How to help snowbirds avoid tax penalties

A tax preparation firm urged advisors to ensure snowbirds know the rules so they do not overstay their welcome in the US and incur potentially severe penalties

How to help snowbirds avoid tax penalties
While most of us pull on toques and ear muffs to get through the bitterly cold winter, thousands of snowbirds jump on a plane to sunnier climes in the US.

But a tax preparation firm is urging advisors to make sure they are up to speed with the implications of their clients fleeing Canada at this time of year.

In the first part of her interview on snowbirds, Lisa Gittens, a tax professional with H&R Block, addresses the issue of residents overstaying their welcome in the US, and says it is vital that advisors are able to help clients plan their movements to avoid potentially costly penalties.

She said the most important aspect to understand is that Canadian residents or citizens can’t spend more than 183 days in the States over a three-year period. Crucially, though, not all days are equal and over that period the rules are actually based on spending 120 days in the US in each calendar year. That’s because, for the past three years, for example, a day in 2017 counts as a full day; a day in 2016 counts as a third; and a day in 2015 counts as a sixth.

So based on spending 120 days in the US during each of the three years, Gittens explains that “120, plus 40, plus 20 means you were there for 180 days – you are under the wire”.

The entry/exit system in the US means Canadian PR holders’ movements are tracked – so records must tally up - but Gittens also urged Canadian citizens to keep records of their days.

She adds that knowing the rules is vital but that advisors should make clients aware of the implications of exceeding the 183-day threshold, which the US government uses to determine whether someone is considered a resident for tax purposes.

These include potentially losing benefits like your provincial healthcare and being taxed on your worldwide income, effectively being taxed twice. Maintaining your US non-resident status by staying under the 183-days limit means you will be taxed only on your US source income. For these snowbirds to avoid double taxation, Gittens says they must file a W-8BEN form with the IRS.

She said: “If you are a US non-resident, you are going to file your Canadian tax returns as you have always done. You have US income whether it’s a US bank account that’s earning interest or you are renting out that vacation property.

“File your Canadian tax return, file your certificate of foreign status, of beneficial owner for US tax withholding and reporting. It’s called form W-8BEN. Filing that form when you report US income indicates I am Canadian resident and I do not want to be taxed twice on my US income because there is an income tax treaty and I would like you to reduce my tax rate.”

This form, once filed, stays in effect for three years but failure to do so, says Gittens, means you will be taxed in Canada when you file the return, while the US will also withhold 30% tax on your earnings.

She added: “It’s not that we want anyone to be terrified of filing their taxes and, if as advisors, we are aware and we understand the reporting requirement and the consequences of not reporting, we can explain it to our clients and complete the process for them. We can explain to them why are we asking for this information, letting them know what they are required to keep as records for themselves.”

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