If you’re a Snowbird who spends a lot of time in the U.S., you should know about the ‘substantial presence test.’ There is a formula that involves adding up the number of days spent in the U.S. over a three-year period, including a certain fraction of the total for each of the past two years.
If your resulting number is higher than 182, you are considered a U.S. resident for tax purposes. That means you must report all your worldwide income to the IRS (Internal Revenue Service) and possibly file additional financial disclosures with the U.S. Treasury.
Many Canadians who travel to the U.S. on a regular basis for lengthy stays are likely aware of the substantial presence test. If not, they should be. However, the current pandemic has led to a lot of plans going out the window.
There Is Help
Fortunately, there is help for individuals and businesses to weather the consequences of COVID-19. The IRS just released a new revenue procedure for those who have exceeded 182 days in the U.S. due to travel restrictions, cancellations, shelter-in-place orders, etc.
Under the new provisions, if you were already in the U.S. on or after February 1, 2020 – and in the U.S. on or before April 1, 2020 (also known as the COVID-19 Emergency Period) – and you intended to return to Canada during this period, you may be able to exclude 60 consecutive days for the purposes of the substantial presence test. In addition, if you were there earning income and are normally protected under a U.S. income tax treaty, the number of days of presence within the emergency period will not be counted in determining your eligibility for treaty benefits.
If you still exceeded the 182-day allotment, even with this 60-day exemption, you still have a few solutions.
1) If you stayed in the U.S. longer than planned because of a medical condition and could not leave or required treatment, you are pretty much in the clear. The government won’t include those days as U.S. presence as long as you file Form 8843 to have them excluded by the due date. But the IRS won’t be sympathetic if your illness arose or existed before your arrival to the U.S., and you were aware of it. Nor will it give you a personal exclusion if your spouse got sick.
2) To meet the requirements of the Closer Connection Exception, don’t be in the U.S. for more than 182 days in a single calendar year, and maintain your ties to Canada (i.e., you still maintain a home here, your life savings and family are in Canada). You will need to file Form 8840 by its due date to disclose your number of U.S. days and your ties to Canada.
3) If all else fails, you can file for protection from U.S. taxation under the Canada-U.S. Income Tax Treaty, but this requires a lot of paperwork. While you may not end up paying U.S. tax, you will be reporting to the IRS and U.S. Treasury on pretty well all the financial aspects of your life.
Do The Math
So, if you’re a Snowbird who had to ‘hunker down’ longer than usual, or you’re or an employee of a foreign business operating in the U.S. whose cancelled travel plans left you stranded, it’s important to do the math and make sure you are reporting properly. While you may not be counting days, the IRS certainly is and you risk being subject to additional tax, fines and penalties if you meet the substantial presence test and fail to report.
If you are eligible for the 60-day COVID-19 emergency period and must file a Form 1040-NR, (U.S. Non-resident Alien Income Tax Return) for 2020, you will have to claim the COVID-19 medical condition travel exception by attaching Form 8843 (Statement for Exempt Individuals and Individuals with a Medical Condition) to Form 1040-NR
If you are eligible for the exemption and not required to file a 2020 Form 1040-NR, you likely don’t need to worry about Form 8843. But retain all relevant records to prove your eligibility under the new provisions as you may be asked by the IRS to produce the proof and complete a Form 8843.
Elena Hanson is founder and managing director of Hanson Crossborder Tax Inc. She is currently doing a podcast series with Darren Coleman, a wealth management adviser, called ‘Two Way Traffic,’ which is about cross-border tax and financial issues