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Heading south for the winter? Here are some tax pitfalls to watch for

Heading south for the winter? Here are some tax pitfalls to watch for
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I recently flew to the States for a visit. The U.S. immigration officer at Pearson Airport asked a few innocuous questions about the purpose of my trip (vacation) and how long I would be staying. As he was doing this, his computer scanned my passport and I was waved on.

Seems simple enough. But there’s a lot going on in the background that most Canadians aren’t aware of when they cross the border.

For example, that passport scan created an I-94 record for me. There is nothing in my passport to indicate this, but the file exists up in the cloud somewhere, to be called on by Homeland Security if necessary.

Interestingly, only Canadians arriving in the U.S. by air or sea are issued an I-94. If you are crossing at a land border point, it isn’t required – yet.

As the accounting firm of PwC pointed out in a recent bulletin, the I-94 contains an expiry date that mandates when you must leave the U.S. Failure to do so could lead to some expensive tax consequences.

Complicating matters is that you aren’t told about your I-94 status when you enter the country. Six months is the normal maximum length of stay but the Customs and Border Protection (CBP) officials have the authority to reduce the length of your visit or even deny admission (as has happened recently to some executives of cannabis companies).

But while CBP doesn’t say anything, there is a web page where you can go to check your status at i94.cbp.dhs.gov. Enter your name and passport number and you can view your travel history, the length of time you can remain in the country and print a copy of your form.

If this isn’t complicated enough, Canadians entering the U.S. as visitors are given a B-2 status, which requires that they provide evidence that they only intend to stay temporarily. Border agents don’t normally ask for it, but you should have documents that show you intend to return to Canada, such as a return ticket, proof of property ownership, etc. The B-2 is valid for six months from the date of issue – even if you return to Canada temporarily in the meantime.

Last year a friend had a run-in with U.S. immigration when he made a temporary trip to his Florida residence in early September. He received a B-2 that expired in early March. When he returned in November to begin what he thought would be a six-month stay, he was told his B-2 would expire March 5 and he had to be out of the country by then. Needless to say, he was not happy!

If you are travelling to the States for any length of time, you need to be aware of the potential tax implications. For example, most people think that if they stay for less than six months, there’s no problem. In fact, there could be. If you meet what is called the “substantial presence” test, the IRS may swoop – and that’s not something you want to happen.

This test looks at how long you have spent in the States for the past three years. The calculation involves adding the number of days in the current year with one-third of the days in the previous year and one-sixth in the year before that. If the total is 183 or more, you’re considered to be a U.S. resident and subject to taxes.

This calculation puts many snowbirds into the 183+ category. But you can escape the long arm of the IRS by filing a “closer connection” statement (form 8840) each year. Every accountant I have talked to who is familiar with cross-border taxation advises doing this, but many people don’t. The IRS seems to ignore the forms – no one I know has ever received an acknowledgement – but there is actually a fine on the books for not completing it.

One more point. Many retired Canadians want to spend the winter in the sun and decide to buy a place of their own. To reduce the costs, they rent it out when they’re not using it. That triggers federal and possibly state taxes in the U.S. and the income must also be reported on your Canadian tax return. The U.S. form to use is 1040NR.

When the time comes to sell the property, the IRS will withhold 10-15 per cent of the purchase price and you have to file a return to get any refund.

If you’re OK with all that paperwork, fine. Frankly, I prefer to rent. Let someone else handle the tax headaches.
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