 183 days, the person may become subject to tax in the US on their worldwide income (the person may become a US resident for tax purposes at least for that year, but the US-Canada Tax Treaty does offer potential relief for the Canadian citizen being deemed a US tax resident in this scenario). Also recall that if over a three year period the Canadian citizen is in the US so much that he or she fails the "substantial presence" test (and does not file the closer connection Form 8840...big mistake), the individual may also be considered a US tax resident for that year. On the plus side, even if the Canadian is deemed a US tax resident for the year and the US taxes the Canadian citizen on all his or her worldwide income, there's a good chance Canada will credit most (if not all) the US taxes paid. So for the Canadian who stays a little too long in the US there probably won't be much, if any, double tax between the US and Canada (although the individual could easily end up paying the higher rate of tax between the two countries).

What else does being a US tax resident for a given year mean? Many people are surprised to find out it means you must provide the US Department of Treasury information about all your foreign bank accounts. Well, for the Canadian snowbird visiting the Coachella Valley, there's a good chance most if not all his or her bank accounts are in Canada, so this becomes a significant required disclosure.

US Citizens or Tax Residents Must File a FBAR Annually

US tax citizens or residents must file a "FBAR"( a "Report of Foreign Bank and Financial Accounts") annually, provided the US citizen or tax resident has over $10,000 in financial account(s) which are not located in the United States (which will be a certainty for the Canadian snowbird). The term financial account is broadly defined and includes any bank, securities derivatives, or other financial instrument accounts. It also includes any savings, demand, checking, deposit, or other account maintained with a financial institution in addition to certain annuity and life insurance contracts, commodities and precious metals and safe deposit accounts. The FBAR is filed on a US Treasury Form TD F 90-22.1. The FBAR is filed with the US Department of Treasury by June 30 of the year after the US citizen or resident had a non-US account. That means, in any year in which a Canadian snowbird is deemed a US tax resident, he or she must file a Form TD F 90-22.1 by June 30 of the following year.

What are the Penalties for Failure to File a FBAR?

For a "non-willful" failure to file a FBAR, the penalty will not exceed $10,000 per violation. In the case of a non-willful violation, no penalty should be imposed if the failure is due to reasonable cause and the account was properly reported. We will discuss what constitutes a "non-willful" failure to file in future posts. For each willful violation, the maximum penalty that may be imposed is the greater of $100,000 or 50% of the aggregate value of the non-US account(s) at the time of the violation. THAT'S CORRECT, FAILURE TO FILE A FBAR CAN LEAD TO A PENALTY OF 50% OF THE AGGREGATE VALUE OF THE NON-US ACCOUNT(S) AT THE TIME OF THE VIOLATION!!! Not 50% the taxable amount, 50% of the account balance!!

Wow, for a "willful" failure to file a FABR, the US can (try) to take 50% of the Canadian citizen's account balances of non-US accounts for a given year. As you can see, the potential damage is staggering for the Canadian snowbird who spends a little too much time in Palm Springs (or anywhere in the US) in a particular year or years (if the failure to file is deemed "willful", to be discussed...). There is, however, currently an IRS amnesty program for the non-FBAR filer, which we will discuss in the next post.