In a previous article we published, we explained how the IRS tracks the travel dates of Canadians entering and exiting the US for purposes of US taxation.
For Canadians who have not been diligently tracking their time in the US, due to a new Canada-US program taking effect in 2014, they could be in for a nasty IRS audit if they spend too much time physically present in the US and don’t file the proper US tax return or form.
Starting June 30, 2014, both Canada and the US will begin sharing immigration Entry/Exit dates under the Entry/Exit Initiative of the Perimeter Security and Economic Competitiveness Action Plan. Sharing this information will now speed up the process for the IRS to determine the number of days a Canadian spends in the US.
Because of this information sharing agreement, we expect many Canadians, not just Snowbirds, to get trapped in the web of US taxation.
Why? Because US tax residency is based not only on US Citizenship and green card status but on physical presence in the US. And, with a few exceptions, physical presence generally includes time you physically spend in the US say for shopping trips, business trips and holidays. It comes as a surprise to most Canadians that even if you are in the US for business on behalf of your Canadian employer or to attend conferences, those days will still count towards your US tax residency status. Moreover, there is a misconception among Canadians that US tax residency is dependent on US immigration status when in fact the two are mutually exclusive.
With the risk of being considered a US taxpayer now greater than it’s ever been before, we expect the number of Canadians subject to an IRS audit examination to increase significantly. This will require unsuspecting Canadians with no real ties to the US to pay US tax on their worldwide income, to become subject to US estate tax and to file the onerous and costly US foreign compliance disclosures to report all their Canadian holdings from bank accounts to Canadian corporations to Canadian partnerships to the IRS. Moreover, most Canadians don’t realize that even if they qualify as a Canadian tax resident under the Canada-US tax treaty, they are still responsible for filing all the US foreign compliance disclosures as if they were a US tax resident. To ensure our Canadian clients are never considered a US tax resident under US tax law, at Gedeon Law & CPA, we generally recommend Canadians spend less than 120 days in the US each calendar tax year.
If you frequently visit the US, contact the tax professionals at Gedeon Law & CPA for help with assessing your US tax residency status and to determine if you qualify under US tax law or the Canada-US tax treaty for an exemption from being treated as a US tax resident.