Flying South for the Winter - Income Tax Considerations for Canadians

Every year, thousands of Canadians escape our winter by traveling south, usually to the U.S., for a few weeks or months, or even the whole winter. While recent fluctuations in the value of the Canadian dollar relative to the U.S. greenback might mean that a stay in the U.S. will be more expensive this year, the lure of warm temperatures and no snow will still win out for many.
The thoughts of such snowbirds, intent on escaping the Canadian winter, are typically on improving their golf game or enjoying the sunshine, and not on the tax implications of their whereabouts. Notwithstanding, there are tax consequences and costs which can result from spending an extended period of time outside of the country.
The following information pertains to Canadians who will be spending a few weeks or months south of the border on an annual vacation, and staying in a rental property or hotel. The situation changes where the actual purchase of a property located in the U.S. is contemplated, as the rules governing the purchase and ownership of such property by Canadians are complex. The 2008 mortgage lending debacle in the U.S. has put residential real estate on the market in places like Florida and Arizona at prices which can be hard to resist. A double caveat is, however, in order. Professional tax advice is a necessity whenever a purchase of real estate in another jurisdiction is being contemplated. And additional caution is warranted where the contemplated purchase is of a property which has been foreclosed on or is being sold under power of sale. There have been instances where Canadians have purchased such property in the U.S. only to later find out that the foreclosure was not properly carried out and title to the property which they have purchased is in dispute. That’s not a situation any new property owner wants to find themselves in, especially when it’s all happening in a foreign country.
Tax 101 for snowbirds
Typically, snowbirds who go south for the winter remain what is called, in tax parlance, “factual residents of Canada”. In practical terms, the income of such taxpayers is treated, for Canadian tax purposes, as though they had never left Canada. Factual residence is determined by the Canada Revenue Agency (CRA) on the basis of whether a taxpayer has maintained “residential ties” to Canada. Such residential ties could include continuing to own a home in Canada, having a spouse or dependants who remain in Canada while the snowbird is out of the country, having personal property (like a car) in Canada, and continuing to hold a Canadian driver’s licence and medical insurance.
The vast majority of snowbirds who winter down south do maintain sufficient residential ties to Canada to be considered factual residents. Consequently, when they file their tax returns for the year, they follow all the same rules as year-round Canadian residents. They report all income received during the year from both inside and outside Canada and claim all available deductions and credits. Income tax is paid to the federal government and to the province with which their residential ties are kept. Finally, snowbirds who remain factual residents of Canada remain eligible for the goods and services tax credit, which may be paid to recipients outside of Canada.
Health care coverage
One of the biggest concerns of many snowbirds is maintaining health care insurance coverage while out of the country. In all cases, the availability and degree of coverage will depend on the health care plan in effect for the province or territory of which the snowbird is a resident, and it’s necessary to confirm in advance the coverage which will be made available for out-of-Canada medical expenses. Most snowbirds end up obtaining supplementary health-care coverage, and the premiums paid for such coverage can usually be claimed as a medical expense on the Canada tax return. As well, any out-of-pocket costs incurred for eligible medical expenses while out of Canada (whether for the individual or his or her spouse) can be claimed as a medical expense on that year’s tax return.
Old Age Security and Canada Pension Plan payments
Both Old Age Security (OAS) and Canada Pension Plan (CPP) benefits can be paid to benefit recipients who are living outside Canada, and there is no change in the amount of the benefits. As well, such payments can be made by direct deposit, and in US dollars.
Both OAS and CPP benefits received will, of course, be subject to Canadian income tax and OAS payments will be subject to the OAS “recovery tax” (clawback), if the recipient’s income for the 2011 tax year is more than $67,668.
Application of U.S. tax laws
The application of U.S. tax laws to snowbirds can, unfortunately, be a good deal more complex than the equivalent Canadian laws, and any snowbird who thinks he or she may have a U.S. tax filing or payment obligation should certainly seek professional advice. That said, it is possible to summarize in a general way the basic rules which govern the application of U.S. tax laws to snowbirds.
Canadian residents who spend part of the year in the U.S. are classified as either resident aliens or non-resident aliens. Resident aliens are generally taxed in the U.S. on income from all sources worldwide and non-resident aliens are generally taxed in the U.S. only on income from U.S. sources. The classification depends, in the first instance, on the amount of time the person spends in the U.S. during a given calendar year. A person who was in the U.S. for 183 days or more (i.e., more than half the year) during the calendar year is considered to have met the “substantial presence” test and is classified as a resident alien of the U.S. At the other end of the spectrum, a person who was in the U.S. for less than 31 days during the calendar year is considered a non-resident alien. Those who fall in the middle (which would include most snowbirds who spend, for instance, the months of January and February in Florida or Arizona) may meet the substantial presence test, depending on the application of a complex formula which uses a weighted average of the number of days of residence in the current and two previous calendar years.
Recognizing that the tax consequences of spending extended periods of time south of the border will affect thousands of Canadian taxpayers, the CRA has published an information booklet on the subject, which is available on its Web site at http://www.cra-arc.gc.ca/E/pub/tg/p151/p151-10e.pdf. The Agency has also devoted a section of its Web site to issues affecting Canadians who vacation out of the country, and that information can be found at http://www.cra-arc.gc.ca/tx/nnrsdnts/sth-eng.html.
 
Even this brief summary is sufficient to illustrate the complexity of the U.S. tax laws as they may apply to snowbirds. The best advice for those whose plans include an extended stay south of the border, particularly if they are contemplating repeat visits on an annual basis, and certainly if they are contemplating the purchase of a U.S. vacation home, is to obtain professional advice in advance on the U.S. and Canadian tax consequences. Doing so can ensure that what was intended to be a relaxing vacation doesn’t end up causing a major tax headache.