Canada: Beware Of The US "Snowbird Visa Tax Bomb!"
22 May 2013
Posted by: Author: Roy Berg
Source: Mondaq (Moodys Tax Advisors)
The current immigration bill pending before the US Congress
contains provisions that will make it easier for Canadians and
retirees to obtain non-immigrant status in the US. If the bill
becomes law, these people will be able to obtain a "Snowbird
Visa," which will entitle the visa holder to be physically
present in the US for a period of 240 days. The Canadian press has
been agog with articles and commentary on the virtues of the
proposed law, but few have addressed the explosive US tax
consequences that might befall those who would obtain one of these
visas. We refer to this as the "Snowbird Visa TAX
Here's why the Snowbird Visa TAX BOMB is a trap for the
uninformed: while the proposed legislation would allow the
individual to remain in the US for a period of 240 days, the law
does not exempt these days for tax
purposes. In other words, the "day count"
for purposes of the Snowbird Visa is different than the "day
count" for tax purposes. As a result the would-be holders of
the Snowbird Visa can become subject to US income tax and US estate
tax and, therefore, inadvertently light the fuse on the Snowbird
Visa TAX BOMB.
Day Count for US Income Tax
The US taxes three classes of individuals on their worldwide
income: US citizens, US green card holders, and "US
Residents." Individuals are "resident" in the US
based on two relatively straightforward tests.
The first test is the easiest to understand and administer: if
an individual is physically present in the US for more
than 182 days in the calendar year that person is a
resident and therefore subject to US income tax and foreign
reporting obligations on worldwide income. It is worth noting that
such individual, as a Canadian resident, would also be obligated to
file Canadian tax returns and report worldwide income.
For those who are present in the US for more than 182 days in
the calendar year the Canada-US Treaty does afford a tiny bit of
relief. If the individual can establish that their center of vital
interests is in Canada the Treaty will override the 182 day rule
and deem him resident of Canada and therefore not subject to tax on
worldwide income. However, such individual must still file a US tax
return to claim the relief afforded under the Treaty.
However, this is only a pyrrhic victory for the taxpayer because
the Treaty relieves the individual only from US tax on worldwide
income. The Treaty does not relieve the individual
from either the obligation to file all requisite US forms
(including the dreaded FBAR) or the obligation to pay potentially
ruinous penalties for the failure to file these forms.
The second test is called the "Substantial Presence
Test." It is somewhat more involved and requires applying a
mathematical formula to the days present in the US. The formula
works like this:
- Start with the number of days present in the US during the
current year and, if greater than 30, add 100% of these days
and continue to step 2;
- Add 1/3 of the number of days present in the US during the
- Add 1/6 of the number of days present in the US two years
If the individual spends more than 30 days in the US in the
current year, and the sum of those three figures is greater than
182 then the individual is resident in the US for US income tax
purposes and therefore subject to tax on worldwide income. If the
sum is less than 182 or less, then the individual is not resident
for US income tax purposes.
However, this second test ("Substantial Presence
Test") has an important exception. If the individual has a
closer connection to Canada and files the US form 8840 with the IRS
on or before April 15 (June 15 if he is outside of the US on that
date) then he will be deemed to be not resident in the US and
therefore exempt from US tax on worldwide income
and all US filing obligations.
US Estate Tax
The US also imposes an estate tax on the value of certain
individuals' worldwide assets owned at death. The individuals
subject to the estate tax on worldwide assets are those who are
either US citizens or "US Residents." If the individual
is neither a US citizen nor a US resident, only the property that
situated in the US will be subject to the US estate tax.
Those who expect consistency and logic in tax law will be
disappointed (though probably not surprised) to learn that the test
to determine residency for the US estate tax is different than the
test to determine residency for US income tax purposes.
For estate tax purposes an individual is resident if he: a) lives
in the US, even for a brief time; and b) has no definite present
(or later) intention to move. The test applied by examining all of
the surrounding facts and circumstances.
This fact and intent based test is challenging to apply because
facts are messy and change with time. Thus, an individual may not
be resident for estate tax purposes in one year but several years
later that conclusion may change.
Tax considerations are a factor that should be considered in
many of life's major decisions. The weight to be given to tax,
however, is dependent on many factors and is seldom the only
consideration. The would-be holders of the Snowbird Visa need to
realize that both US and Canadian tax issues will arise if they
spend a significant amount of time in the US. Given the
magnitude of the tax consequences, individuals need to be wary and
avoid accidently lighting the fuse on the Snowbird Visa TAX