Select United States Residency and Reporting Issues for Canadians
Updated: May 9, 2020
Given the recent focus on reporting requirements for Canadians in relation to their US holdings, we reached out to Tim Laceby, Spence Walker and Jim Sandiford of Kreston GTA LLP to get their views on how this is affecting Canadian investors and what steps they need to take to ensure that they are compliant.
Please note the following does not apply to United States of America (“US”) citizens/ green card holders.
Snowbirds If you are a Canadian resident and spend a significant amount of time in the US, you may believe that you have no filing requirements with the IRS because you spend more time in Canada than in the US. The General rule is, if during the year, you spend more than 183 days in the US, you would be considered to be a tax resident of the US. Unfortunately, the US also has a residency test called the Substantial Presence Test. The test adds the number of days you were in the US in the current year, plus 1/3 of the days you were present in the US in the prior year plus 1/6 of the days you were present in the US in the second prior year. If the total is 183 or higher, then the US generally considers you to be a US resident for income tax purposes.
If you are deemed an income tax resident of the US, you are then liable to pay income tax in the US on your worldwide income for the year, and you may even be subject to the dreaded US estate tax on your worldwide assets. If you spend between 120 and 182 days in the US every year, you would be deemed a US resident by the Substantial Presence Test. If you are in this situation, there is an election (form 8840) that can be filed with the IRS that notifies them that you have a closer connection to Canada than the Unites States. This form cannot be filed late.By filing this form, you would only have to file and pay income taxes in Canada.
Moving to the US from Canada Are you considering a move to the US? Below are some of the more common income tax implications of moving and changing your income tax residency from Canada to the US.
House in Canada
When you leave Canada, there is no deemed disposition of your house for Canadian income tax purposes, unless you start to rent out the house. When you sell the house in the future there may be tax payable and there are multiple forms to be filed. You may be able to claim the house as your principal residence for the years you were living in it while a resident of Canada. This will generally result in no Canadian income tax payable on the sale of the house while you were in Canada.
In general, when you sell the Canadian house, the US would tax the gain on the sale of the house using the original cost of the house. There is an election (form 8833) available under the Canada US income tax treaty to bump up the cost of the house if it was your principal residence to its fair market value when you leave Canada.
Non-registered Investments When you leave Canada, you are deemed to have sold most of your non-registered investments for the fair market value on the date of departure and are required to pay income tax in Canada on the deemed capital gains, if any. Generally, the US does not consider there to have been a disposition and re-acquisition of the investments when you become a US resident and will tax any future gains based on the original cost of the investment. There is an election (form 8833) available under the Canada US income tax treaty to bump up the cost of the investments to their fair market value on the date of departure from Canada.
Registered Retirement Savings Plans When you leave Canada, there is no deemed disposition of your Registered Retirement Savings Plan (“RRSP”) or Registered Retirement Income Fund. (“RRIF”). Future income growth inside the plan is not taxable in Canada until funds are withdrawn. As funds are withdrawn, withholding taxes will need to be paid to the Canada Revenue Agency. In General, the US treats an RRSP and RRIF the same as a non-registered account and because of this, the income earned in the RRSP is taxable in the US in the year it is earned. An election can be filed (form 8891) to defer taxation of the income until it is withdrawn from the plan. As there is no Canadian deemed disposition of the assets upon departure from Canada, there is no election to increase the adjusted cost base of the underlying RRSP assets to the fair market value on the date of departure. A similar result can be obtained by crystallizing/ triggering any gains in the RRSP prior to leaving Canada.
To discuss your specific situation in detail, please feel free to contact your Northland Wealth representative.