Snowbirds: Know the Rules to Save on Taxes and Keep You Out of Trouble
Spending our long, chilly (truly Canadian) winters in the warm, sunny south is a dream for many Canadian retirees. In fact, over half a million Canadians own property in Florida alone, according to a BMO survey.
However, being a snowbird is more complicated than many people realize. Outstaying your welcome could lead to being taxed heavily, deported or refused re-entry. Here are some of the rules you need to be aware of to stay out of trouble.
Know how long you can stay
If you spend too much time in the U.S. you can be considered a resident for tax purposes and end up having to pay the American government taxes on your worldwide income, on top of your Canadian taxes.
The Substantial Presence Test ruling is a somewhat complicated calculation that determines if you’re considered a U.S. resident.
This calculation takes into account every day you have spent in the U.S. during the current year, plus a third of the days you spent the previous year, and a sixth of those spent the year before that. The total must be less than 183 days. Confused yet?
Here’s an example to help explain. If you spend 120 days every year in the U.S., following the above calculation, your total count comes to 180 days over the three year period, just below the 183-day threshold.
What if you want to stay longer than 120 days a year?
Successfully applying for the Closer Connection Exception can theoretically increase your annual stay to 182 days. This would require you to hand in form 8840 to the IRS by June 15.
To qualify, you need to prove that you have closer connections to Canada than the United States. This includes proving Canada is where you have your primary residence, where you keep your belongings, where your family lives, where you vote and have your government health plan, etc.
The final option is claiming exemption based on the Canada-U.S. Tax Treaty. But this option is expensive and time-consuming that it likely isn’t worth it and isn’t often recommended.
Watch out for the immigration rules
Even if you set yourself up to stay in the U.S. for 182 days with the Closer Connection Exception, American immigration rules only allow Canadians to visit for 180 out of 365 consecutive days.
If you stay longer, you could be subject to deportation or refused entry when you try to return to the U.S. Don’t outstay your welcome, or you may find you can’t go back.
Make sure to keep your health coverage
Staying away from your home in Canada for too long can also mean you lose your provincial health coverage, at least temporarily. Most provinces require that you reside in your home province for five or six months a year to be considered a resident and therefore, qualify for health care.
If you are away for longer than five or six months, you can lose your residency status and health care benefits. You would then have to live in your province for three consecutive months before getting your health care reinstated.
And don’t forget, healthcare in the U.S. can be extremely expensive. A trip to an emergency room can cost as much as $12,000 just to treat a bee sting. Make sure that you have comprehensive travel insurance that will cover the costs of any emergency medical treatment while you’re away.
What you need to know if you own property down south
Canadians owning property in the U.S. need to be aware of several rules. If you decide to rent out your home in the U.S. for the periods you aren’t there, you will be subject to a withholding tax of 30% of the gross rental income, as well as individual state taxes. Hiring a local accountant could help you pay less tax and navigate these laws.
When the time does come for you to sell your American property, some of the gross sale price (usually 10%) is withheld and handed over to the IRS as a prepayment of U.S. capital gains tax. A local accountant may be able to help you recoup some of this tax.
You have to report half of the capital gain on your Canadian tax return, but foreign tax credits can reduce the double taxation.
If the owner of the property passes away, this can lead to a messy situation called probate. This is an expensive and lengthy process that can cost up to 4% of the property’s market value and take up to a year to resolve.
You can avoid probate by buying your property through a Cross Border Trust. The trust continues to own the property even after the death of the owner. At the time of passing, the property will be inherited within the trust.
How to go about owning your own piece of sunshine
Now that you know all about the rules regarding the snowbird life, you might be tempted to buy your own property in the sunny south.
One very affordable way to buy a holiday home is with the CHIP Reverse Mortgage®. As a homeowner aged 55+, you could borrow up to 55% of your home’s value and use some of this to purchase your dream vacation home. Can you hear the beaches and golf courses calling your name?
With properties in states like Florida still selling for $250,000 or less, this option would allow you to buy your winter getaway home without having to make any mortgage payments (you only pay back what you owe when you move or sell your primary Canadian residence).
If you’re interested or want to learn more, call us at 1-866-522-2447 to find out how much tax-free cash you could qualify for with the CHIP Reverse Mortgage.