In the past few months, you may have heard how a U.S. citizen is subject to U.S. income tax on their worldwide income and must file U.S. income tax and foreign disclosure forms, regardless of where they actually live. Did you also know that these same rules can also apply to a non-U.S. citizen if they spend a lot of time in the U.S. for any purpose? This could easily apply to Canadians that fly south to the U.S. for the winter or to Canadian students who attend university in the U.S.
Non-U.S. individuals travelling to the U.S. have to be more conscious of the amount of time they spend in the U.S., especially since Canada and the U.S. are keeping track of the actual days spent in the country under the Entry/Exit Initiative, as outlined in our blog “Snowbirds Tax Alert” ( http://fullerllp.com/snowbirds-tax-alert/). Any non-U.S. individual can review the record of their U.S. days monitored by the U.S. by accessing the following link on the Department of Homeland Security’s website (https://i94.cbp.dhs.gov).
Now, before you sell that U.S. vacation property or drop out of the U.S. school, the IRS does provide some relief from these “deemed U.S. resident rules.” However, in order to take advantage of this relief, you will have to file a Form 8840 or 8843 with the IRS. Which form to file depends on what you are doing physically in the United States.
Form 8840 – Including Canadian Snowbirds
Under U.S. domestic tax rules, a non-U.S. person can be treated as a U.S. resident for tax purposes if they meet the “Substantial Presence Test.”
Therefore, as a Canadian who travels to the U.S., you can meet this test if you were physically present in the United States for at least 31 days during the current calendar tax year and for at least 183 days during a three year period calculated as the sum of:
- Total US days in the current calendar tax year
- 1/3 of the total US days in the previous calendar tax year
- 1/6 of the total US days in the 2nd previous calendar tax year
Days treated as physically present in the U.S. can consist of any time spent in any part of the day.
Even if you meet the Substantial Presence Test, you can still be treated as a non-resident of the U.S. by filing Form 8840, which allows you to claim a closer connection to your home country (i.e. Canada) based on your residential ties to your home country, such as your spouse, principal home, social ties, economic ties, etc. This closer connection acts as an exemption from the Substantial Presence Test.
The Closer Connection exception only applies if during the current calendar tax year:
- You were present in the U.S. for fewer than 183 days,
- You establish that you had a tax home in a foreign country, and
- You had a closer connection to the foreign country in which you had a tax home as compared to the U.S.
Form 8840 is due by April 15th of the following applicable tax year including extensions.
Form 8843 – Including Canadian Students Attending a U.S. University/College
In addition to the Closer Connection Exemption, there is also another exemption from the Substantial Presence Test for non-U.S. individuals considered “exempt individuals” or for non-U.S. individuals who were unable to leave the U.S. because of a medical condition or medical problem.
An “Exempt Individual” includes the following:
- Student (temporarily present in the United States under an “F,” “J,” “M,” or “Q” visa);
- Teacher or trainee (temporarily present in the United States under a “J” or “Q” visa);
- A professional athlete temporarily present in the United States to compete in a charitable sports event.
You can file Form 8843 to claim the “exempt individual” or the medical condition exemption from the Substantial Presence Test and continue to be treated as a non-resident of the U.S. for tax purposes
Form 8843 is due by April 15th of the following applicable tax year including extensions.
Failure to file Forms 8840 or 8843
The penalty for not filing Forms 8840 or 8843 in a timely manner is the inability for you to claim any of the exemptions from the Substantial Presence Test. As a result, you could be treated as a U.S. resident for tax purposes and be subject to U.S. on your worldwide income. Also, you will be required to file the U.S. foreign disclosure forms, which can carry penalties of US$10,000 per form.
What if Forms 8840 or 8843 do not apply?
A non-U.S. individual who cannot claim any exemptions under Form 8840 or 8843 can still possibly be treated as a non-resident of the U.S. under the “residency tie-breaker” rules under the Canada – U.S. Income Tax Convention. This would require the filing of a non-resident U.S. tax return with the Form 8833 treaty exemption form.