Snowbirds Flying Into FATCA Trap
This article, by Chris Horlacher, was originally published by The Dollar Vigilante.
Many Canadians, referred to as snowbirds, spend three to six months each year in the United States. If they think to consult a tax adviser at all, they’re usually told that as long as they spend less than 183 days per year in the U.S., they can rest assured that they will not be triggering any tax consequences. A brief reading of the U.S. tax code would appear to verify this statement; however, there is a nuance that threatens to trap snowbirds in the IRS’s web.
It’s called the substantial presence test, and it’s a second layer of the standard test performed by the IRS in order to determine residency. Not only can you not exceed 183 days in United States for the current year, but after adding in one-third of the prior year’s days and one-sixth of the second preceding year’s days that total is not allowed to exceed 183 either. What this means is that your annual day allowance is not 183, but 122.
Many snowbirds thinking they’re safe and not triggering any U.S. tax liabilities could be in for a rude awakening come March 2015 when Canadian banks send their first Foreign Account Tax Compliance Act (FATCA) reports to the Canada Revenue Agency for them to forward along to the IRS. Because of FATCA, Canadian banks will now report anyone with ties to the United States, and the likelihood of being deemed a U.S. taxpayer rises substantially.
Being deemed a U.S. taxpayer can quickly become a nightmare. Penalties, interest and professional fees come at a substantial cost; and the IRS is far more aggressive and unforgiving than the CRA. Furthermore, differences in how the two tax systems treat your registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs) and other tax-sheltered accounts in Canada can rob you of the advantages of using them. Foreign tax credits can be claimed to keep your overall tax liability close to what it has always been, but they’re typically a clumsy way to do this and don’t relieve you of the obligation and costs associated with filing.
How easily can you attract the evil gaze of the IRS? It’s getting quite easy with FATCA. If you have a U.S. address, phone number or any other U.S.-based information on your Canadian accounts, it could likely trigger a report and put you under greater scrutiny. A large number of transactions in the United States could also trigger a report. Once the IRS has you in its sights, your ability to enter and exit the U.S. can be complicated significantly. Through the Treasury Enforcement Communications System, IRS agents can put you on a DHS watch list. For the time being, you won’t be arrested at the border; but you will likely have an uninvited guest from the IRS show up during your stay in the United States.
Luckily, there’s a way to establish your ties to Canada (or any other country) and avoid being deemed a U.S. resident even if you breach the substantial presence test. You won’t have to file a return to the IRS and will get to stay relatively free of the U.S.-tax farm. For that to happen, you have to file an annual form establishing a closer connection to another country.
But what about all the past years where this was not done? Unfortunately, there is no clearly correct approach for all circumstances. You could choose to begin filing the form on a go-forward basis, or do nothing and hope you’re too small for the IRS to bother with. In the event that you do get caught up, there are still things you can do to avoid having to file; but these are very technical and legally complicated.
The best solution may be to simply stop going to the United States. With all that’s happening there, why go at all? The excise taxes you pay while there help subsidize the most evil and expansive criminal syndicate known to humanity. It’s a big world, and perhaps you should explore it more. This may be the easiest and most enjoyable solution of them all.
Chris Horlacher is a contributor to The Dollar Vigilante and a chartered accountant practicing in the Greater Toronto Area. Formerly an auditor to Fortune 500 companies with Deloitte & Touche, he now provides project management and consulting services to mid-sized to large enterprises, specializing in financial institutions. His work has included helping launch a successful stock brokerage, insurance and tech company. Chris is also the vice-chair of the Mises Institute of Canada and an adviser to the Bitcoin Alliance of Canada. His company website is www.mycfoweb.ca.
