A client may often travel to his or her vacation property in the United States for all or part of the winter. Such clients are often referred to as Snowbirds. The US income taxation regime must be considered by the snowbird. It is likely that the Snowbird will escape US residency (and full US taxation) by virtue of the "closer connection" exception provided in the Internal Revenue Code of 1986 or by virtue of the "tie-breaker" rules provided in the Income Tax Convention Between the United States of America and Canada with Respect to Taxes. Consequently, the Snowbird should be subject to US income tax only on US source income (or, in limited cases, on business income effectively connected with a US trade or business conducted through a US permanent establishment). The Snowbird being a Canadian resident also be subject to Canadian income tax on his or her US source income. Relief from Canadian income tax on US source income may be provided by foreign tax credits provided under the Canadian Income Tax Act. The Snowbird may be required to file US income tax returns and/or various other filings in the United States.
US citizens are subject to US income tax on their worldwide income. An individual who is not a US citizen is considered an alien. Aliens are classified as resident aliens an non-resident aliens. Resident aliens are generally taxed by the US on their worldwide income, the same as US citizens. Consequently, to avoid US taxation or worldwide income, it is necessary for the Snowbird to avoid US resident alien status or to meet the conditions for relief under the Treaty. Subsection 7701(b) of the Code provides that an alien individual is considered to be resident of the US in a calendar year if the individual is:
(a) lawfully admitted for permanent residence at any time during the calendar year;
(b) meats the substantial presence test; or
(c) makes a first year election.
Each of these conditions is considered separately below:
Lawfully Admitted for Permanent Residence
An individual is a lawful permanent resident of the United States if the individual has 'been lawfully accorded the privilege of residing permanently in the US as an immigrant in accordance with the immigration laws' and such status has not been revoked. An individual will meet this test if the US Citizenship and Immigration Services (USCIS) has issued an alien registration card, Form I-551 (a green card) to the individual and such individual has entered the US with the green card. Consequently, this test is generally referred to as the green card test.
The Substantial Presence Test
The substantial presence test is based on the number of days an individual is present in the US during the calendar year and the previous two calendar years. The substantial presence test is met in a calendar year if the individual was present in the US:
(a) on at least 31 days during the calendar year; and
(b) on at least 183 days during the calendar year and the preceding two calendar years, based on a formula that counts:
- all days in the calendar year;
- one-third of the days in the first preceding year; and
- one-sixth of the days in the second preceding year.
Consequently, an individual who spends 123 days in the US each year will meet the substantial presence test (123 + 1/3 of 123 + 1/6 of 123 = 184.5 days).
Canada and the US implemented as of June 30, 2014 a cross-border program to determine precisely the number of days Canadian citizens and residents spend in the US. Canadians with winter homes in the US have often availed themselves of the "closer connection exception" and remained in the US for up to 182 days a year and then some. This has mostly gone undetected and unregulated. With the new precise day counts, Canadian Snowbirds must carefully count their days or rely on the Treaty relief.
First Year Election
The final way for an individual to be considered a resident alien of the US is through making a "first year election". The first year election is available only if the "green card test" and the "substantial presence test" do not apply for the calendar year. Generally, this election allows an individual who is present in the US for at least 31 days in the current year to elect resident alien status if the individual is resident in the United States in the immediately subsequent year under the substantial presence test. This election is unlikely to be relevant for a Snowbird.