Basic Tax Advice For Canadian Snowbirds In The USA
Although filing a tax return is never an exciting topic, it’s important to note that tax rulings for Canadian-US snowbirds are a little more complicated than standard Canadian taxation.
If you’re heading south of the border for the winter, it’s good to understand some general snowbird tax advice before you depart. Our aim with this guide is to hopefully save you from the irritating repercussions that come with inaccurate tax filings.
TOP CONSIDERATIONS TO MAKE WHEN FILING A SNOWBIRD TAX RETURN
There are a few main things to consider in regards to your tax situation abroad, and of course your obligations will relate to asset ownership and income. By learning some of these concepts, you’ll be much better off during tax season when the time comes to balance the books.
Please note that this guide is designed to act as a starting point – for fully comprehensive and detailed information, it’s best to supplement your research using government websites or consult with a snowbird-tax professional.
TAXATION ON UNITED STATES REAL ESTATE
This is the most extensive snowbird tax category, so it really pays off to stay informed on the subject. Ownership of property in the United States as a Canadian comes with a handful of new tax implications enforced by either nationality.
A Home In The United States
Assuming you own the rights to an American residence that is solely intended to accommodate yourself and family, you won’t need to file anything related to rental income tax. In other words, the only tax you’d actively be paying on the home is the local property tax – on which the exact percentage will vary state by state. The only way to navigate around this tax is by getting rid of the property, but then you’d have to rent to live in the US.
Rental Properties In The United States
If you’re looking to make money from your idle properties in the United States, you will certainly be subject to US rental income tax rulings. Keep in mind that as a Canadian citizen you’ll need to declare any rental income on your Canadian records as well. Don’t worry; you won’t be paying the same amount in Canadian taxes since you can benefit from a foreign tax credit on the property.
In the majority of cases, choosing to have your net rental income taxed (the number after all expenses are paid off) is the most efficient option for your bottom line. By doing so, you’ll be able to discount many other charges from the gross rent, for example: the interest accrued on your mortgage (if any), and the government mandated property tax.
Selling Properties In The United States
When you officially list your property for sale and get matched with the right buyer, you’ll face an income tax at the end of the transaction. Assuming you’ve managed to sell the property at a gain, since you’re from out of the country you’ll be subject to a withholding tax rate that falls anywhere from 10-15% on the gross sale. Technically speaking, your withholding rate is much higher than what you’d actually have to pay in real taxes; it’s a federal tax tool invented to ensure that United States tax revenue is received from individuals outside the country.
Since you’ve already established that you’ll be paying US income tax, you can place a formal request with the IRS to lower your withholding. Although it sounds simple enough, getting your withholding certificate and identification number is a fairly slow process, so make sure you dedicate enough time for it.
TAXATION ON DUAL CITIZENSHIP
As a dual citizenship status holder, you’re obligated to file income tax returns for both countries that declare your global income. Ideally you want to categorize your taxable items correctly so you’re not just paying double the tax.
Since you’ll likely be declaring income sources from both nations, the process can become tricky with foreign tax credits popping up all over the place.
IRS Form 1040
The 1040 form pertains to individual income taxation. Part of the dual citizenship requirements is that you are ineligible to submit a 1040 Non-Resident form. Regardless of where you permanently reside, as a US citizenship status holder you must file the standard 1040.
Be very thorough and attentive in when filing your individual nation tax returns separately. Failure to disclose certain income sources (or just mismatching the numbers) can cause a ton of headache down the road.
TAXATION ON UNITED STATES ASSET OWNERSHIP
As mentioned earlier, anything valuable that you own in other countries must be declared to the Canadian government during tax season. All Canadian citizenship status holders that possess over $100,000 (in Canadian dollars) of foreign asset value need to file a T1135 Form that relates to Foreign Income Verification.
CRA Form T1135
There is some good news; any US assets that you own exclusively for personal usage purposes – in other words does not generate some sort of income – are exempt from this tax form. This can include a not-for-rent home, cars, artwork, etc.
However, if you’re a landlord that’s leasing out one or more properties they need to be declared. Other typical non-real estate related assets that need to be declared on this form can include foreign equity (US company stock) and any bank accounts registered abroad.
TAXATION ON UNITED STATES ESTATE PLANS
It’s important to understand that even as a Canadian snowbird you might be caused to experience United States taxes on estate. If you were to pass away with ownership of US property, your US residency status does not matter – you won’t be exempt from this tax (even if you’re not a officially a permanent resident of the country). Generally speaking, any capital assets owned at your time of death (company shares, real estate, etc) are tax-eligible for a maximum of 40% of their fair value.
CAN-US Income Tax Treaty
In order to dodge the US estate tax entirely, you can take advantage of the CAN-US Income Tax Treaty. This act can provide you with a lessened tax burden if your total global asset ownership value is less than the US estate tax exemption amount*
*As of 2018, this amount became a little over $11 million USD
Of course if your estate plans consists of a total value less than $60,000 USD you are automatically exempt from US estate tax regardless.
BONUS ADVICE FOR SNOWBIRDS
As a Canadian snowbird you can stand to greatly benefit from submitting 8840 tax forms each year. The 8840 form outlines the exact length of your stay south of the border whilst declaring main allegiance to Canada. Put simply, by filing this form you can avoid being taxed as a permanent resident of the United States.
If you’re concerned about your snowbird financial situation and want to take active measures to improve it, check out our guide to proper budgeting as a snowbird