Snowbirds or … Sitting Ducks!

How much is too much time in the U.S.?

If you spend more than 182 days (approximately 6 months) in any one year in the States you are considered a U.S. citizen for tax purposes. Most travelers are aware of this and take measures to keep below the radar by staying a maximum of 181 days south of the border.

Be aware of the Substantial Presence Test.

However, what most don’t consider is, in addition to the 182 day mark, there is also a substantial presence test. This is a special formula used to determine if you qualify to be assessed as a U.S. citizen. You would think that the substantial presence test could mean that if someone spent more than half a year (182 days) in the States, they would be assessed under this formula. Not so! The formula determines that if you spent more than 122 days in three consecutive years visiting the U.S. you would be considered a resident and the U.S. has the right to tax you on your worldwide income. This would be taxes paid in addition to what you would pay in taxes to Canada because you are a Canadian citizen.

You might want to fail this test!

If 2009 > 31 days
then this formula applies
2009 + 1/3(2008) + 1/6(2007) > 182 days

To avoid the unpleasant experience of paying taxes in two countries, it is important to understand exactly how the substantial presence test works. The test includes current year days plus 1/3 prior year days and 1/6 second prior year. If the total exceeds 182 days and you have more than 31 days in your current year, you qualify. This is not a test you want to pass. There are forms the Snowbirds must file with the Internal Revenue Service of the U.S. before June 15 of the following year. Some options allow them to prove that they have a “tax home” in another country and have a closer connection to that other country and that they have spent no more than 182 days in the States.

Be prepared.

Understanding how the formula works and how it pertains to you will be your best defense against double taxation. Documenting your time and being compliant can save you some unpleasant surprises.

As in all matters of tax and your money, it is best to seek the advice of an accountant or tax professional to determine what is best suited for your individual circumstance. For all you Snowbirds, travel safely and mind your time, it could be costly if you don’t.

This report prepared by Michael Furlot, CSA, Certified Senior Advisor with Insurance & Financial Services in Ladysmith, BC. Comments or questions – Michael can be reached at (250) 245-2052, Toll Free 1-866-746-2002

The taxing truth about selling your U.S. property. Escalating costs may have you considering the sale of your U.S. real estate holdings. But, before you hammer in that “For Sale” sign, consider this — as a Canadian resident, your sale has the potential to attract Canadian, U.S. and U.S. State income tax.

Canadian Taxation

As a resident of Canada, your worldwide income is taxable — which means that the taxable capital gain or loss on the sale of a U.S. property must be reported on your Canadian tax return in the year of sale. It is possible to use your principal residence exemption to shelter the gain from Canadian income tax, but you may not want to waste that exemption if tax arises in the U.S. on the transaction. If you have claimed depreciation on the property, there is also a possibility for recapturing that depreciation — which is fully taxable.

U.S. Taxation

The U.S. imposes tax on real property in accordance with the Foreign Investment In Real Property Tax Act (FIRPTA). Therefore, you must report the sale of U.S. real estate on a U.S. tax return, regardless of whether you gained or sustained a loss on the sale. And keep in mind, there are some differences on how the capital gain is taxed in the U.S.. In Canada, we tax the difference between the fair market value and the ‘adjusted cost base’ of a property. In the U.S., the capital gain is the difference between the fair market value and ‘basis’, which may not be the same as the ‘adjusted cost base’. If you have claimed depreciation on your U.S. property for tax purposes, the ‘basis’ will be reduced by all the depreciation previously claimed. As a result, the capital gain for U.S. purposes may be greater than the Canadian capital gain. There is no recapture of depreciation for U.S. purposes. Capital gains are fully taxable in the U.S., although the rate of tax applied to a gain may be lower.

U.S. State Taxation

Each state imposes its own taxes so you must consult the relevant legislation for the state in which your property is located. Any state income tax may be used as a deduction when calculating U.S. federal tax.

