Traveling To, Or Working In, The United States? What You Need To Know To Avoid A US Tax Surprise
Most Canadians know that Canada and the United States share the longest international border in the world. The United States often serves as a major market for expanding Canadian businesses, so employees may find they not only travel but may be asked to spend considerable time there during the year.
What some Canadians may NOT know is that spending too much time in the United States could make you subject to U.S. income tax on your worldwide income or, as a minimum, your US sourced income. It's true. The United States levies income tax on non-Americans, or “aliens”, that they consider to be “resident”. This issue has become even more prevalent with the remote workplace as employees can work virtually from anywhere.
Who Qualifies As A U.S. Resident?
Individuals that are permanent residents for immigration purposes (“Green card” holders) are resident in the United States, not surprisingly. However, individuals that spend too many days in the United States may also find themselves deemed resident and subject to US tax based on the Internal Revenue Service (IRS) Substantial Presence Test even if they still remain resident in another country. This is one of the reasons we strongly encourage individuals to track their days and, if possible, ensure the number of days is less than 183.
How Does It Work?
The Substantial Presence Test assesses how much time you have spent in the United States over the past three years. To meet the test you must be physically present in the US for at least:
31 days during the current year, and
183 days during the current and prior two years, and number of days for this purpose is determined as:
Full day for each day in the current year spent in the US;
Each day spent in US in the preceding year counts as ⅓ of a day; and
Each day spent in the US in the second preceding year counts as ⅙ of a day.
We note that an individual who has less than 183 days of US presence in the current tax year and can establish a “tax home” in and a “closer connection” to another country for the entire year may still qualify as a non-resident alien, even if the three-year 183-equivalent day requirement is met (subject to the respective Tax Treaty).
What About Travel Days?
The days you enter and exit the US must be included as a full day in the US for the Substantial Presence Test.
Any Exceptions?
There are some circumstances where days spent in the US do not count. For example:
If you become ill while in the US and are unable to leave the country;
If you are passing through the US on your way to another country the time spent in the US does not count. If, however, you extend a layover and spend a few days in the US, those days DO count for the Substantial Presence Test; and
Other exemptions apply for students, teachers, trainees, professional athletes, foreign government officials and commuters.
What To Do If You Are Deemed A US Resident
If you are caught by the Substantial Presence Test but spent less than 183 days in the United States in the current year irrespective of claiming treaty benefits, you will have a filing obligation to complete Form 8840, known as the Closer Connection Exception Statement for Aliens. As per its name, this form confirms that you have a closer connection to another country than you do with the US. To be able to fill out a Form 8840 you must meet three general conditions:
You spent fewer than 183 days in the U.S. in the current year;
You maintained a home in another country within which you paid taxes; and
You had a closer connection with another country during the year than you did with the US. This closer connection is determined under the relevant tax treaty and considers questions such as Where do you bank?, and Where do you vote?
If you have spent over 183 days in the US in the current year, you will be required to file a US tax return (Form 1040NR) and may be liable to US tax to the extent of your US source income, irrespective of maintaining your actual residency. It will be important to seek tax advice BEFORE that time to properly plan to avoid any tax surprises. The intricacies of managing both Canadian and US tax on your income and the ability to claim foreign tax credits is a very complicated area, often ending up with some tax inefficiencies, especially where US employment income is earned by Canadian residents. In addition, deemed US residents have other US filing requirements including the requirement to file the Report of Foreign Bank and Financial Accounts (FBAR) forms. This is a key reason we recommend staying under the 183 day threshold and if that is not possible, ensure you are aware of the tax impacts and filing obligations.
At digitaltaxCPA, we seek to assist our clients to proactively manage their tax affairs. The above blog post is designed to provide general information only and is not considered the provision of tax advice.
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