Snowbirds beware! You can be a tax resident of both Canada and the U.S.

The topic of the day:

The problem revealed:

The reason as described by Ms. Jeker in the post:

The criteria often cited for meeting the substantial presence test is residing in the US for more than 182 days in a given calendar year.  This is very misleading, as the actual calculation used by the IRS is more complicated and looks at US residency over a three-year period.  An individual has a” substantial presence” in the US if the sum of the following equals 183 days or more:

1) The number of days they were present in the US during the current calendar year;

2) One-third the number of days they were present in the US during the previous calendar year;

3) One-sixth the number of days they were present in the US during the second previous calendar year;

In addition, the individual must have spent at least 31 days in the United States in the current calendar year.

This means that a person who resides in the US for 121 days each year, for three consecutive years, would fall just short of the substantial presence criteria (121 + 40.33 + 20.16 = 181.49 days).  Any more than that risks being classified as a US person, or more specifically what is called a “resident alien”.  Helpful guidance from the IRS can be found here.

Form 8840 – The antidote to having overstayed your welcome

The problem is that one can be both a tax resident of the U.S. by meeting the “substantial presence test” and still be a tax resident of another country. (Think snowbirds – Canada and the U.S.A.) In this case one can make an affirmative claim of “closer connection” by filing Form 8840.

Ms. Jeker commenting on Form 8840 writes:

Claiming a closer connection with a foreign country requires filing Form 8840 – Closer Connection Exception Statement for Aliens. This form must be filed by the 15th of June the year after a given tax year in order to be valid for that tax year.  Those who successfully claim the closer connection exception will remain classified as nonresident aliens, and can avoid facing tax obligations on their non-US income.

More information on how the Closer Connection Exception is determined can be found on the IRS page here

A final thought …

Please note also that Form 8840 and the “Closer connection test” is NOT available to U.S. citizens or Green Card holders! Green Card holders may be able to make a “treaty election” to be taxed as a non-U.S. resident BUT ONE MUST BE AWARE THAT THIS COULD TRIGGER EXPATRIATION AND ALL THE HORROR THAT THIS ENTAILS! Extreme caution is warranted!