Canada-US Tax Treaty

To prevent double taxation, Canada allows you a foreign tax credit up to the amount of the U.S. tax paid. Property owned on September 26, 1980 is afforded special treatment that may reduce the amount of your U.S. taxation.

Witholding Tax on Sale

The U.S. may impose a withholding tax on the sale. Ten percent of the gross proceeds of the sale will be withheld, unless the purchase price is $300,000 U.S. or less and the purchaser intends to use the property as a residence. This tax is shown as a credit on your U.S. federal tax return.

These are just some of the subtleties impacting the sale of your U.S. property. Be sure to talk to us before you decide for sure if ‘For Sale’ is right for you.

This report specifically written and published by Investors Group is presented as a general source of information only, and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide legal advice. Prospective investors should review the annual report, simplified prospectus, and annual information form of any fund carefully before making an investment decision. Clients should discuss their situation with their Consultant for advice based on their specific circumstances. ™Trademark owned by IGM Financial Inc. and licensed to its subsidiary corporations. “The taxing truth about selling your U.S. property” ©2007 Investors Group Inc. (07/2007) MP1017

by Investors Group Inc
 

Secure your nest before going south. When you travel, the last thing you want to worry about is finances. But, if your finances aren’t in order before you leave Canada, you could return to a money mess.

It’s especially important that those leaving the country for an extended vacation make appropriate arrangements — including snowbirds who split their retirement between Canada and the southern U.S. Here are some issues to discuss before making your next trip:

Health insurance

Make sure you have adequate out-of-country health insurance coverage. If you run into a medical emergency, you can run up massive debts without insurance coverage. Be sure you are familiar with the terms of your policy — particularly the sections concerning existing medical conditions (which may not be covered).

Wills and Powers of Attorney

Your will should be up to date so that all of your bases are covered. If you have assets outside Canada your will should be reviewed to ensure these assets are properly dealt with. There may be planning opportunities to take advantage of. This is especially important since a death in a foreign country can complicate estate issues. Your relatives or executor should know where to find your will. Your Power of Attorney (called a Mandate in anticipation of incapacity in Quebec) must also be current. Through a Power of Attorney, you designate someone to make financial decisions for you should you become incapacitated. If necessary, you can appoint someone you trust to manage your domestic finances while you are away or out of reach.

Manage your investments

Make arrangements in advance to deal with term investments that might come due in your absence, such as Guaranteed Investment Certificates (GICs). If you have mutual funds or securities in your portfolio, speak to your financial advisor about how to best handle them while you’re away. If you have a computer and you’re willing to tear yourself away from leisure activities, you may be able to manage most of your finances via the Internet. Check with your financial institution.

Income taxes

Unfortunately, you can’t take a holiday from the taxman. Make arrangements to file your yearly income-tax return if you are absent at the end of April. If required, make sure quarterly income tax payments are made in your absence.

Pay bills

Pay outstanding bills before you leave, and make arrangements to have those that arrive in your absence paid. Again, you may be able to take care of these through Internet banking.

Access to cash

A host of other details should be taken care of before you travel, such as arranging for access to cash through an ATM. It’s a good idea to obtain a duplicate ATM card in case your original is lost or stops working. And investigate other means such as a U.S. dollar money market account that carries chequing privileges.

The best way to ensure you’ve thought of everything is to sit down with us before your trip starts.

This report specifically written and published by Investors Group is presented as a general source of information only, and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide legal advice. Prospective investors should review the annual report, simplified prospectus, and annual information form of any fund carefully before making an investment decision. Clients should discuss their situation with their Consultant for advice based on their specific circumstances. Commissions, trailing commissions management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Insurance products and services offered through I.G. Insurance Services Inc. (in Quebec, a financial services firm). Insurance license sponsored by The Great-West Life Assurance Company (outside of Quebec). ™Trademark owned by IGM Financial Inc. and licensed to its subsidiary corporations. “As the snowbird flies” ©2007 Investors Group Inc. (07/2007) MP1016