Coming June 30, 2014, Canada and the US will start to share immigration entry and exit dates with each other under the Entry/Exit Initiative of the Perimeter Security and Economic Competitiveness Action Plan. Under this plan, the Entry/Exit Initiative will implement a system to exchange Biographic Entry Data between Canada and the U.S. Through this cooperation, the IRS will now have readily available data to assist them in determining the number of days a Canadian resident spends in the U.S.
Canadians who have not been tracking their time in the US may find themselves in a quandary due to this latest initiative. It may come as a surprise to many to learn that US immigration status does not dictate US tax residency. For example, US tax residency is not only determined by citizenship or lawful residency status but it also includes the duration of physical days spent in the United States. Such physical presence can include cross-border shopping trips, business trips or holidays.
The implementation of the Entry/Exit Initiative at the end of June 2014 will increase the risk for Canadians to be considered US taxpayers. This could subject Canadians staying in the US to potential IRS audit examinations, where they may be liable to pay tax in the US based on their worldwide income and be subjected to US estate tax rules. Moreover, as soon as any Canadian becomes a US taxpayer, regardless of their actual intention, they will be forced to file the tedious and exorbitant US foreign compliance disclosure forms. This includes reporting all their Canadian holdings, from bank accounts, shares in Canadian corporations, and other foreign assets to the IRS.
The IRS will determine the US tax liability based on something they call a “Substantial Presence Test.” In order to avoid paying tax to Uncle Sam, at Cardinal Point Wealth Management, we suggest that Canadians (or any foreign citizen for that matter) try to limit their stay in the US to 120 days or less during a single tax year.
If you are a frequent visitor to the United States, you should consult a cross-border financial advisor to assess your US tax residency status. We can help you determine if you have become eligible to pay US taxes due to your physical presence in the United States, and if there are any possibilities to reduce your tax burdens based on existing US-Canada tax treaty exemptions.
Terry Ritchie is the Director of Cross-Border Wealth Services at Cardinal Point Capital Management Inc., a cross-border wealth management firm with offices in the United States and Canada. Terry has been providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services to affluent families for over 25 years. He is active as an author, speaker and educator on international tax and financial planning matters.