Do you spend a considerable amount of time in the U.S., perhaps, to escape our Canadian winters? If so, you may already be aware of the importance of filing Form 8840, Closer Connection Exception Statement for Aliens, with the Internal Revenue Service (IRS).
To provide some background, the U.S. applies the Substantial Presence Test (SPT) to determine whether you are considered a U.S. resident for tax purposes. This test is based on a weighted formula and takes into account the number of days you spent in the U.S. over the last three years. If you meet the threshold set by this formula, you are considered a U.S. resident for income tax purposes―you are liable for U.S. income tax and subject to non-compliance penalties.
You meet the SPT if you spend 183 days in the U.S. in any given year. If you regularly spend about four months a year in the U.S. (i.e., 122 days) you are also considered a U.S. resident under the formula. This rule can, therefore, catch ‘snowbirds' who regularly winter in the U.S. (but who may not spend 183 days in the U.S. in any given year).
The benefit of filing Form 8840 is that you can avoid being considered a U.S. resident for income tax purposes by acknowledging that you meet the SPT and claiming that you have a closer connection to Canada. Various factors need to be considered when claiming this closer-connection exception. Our tax bulletin, U.S. Tax Issues for Canadians has more information.
Take note that Form 8840 needs to be filed annually by June 15. The deadline is June 17, 2019, for the 2018 filing, however, as June 15 falls on a Saturday this year. Non-compliance penalties can be significant. We recommend that you file Form 8840, if it is applicable to you, by the deadline to protect yourself from potential penalties.
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of April 2, 2019.