Many Canadians flock to the southern U.S. during the winter months. Leaving Canada for months at a time requires a lot of preparation. Finding a house sitter for your Canadian home, making sure you have enough travel and medical insurance, forwarding your mail—the list can be daunting. One thing that can be overlooked: U.S. income tax.
Canadian residents are often surprised to discover that travel to the U.S. can make them subject to U.S. tax on worldwide income. The U.S. levies income taxes not only on citizens, but also on non-citizens (“aliens”, in the parlance of the U.S. tax legislation) who are resident in the U.S.
The substantial presence test
The Internal Revenue Service (IRS) uses a “substantial presence test” to determine residency in the U.S. Based on this test, it tallies the days spent in the U.S. in the current calendar year and the two preceding years. It adds up three figures:
- All of the days spent in the U.S. in the current year
- One-third of the days spent in the U.S. in the preceding year
- One-sixth of the days spent in the U.S. in the year before that
If the sum of these days is 183 days or more and in the current year you have spent at least 31 days in the U.S., you meet the substantial presence test. The IRS will consider you a resident unless you take further action.
Canadians can reach 183 days through various combinations. For example, spending 120 or more days in the U.S. in each of three consecutive years will be enough to meet the test. Say that you go the U.S. in mid-November each year and stay there until late March of the following year—in the third full year, you will meet this residency test.
Permanent residence and the substantial presence test
Note that the substantial presence test is a test of income tax residency for U.S. tax purposes and it is generally not dependent on your U.S. immigration status. If you have a permanent resident card (a “Green Card”), you will be considered resident by virtue of the Permanent residence test and not by virtue of the “substantial presence test.” In addition, if you have applied for Permanent residence, you cannot avoid U.S. taxes using the “closer connection” exception in Form 8840 (see further discussion below).
Do part-days count for the 183 total?
Yes. Counting the days shouldn't be a big problem if you're spending time in the U.S. but remember to count partial days—the day you enter the U.S. and the day you leave are each considered a full day of presence for the substantial presence test.
Do I need to track every single day?
In limited circumstances, Canadian snowbirds can disregard some time spent in the U.S. when calculating their days for the substantial presence test. Common examples include:
- You are unable to leave the U.S. due to a medical condition that arose during a current visit to the U.S.
- You are in the U.S. for less than 24 hours while in transit between two non-U.S. countries. For example, if in flying from Canada to Mexico you have a layover of a few hours to change planes in the U.S., that time would not count as a day for the substantial presence test. However, if you decided to extend your layover, say for a weekend, you must count the time spent in the U.S. during the layover for the substantial presence test.
Other exceptions could apply in counting days for the substantial presence test that would not normally apply to snowbirds. For example, there are exceptions for students, teachers, trainees, foreign government officials, and commuters.
Form 8840—“Closer Connection” to Canada
If you meet the substantial presence test in any calendar year, you need to file a statement with the IRS. This statement is Form 8840–Closer Connection Exception Statement for Aliens, also known informally as the “snowbird filing.” If you meet its conditions, filing Form 8840 will allow you to maintain your tax status as a non-resident of the U.S. under U.S. law.
The filing deadline for Form 8840 is June 15 of the year following the end of the relevant tax year unless the filing date falls on a weekend or a holiday. The due date for Form 8840 for the 2022 taxation year is June 15, 2023. No filing extension is available.
Alternatively, if you are required to file a U.S. nonresident alien income tax return (Form 1040-NR) to report U.S. source income, Form 8840 is required to be filed together with that return, by the normal filing deadline for that return. That return is typically also due by June 15 of the following year, but the deadline can be extended to Oct. 15.
If you do not file form 8840 on time, or if you meet the days test but do not meet the other conditions to file Form 8840, you could become subject to U.S. tax on your worldwide income or face a penalty for not filing the appropriate statements with the IRS. These consequences are explored in more detail in our Tax Bulletin — U.S. Tax Issues for Canadians.
How to fill out Form 8840
Form 8840 does not ask for any information regarding the amount of your U.S. income or expenses. Rather, it seeks to confirm that for income tax purposes you have a closer connection to another country than you have to the U.S.
Three general conditions must apply to be able to file a valid Form 8840, which are:
- You spent fewer than 183 days in the U.S. in the current year.
- You maintained a “tax home” in another country during the year. Retired Canadians who live in Canada for most of the year and pay taxes as a Canadian resident will generally be considered to have a “tax home” in Canada.
- You had a closer connection during the year to the other country than you did to the U.S.
Defining a “closer connection”
The final condition of Form 8840 requires a closer connection to another country than to the U.S. Canadians can meet this requirement by establishing that they maintained more significant social and economic ties with Canada than with the U.S.
To gather this information, Form 8840 asks several key questions. Highlights include:
- Country of residence you designate on forms and documents
- Types of official forms and documents you file with the IRS that would indicate foreign status (such as Form W-9, Form W-8BEN, or Form W-8ECI)
- Location of:
- Your permanent home(s)
- Your family
- Personal belongings, such as cars, furniture, clothing, and jewelry
- Your business activities
- Investments and the banks you deal with
- The jurisdiction in which you hold a driver's license
- The jurisdiction in which you vote
Form 8840 and the CRA
Form 8840 allows Canadians to declare their closer connection to Canada—and thus avoid U.S. tax. However, filing Form 8840 with the IRS has no impact on your Canadian income tax return. That said, don't let your U.S. trip interfere with the more mundane elements of your Canadian responsibilities. If you travel to the U.S. near your Canadian filing deadline, don't forget to file your Canadian return.
If you have questions on filing Form 8840 or on any other tax topics you face as a snowbird in the U.S., please contact:
Partner, Expatriate Tax — U.S. Personal Tax Practice Leader
Partner, Expatriate Tax Services & Leader, Immigration Service
The information in this publication is current as of April 5, 2023.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.