(This information is from sources deemed reliable, but is not guaranteed by Pt. Roberts Realty Inc., It is subject to error, change or omission.)Immigration as a Canadian – How much time can I spend in the U.S.?
If you are a Canadian and do not have any U.S. residency status (i.e. U.S. Citizenship, Green Card or Visa) your maximum allowable stay in Point Roberts will be limited to 6 months, less one day. This length of stay will be cumulative for each consecutive 12 month period. Therefore if you stay in Point Roberts at your cabin for 182 days, you are then legally required to vacate the U.S. for 183 days before your next 6 month vacation period begins. If you plan to stay in Point Roberts all summer and occasionally on weekends the rest of the year; which is how most non-resident owners enjoy their vacation homes; be sure that the total number of days does not add up to more than 182. It is very important to realize that you spend your time in Point Roberts as a visitor. You must maintain your permanent residence during your stay in the U.S.. Simply having a mailing address in Canada does not constitute a permanent residence. Point Roberts is a place to be enjoyed by everyone; understanding and complying with the immigration laws will ensure your stay is enjoyable and hassle free, when you cross the border.
This information is provided to assist you in determining your responsibilities in regards to the use of your real property in the United States. This material is intended for informational purposes only, and should not be considered a complete discussion of the Immigration laws relating to these matters. It is distributed with the understanding that Point Roberts Realty Inc., is not rendering legal, or professional advice on this matter and assumes no liability whatsoever in connection with its use. It is recommended that you should consult with the United States Consulate office, Immigration Service and/or a Immigration Attorney for further clarification.
Keeping Track of Your Time in the United States: Are You an Inadvertent U.S. Tax Resident?
Many of us who live near the border will make regular trips to the U.S. to go shopping, take in a show, or fill up our gas tanks. With last year’s increase in the duty free limits to $800 per person for stays over 48 hours, more and more Canadians are taking advantage of the lower prices to be found in the U.S. In addition, places like Arizona, California, Florida and Hawaii become more attractive vacation spots when the winter chill descends here in Canada. So at this time of year it’s not unusual to see the mass exodus of Canadian snowbirds seeking refuge in sunny U.S. destinations.
Most Canadians are aware that if they are a “snowbird” (i.e., they spend part of the year living in the United States), they must keep track of how many days they spend in the U.S. to avoid immigration issues. Many are also aware that they need to limit their time so that they do not inadvertently become U.S. tax residents or else be forced to file a “closer connection” statement, noting that the U.S. bases its right to tax a non-citizen on the number of days that a person physically spends in the U.S. But even fewer Canadians are probably aware that they could get caught up in the U.S. tax regime simply through their regular travels to the U.S. for shopping, holidays, and even employer mandated business trips.
Recent changes at the border may suggest challenges ahead for those Canadians failing to track and monitor their time south of the 49th parallel.
New changes on the horizon: The Exit/Entry Initiative
Introduced in September 2012 as part of the Perimeter Security and Economic Competitiveness Action Plan, the Entry/Exit Initiative is meant to establish a shared system between the Canada Border Services Agency (CBSA) and the U.S. Department of Homeland Security for biographical data on those travelling across the border and, among other things, will allow both countries to detect persons who possibly overstay their lawful period of admission.
To date, Phases I and II of the initiative have been successful in testing and implementing the system at four common land border ports of entry, including both the Pacific Highway and the Peace Arch crossings located in BC. Phases III and IV are expected to be completed by June 2014 to include expansion of the system to all land border ports of entry and eventually tracking by the CBSA for individuals who are exiting by air from Canada.
Full implementation of this new initiative will enable each country to know exactly how many days a traveller spent in the respective country.
Triggering unexpected U.S. tax implications – Revisiting U.S. tax residency (“the 183-day rule”)
Until now, the U.S. and Canada have only collected data on dates of entry at the border. So while each country knew when you entered, they didn’t necessarily track when you left the respective country. Knowing how much time an individual spends in the U.S. is essential in determining whether residency rules for U.S. tax purposes have been breached. Although continuing to maintain residency in Canada, a snowbird (or frequent border crosser) merely has to spend, on average, approximately 120 days annually in the U.S. to be considered a U.S. tax resident, and thus subject to U.S. tax on their worldwide income.
There is a common misconception that if you spend less than 183 days a year in the U.S., you will not be considered a U.S. resident and as a result, will not have a U.S. tax filing obligation. The reality is that the Internal Revenue Service (IRS) uses the “substantial presence test” to determine residency for tax purposes. This test, which only applies to individuals present in the U.S. for more than 31 days in the current year, considers the total number of days spent in the U.S. over a three-year period, and is calculated based on the following formula:
- 100 percent of days in the current year; plus
- 1/3 of days in the prior year; plus
- 1/6 of days in the second preceding year.
