U.S. Tax Considerations for Canadians

As the leaves change and the weather cools, Canadian snowbirds begin to prepare for their migration south for the winter.

While there are numerous steps involved in planning this journey, including obtaining adequate insurance coverage, accounting for cost-of-living expenses, and managing vacant properties at home, an essential, but often-overlooked area of consideration, is that of cross-border taxes.

In this article, we highlight 3 important tips that all snowbirds (or any other Canadian resident owning U.S. assets or spending significant amounts of time living in the United States) need to consider to ensure they are not overlooking taxation requirements that might otherwise come as a surprise – and with a potentially large bill – if not planned for in advance.

Tip #1: Make sure you are not considered a US resident for tax purposes

Here’s a not-so-fun fact that many snowbirds are unaware of: if you spend enough time living in the United States, you will be considered a U.S. resident for tax purposes.

This rule is governed by the “Substantial Presence Test”, which involves a calculation to determine if the time a person spent in the U.S. qualifies them for U.S. income taxes. The following table outlines the calculation, which includes consideration of time spent in the U.S. over the previous 3 years.

 

 

 

 

If the total number of days calculated using this formula exceeds 182 days, the individual may be subject to U.S. taxes on their worldwide income.

There are certain exceptions to this rule (such as if you spend less than 183 days in the U.S in the current year – this is the “Closer Connection Exception”), so speaking with a tax professional prior to determining your income tax status is always recommended. For further reading about this, you might consider BMO Private Wealth’s article here: Canadian Snowbirds and U.S. Income Tax

Tip #2: There are different ways for Canadians to own U.S. Real Property, and each may have its own tax implications

Property ownership can be a complicated thing when it extends beyond borders. For U.S. property (such as vacation homes), there are several ways Canadians can hold ownership, including:

• Direct Ownership – i.e., individual ownership, joint tenancy with the right of survivorship, or tenancy in common;
• Ownership through a Canadian resident trust;
• Ownership through a Canadian corporation; and
• Ownership through a Canadian partnership.

Each of these options have their own intricacies that are beyond the scope of this brief article. The most important thing to know, however, is that each option comes with its own tax implications and, depending on an individual’s circumstances, certain options may be more advantageous than others. Bottom line: talking to a tax professional is strongly recommended if you own or plan to own U.S property as a Canadian, to ensure you are taking advantage of the best ownership strategy available to you. For further reading, see BMO Private Wealth’s article here: Canadian Ownership of U.S. Real Property

Tip #3: If you own enough U.S. assets, you might be subject to U.S Estate Taxes upon your passing

As the saying goes, there are only two things certain in life: death and taxes. And Uncle Sam always gets paid! Luckily, when it comes to U.S. estate taxes, this rule only applies to Canadians if they own a certain amount of U.S. assets, which includes U.S. securities and U.S. real estate. Therefore, it is important to understand how much of your wealth is held in this capacity, to ensure that your estate is not overlooking an American-sized tax bill upon your passing.

As it stands in 2023, the “exclusion amount” for U.S. assets is currently U$12.9M. This means that if you have more than U$12.9M in U.S. assets, you may be subject to US estate taxes when you die. HOWEVER: this exclusion amount is set to shrink to U$5M in 2025 – so even if you would not currently be subject to U.S. estate taxes, you may be on the hook if you pass away in 2025 or later.

When it comes to the actual calculation of estate taxes, the tax rate varies depending on the value of the U.S. assets. The following table summarizes this calculation:

 

 

 

 

 

 

 

 

 

If you are confused, do not worry – the process is not exactly straightforward. To further complicate matters, there are various tax credits and other considerations that might reduce the amount of estate tax you may owe.

Additionally, there are other estate-planning strategies that may mitigate the amount of U.S. estate tax a person may owe, including:

• Transferring property from one spouse to another;
• Using mutual or reciprocal spousal trusts to reduce the estate of the surviving spouse;
• Using a Qualifying U.S. Domestic Trust;
• Life Insurance;
• Using a Canadian Holding Company;
• Investing in the U.S. market through mutual funds; and
• Using a non-recourse mortgage.

As you might expect, the best way to understand your exposure to U.S. estate taxes and options for mitigation is by seeking the advice of a professional with experience in this area, such as a taxation lawyer or an accountant with cross-border expertise. To get started with some more detailed information, you can read BMO Private Wealth’s article here: U.S. Estate Tax for Canadians

Fly south with financial confidence

Canada-U.S. tourism is an important part of the economic and cultural relationship Canadians have with their neighbours to the South. Few traditions reflect this better that the flight of Canadian snowbirds. Unfortunately, as we can see, planning extended seasonal get-aways across the southern border can sometimes get complicated when one considers the tax implications of living this lifestyle; however, with a bit of foresight and the help of trusted and experienced professionals, planning for cross-border taxes can easily become another routine part of one’s wealth management strategy.

If you have questions about how to plan for these considerations, we would love to start the conversation with you. We have access to a network of trusted tax professionals that are always happy to accept our referrals, to provide more detailed guidance in these areas.

If you want to start with some background reading, here is a list of the relevant articles referenced above:

• Canadian Snowbirds and U.S. Income Tax
• Canadian Ownership of U.S. Real Property
• U.S. Estate Tax for Canadians