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Canadian Snowbird Issues I- How Does A Foreign Citizen Become Subject to US Tax?

Next, we start a series directed at snowbirds generally, specifically with an eye towards our Palm Springs/ Coachella Valley visitors who hail from Canada.

The United States taxes its citizens and residents on income they earn anywhere in the world (“worldwide income”). Non-US citizen or residents are only taxed in the US on income which is “effectively-connected” to a United States trade or business or on non-effectively-connected business income which is deemed to come from a “US source.” Does this mean Canadian citizens who are deemed US residents will pay tax twice on the same income (once in Canada and once in the US)? Not necessarily. Canadian citizens resident in the US will generally receive a credit on their Canadian taxes for taxes paid in the US, but not always (so double tax is possible). If you are a Canadian citizen who is merely a frequently visitor to the area, you must be careful not to inadvertently be deemed a US resident.

Individuals who are not citizens of the US may be considered US residents for tax purposes (and therefore taxed on their worldwide income) if any of the following tests are met:

1) The individual has a green card;

2) The individual becomes a lawful permanent resident of the US; or,

3) The individual has a “substantial presence” in the US.

The substantial presence test is the test of which many frequent visitors to the US must be aware. An individual has a substantial presence in the US if the individual is present in the US at least 31 days during the current year and at least 183 days for the three-year period ending on the last day of the current year using a weighted average approach (the weighted average approach works as follows: the number of days spent in the US in the current year are given full weight; the number of days spent in the US in the last year are multiplied by 1/3; and the number of days spent in the US two years ago are multiplied by 1/6….add up the total for the three years and if it equals or exceeds 183 days, the nonresident alien has a substantial presence in the US. For example, an individual who spent exactly 124 days in the US this year and the previous two years would have a total of 187 days under the substantial presence test:

This Year: 124 x 1= 124
Last Year: 124 x 1/3= 42
2 Yrs Ago: 124 x 1/6= 21
Total= 187 days. Substantial presence test of 183 days exceeded…this person could be deemed a US resident, subject to tax in the US on their worldwide income).

Even if an individual satisfies the substantial presence test in a particular year, the individual can still avoid being considered a US resident if the individual is present in the US on fewer than 183 days in the current year, and the individual has a tax home in a foreign country to which the individual has a closer connection than to the United States (e.g., Canada). But for those who pass the substantial presence text and hope to avoid US taxes by declaring a closer connection to another country, that individual must file an IRS Form 8840.

More on this process to follow in Part II.

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