New registration requirement for Snowbirds can impact US tax obligations

The new requirement for Canadian snowbirds to register in the U.S. primarily impacts their tax obligations by potentially subjecting them to U.S. tax residency rules, including the substantial presence test, and the need to file Form 1040-NR.

Here’s a detailed discussion of the implications.

Many Canadians spend winter months in warmer US states where they are known as Snowbirds.

Registration Requirement and Process

Canadian snowbirds, who are Canadian citizens spending significant time in the U.S., must now register their presence in the U.S. This registration is part of the U.S. government's efforts to monitor and enforce immigration and tax laws more effectively. The registration process typically involves providing personal information, travel details, and the duration of stay in the U.S. This information helps the U.S. authorities determine whether the individual meets the substantial presence test, which affects their tax residency status.

Substantial Presence Test

The substantial presence test is a key determinant of whether a Canadian snowbird is considered a U.S. resident for tax purposes. Under this test, an individual is considered a U.S. resident if they are physically present in the U.S. for at least:

31 days during the current year, and
183 days during the three-year period that includes the current year and the two preceding years, calculated as:
- All the days present in the current year,
- One-third of the days present in the first preceding year, and
- One-sixth of the days present in the second preceding year.

If a Canadian snowbird meets these criteria, they are considered a U.S. resident for tax purposes and must file a U.S. tax return (Form 1040) and report their worldwide income.

For example, if an individual was present in the U.S. for 120 days in each of the years 2023, 2024, and 2025, the calculation would be:

120 days in 2025,
40 days in 2024 (one-third of 120), and
20 days in 2023 (one-sixth of 120).

The total is 180 days, which does not meet the 183-day requirement, so the individual would not meet the substantial presence test for 2025.

Filing Form 1040-NR

If a Canadian snowbird does not meet the substantial presence test, they remain a nonresident alien for U.S. tax purposes and must file Form 1040-NR, U.S. Nonresident Alien Income Tax Return, to report their U.S.-source income, if they have any. This form is used to report income that is effectively connected with a U.S. trade or business and other U.S.-source income subject to a flat 30% tax rate or a lower treaty rate.

Who Needs to File Form 1040-NR?

Form 1040-NR, U.S. Nonresident Alien Income Tax Return, is used by nonresident aliens to report their U.S. source income. You are considered a nonresident alien if you are not a U.S. citizen or green card holder and do not meet the substantial presence test. Here are the key scenarios where you must file Form 1040-NR:

Income from U.S. Sources: If you receive income from U.S. sources that is not effectively connected with a U.S. trade or business, you must file Form 1040-NR. This includes interest, dividends, rents, royalties, and other fixed or determinable annual or periodical (FDAP) income. The tax on this income is generally withheld at a 30% rate unless a lower treaty rate applies.
Effectively Connected Income (ECI): If you are engaged in a trade or business in the United States, you must file Form 1040-NR to report income that is effectively connected with that trade or business. This income is taxed at the same graduated rates that apply to U.S. citizens and residents.
Capital Gains: Nonresident aliens present in the U.S. for 183 days or more during the taxable year must file Form 1040-NR to report capital gains from U.S. sources. These gains are taxed at a 30% rate on the excess of gains over losses from the sale or exchange of capital assets.
Social Security Benefits: Nonresident aliens receiving U.S. social security benefits must file Form 1040-NR. 85% of these benefits are included in gross income and taxed at a 30% rate.
Income from Real Property: If you derive income from real property located in the U.S., you may elect to treat this income as effectively connected with a U.S. trade or business, which requires filing Form 1040-NR.

Exceptions and Special Rules

Several exceptions and special rules may apply to Canadian snowbirds:

Closer Connection Exception: Even if a Canadian snowbird meets the substantial presence test, they can still be treated as a nonresident if they:
- Are present in the U.S. for fewer than 183 days during the current year,
- Maintain a tax home in Canada during the year, and
- Have a closer connection to Canada than to the U.S. To claim this exception, they must file Form 8840, Closer Connection Exception Statement for Aliens, explaining their closer connection to Canada.
Treaty Benefits: The U.S.-Canada Income Tax Treaty provides certain benefits that can affect the tax obligations of Canadian snowbirds. For instance, the treaty may allow them to exclude certain types of income from U.S. taxation or reduce the tax rate on specific income types. To claim treaty benefits, they must file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).
Medical Condition Exception: If a Canadian snowbird is unable to leave the U.S. due to a medical condition that arose while in the U.S., those days may not count towards the substantial presence test. They must file Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, to claim this exception.

Penalties for Non-Compliance

Failure to comply with the registration requirement and tax filing obligations can result in significant penalties, including:

Failure to File Penalty: A penalty for not filing a required tax return by the due date.
Failure to Pay Penalty: A penalty for not paying the tax owed by the due date.
Accuracy-Related Penalty: A penalty for underpayment of tax due to negligence or disregard of rules and regulations.
FBAR Penalties: If a Canadian snowbird has foreign bank accounts exceeding $10,000, they must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Failure to file can result in severe penalties.

Conclusion

The new registration requirement for Canadian snowbirds in the U.S. significantly impacts their tax obligations, particularly concerning the substantial presence test and the need to file Form 1040-NR. Canadian snowbirds must be aware of the registration process, potential penalties for non-compliance, and the exceptions or special rules that may apply to their situation. Proper compliance with these requirements is crucial to avoid penalties and ensure that your tax obligations are met accurately. If you have any questions on how these rule changes apply to your specific situation, don't hesitate to reach out.