Spending too much time in the United States could earn you a bill from the IRS
A popular regular feature in Good Times magazine is “Your Questions,” where Olev Edur provides answers to questions from our readers regarding their rights, personal finance, and estate planning. Here’s one on selling property in the United States:
Q.: We are Canadian citizens. We spend six months in Canada where we rent an apartment in Ontario. We own no house or property in Canada. We spend the fall, winter, and spring months (five to six months) in Florida where we own a condo, fully paid for. Because the sale of a permanent residence has advantages in terms of capital gains, if we sell the Florida condo, will Canadian authorities recognize it as our permanent residence?
A.: The short simple answer is yes, Canadian tax law allows you to claim the principal residence exemption (I presume that’s what you mean by “advantages in terms of capital gains”) on a property that is located outside Canada, provided the property isn’t used for other purposes such as earning rental income while you’re not there. But I have to wonder if claiming the exemption would open the door to a host of tax complications related to residency.
For starters, I would refrain from referring to this property as your “permanent” residence because that implies you have taken up full-time residency in the United States; this implication is further reinforced by the fact that you own a home there but don’t own one in Canada. In addition, if you’re spending close to half of each year in the United States, you could be snared by the Internal Revenue Service (the IRS is the US equivalent to our Canada Revenue Agency, or CRA) through the “substantial presence test,” despite the prevailing notion that half of every year is okay.
To meet this test, you must be physically present in the United States on at least 31 days during the current year, and a total of 183 days during the three-year period that includes the current and two preceding years, counting all the days you were present in the current year, one-third of the days you were present in the prior year, and one-sixth of the days you were present in the United States in the year before that.
So, for example, even if you spend only five months (150 days) a year down south, then you would count 150 days for the current year, 50 days for the prior year, and 25 days for the year before that, totalling 225 days. On a steady basis, four months a year is close to the trigger at which point you can be deemed a US resident for tax purposes (120 days plus 40 days plus 20 days equals 180 days).
If you are caught by this test and haven’t already been doing so, you would be required to start filing US tax returns, which are much more complicated than the Canadian return—you could end up paying considerable amounts of money for professional assistance. Furthermore, if you are deemed by the Canadian tax authorities to have become a US resident (based on this test as well as your home ownership situation and possibly other factors), you will also be deemed to have disposed of all the assets you own in Canada, meaning a potentially huge tax bill.
The rules relating to this sort of cross-border arrangement can get exceedingly complex, and your letter doesn’t provide much detail on your financial or living arrangements, so I can’t say more much beyond this: if you’re spending that much of your time these days in the United States, you should definitely seek the advice of a professional who is well-versed in both Canadian and US tax law to ensure that in taking actions such as selling your home, you don’t attract undue attention from the tax authorities on either side of the border.