It is important to note that “a day” in the U.S. includes any part of a 24-hour period that the individual is physically on U.S. soil. So, generally speaking, for purposes of this exercise any part of a day will count as one full day.
If the substantial presence test is met, there are a few options to consider:
- Filing Form 8840 “Closer Connection Exception Statement for Aliens” – this form is available to individuals who have been physically present in the U.S. for fewer than 183 days in the current year, maintain a “tax home” in a foreign country during the year, and can establish that they have a closer connection to a foreign country than to the U.S. during the year. This form is filed to satisfy the IRS that the individual is a non-resident of the U.S. for tax purposes and, as such, has no filing obligation in the U.S.
- Filing a U.S. non-resident tax return (Form 1040NR) claiming tax treaty benefits – if the individual has been physically present in the U.S. for more than 183 days in the current year, and is thereby not eligible to file the closer connection statement, they can file a nil U.S. non-resident tax return along with Form 8833 “Treaty-Based Return Position Disclosure” claiming tax treaty benefits to avoid being considered a U.S. resident. However, as a deemed U.S. resident, the individual should also consider other potential information reporting that may be required.
Forms 8840 and 1040/8833 are required to be filed by June 15th of the year following the applicable tax year.
Monitoring your days in the U.S.
For someone who travels frequently across the border without maintaining accurate logs of days spent in the U.S., obtaining a precise count of both entry and exit dates requires the individual to submit requests to both countries, further requiring they reconcile to their own records or otherwise risk relying on memory for purposes of complying with their annual tax filings. Because of this onerous process, most travelers have simply calculated an estimate of their days spent in the U.S. or, since they consider themselves Canadian residents, just ignored the day counting issue altogether. And as a result of the lack of data sharing between the two countries, few Canadians have ever been challenged on their day counts through an IRS examination. This is likely about to change.
We anticipate that because the IRS will now have access to the entry and exit data and could more carefully scrutinize traveller records, there is a much greater chance that the IRS and border authorities will work in conjunction to identify Canadians who have passed the residency threshold. At the very least, if the IRS identifies, from its own records, that a Canadian has exceeded the “substantial presence” test and has not taken the initiative to file the closer connection statement referred to above, we anticipate a much greater probability of that person being requested by the IRS to file a U.S. tax return as if they were a U.S. tax resident. Assessment of penalties for failure to file on a timely basis also may be possible.
Spending too much time in the U.S. can also have other adverse tax consequences. A deemed U.S. tax resident could be subjected to U.S. Estate Tax on the fair market value of their worldwide assets upon their death.
Aside from U.S. tax implications, a Canadian person who is deemed to be a U.S. tax resident could be considered to have ceased tax residency in Canada in the eyes of the Canada Revenue Agency (“CRA”). A taxpayer is deemed to have disposed of their assets and, with a few exceptions, pay tax on the increase in value to CRA. This type of disposition is often referred to as “departure tax”.
Beware of non-tax related complications – consider the “unlawful presence” rules
Other troubles, such as immigration, may also plague the frequent visitor to the U.S. and could result in a temporary ban on travel to the U.S.
If a Canadian exceeds 180 days in the U.S. in a rolling twelve month period they are in jeopardy of being deemed unlawfully present. Under the new initiative, a three year travel ban will be imposed on an individual who is unlawfully present between 180 and 365 days. If unlawfully present more than 365 days there will be a ten year travel ban for the Canadian. Without a proper visa or other U.S. immigration status, a Canadian who stays beyond 180 days in any given twelve months could now find themselves facing sanctions from U.S. Immigration and Customs Enforcement.
To avoid the potential tax and immigration pitfalls, Canadians who frequently travel to the U.S. are encouraged to track their days carefully and become more familiar with how the U.S. determines tax residency.
A Canadian who cannot limit their presence in the U.S. such that they exceed the 183 days under the substantial presence test, but will remain under 183 days in the current tax year, is well advised to closely monitor their days in the U.S. and should consider filing Form 8840 with the IRS to protect against unwanted tax concerns. Because if you do not timely file Form 8840, you will not be eligible to claim the closer connection exception and may be treated as a U.S. resident.
Although the Entry/Exit Initiative is designed to aid and improve border management, the Canadian snowbird could be left out in the cold, literally speaking, and may find they must limit their stays in the U.S. Seeking the solace of a sunny U.S. destination and overstaying your welcome within the U.S. borders may be hazardous to your tax health.
What is FIRPTA
FIRPTA (Foreign Investment in Real Property Tax Act) Witholding
Withholding of Tax on Dispositions of United States Real Property Interests
The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding.
FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests.
A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations that are considered U.S. real property holding corporations.
Persons purchasing U.S. real property interests (“transferee”) from foreign persons, certain purchasers’ agents, and settlement officers are required to withhold 15% (increased from 10% effective February 15th 2016) of the amount realized (special rules for foreign corporations).
Withholding is intended to ensure U.S. taxation of gains realized on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax.
One of the most common exceptions to FIRPTA withholding is that the transferee (purchaser/buyer) is not required to withhold tax in a situation in which the purchaser/buyer purchases real estate for use as his home and the purchase price is not more than $300,000. However, buyers should be aware that while they may meet the withholding exemption they are still responsible for the seller’s tax liability, interest and penalties should the seller not file a US income tax return to report the sale and pay any relevant taxes.
For further information from the IRS website regarding tax withholding and filing exceptions visit http://www.irs.gov/Individuals/International-Taxpayers/FIRPTA-Withholding
January 2016 – Change in Withholding Rate for Closings after February 14th, 2016
The PATH Act of 2015 set into motion several tax extenders and new tax laws. One area addresses Section 324 of the act increasing the rate of FIRPTA withholding from 10% to 15%. The withholding rate of 10% still applies to the sale of property where the amount realized is $1 million or less AND the purchaser of the property signs an affidavit that the house will be used as their primary residence. The exemption from FIRPTA withholding remains where the amount realized is $300,000 or less, providing that the purchaser signs the primary residence affidavit. The provisions of Section 325 of the PATH Act of 2015 are effective for closings taking place after February 14th 2016.
March 2013 – Note to Non-Resident Buyers – as stated below; the IRS considers the transferee/buyer to be responsible for ensuring that FIRPTA is handled in a transaction where the transferor/seller is a non-resident. In order to ensure a smooth transition on your eventual sale you must ensure that you retain proof that FIRPTA was satisfied on your original purchase.
If you purchase property from a non-resident seller and an exception to FIRPTA withholding does not apply then you must ensure that FIRPTA is satisfied as part of the closing. Check your settlement statement prior to closing where you should see 10% of the sales price withheld on the seller’s side of the settlement statement. Request a copy of the withholding certificate from the closing agent and, if withholding was calculated, request a copy of forms 8288, 8288-A and front and back of cancelled check. Retain these documents in a safe place along with your settlement statement and other closing documents.
Foreign Investment in Real Property Tax Act (FIRPTA) Withholding
U.S. Tax law requires that a non-resident alien who sells an interest in U.S. real property is subject to withholding, for tax purposes, of 15% of the gross sales price (i.e. $45,000 on a property with a sales price of $300,000). The withheld amount is required to be forwarded to the IRS, by the Closing Agent, within 20 days of the date of closing. These funds are held until the IRS is satisfied that all taxes due by the non-resident are paid. In order to apply for a refund you can either:-
- File U.S. tax returns for each year that rental income was received, reporting all income and expenses; file a final U.S. tax return in the year following the year of sale, to report the sale and recover the balance of cleared funds. This process can take up to eighteen months depending on when, during the tax year, the property is sold.
- File prior year tax returns (where required) plus an application for early release of cleared withholding on or before the date of closing. By making this submission, the 10% withholding remains with the Closing Agent whilst the IRS processes the Withholding Application and issues a Withholding Certificate for the cleared funds – usually around 90 days.
Please note that applying for and receiving a Withholding Certificate does not eliminate your requirement to file a final U.S. income tax return to report the sale transaction. In fact, when your final tax return is filed you may receive a further tax refund depending on the number of owners and length of time that the property was held.
In order to ensure a timely release of your funds it is extremely important that the following is obtained PRIOR to closing:-
- Buyer’s names, address and SSNs – if U.S. Citizens
- Buyer’s names, address and ITINs – if non residents
- Or, if the buyers are non residents and do not have ITINs, the buyer’s completed Form W-7 (one per buyer) and authenticated copy of the picture page of their passport(s)
Without this information the Application for a Withholding Certificate and early refund will be rejected.
A wonderful article relating to taxation and holding title to property in the United States can be found here: Things to Consider when purchasing in US
Additional helpful FIRPTA links: Here are some helpful links to further understanding FIRPTA: Cornell Education FIRPTA (Note: “Transferee” = Buyer, “Transferor” = Seller)
Internal Revenue Service – FIRPTA WITHHOLDING
Internal Revenue Service – Reporting and Paying Tax on U.S. Real Property Interests
Internal Revenue Service – Withholding Certificates
Internal Revenue Service –Definitions Unique to FIRPTA
(This information is from sources deemed reliable, but is not guaranteed by Pt. Roberts Realty Inc., It is subject to error, change or omission.)