Mary and Joseph had been making a winter pilgrimage to the United States for many years, in search of warmer weather. Each year they would spend about five months in a cosy park model trailer in Mesa, Ariz., soaking up the sun and engaging in some full contact mah-jong.
They loved it so much they might have stayed longer, but they knew that as Canadian citizens they were travelling to the U.S. on a visitor's visa, and they could only be present up to 182 days a year in the U.S.
Last fall, as they were chatting pleasantly with the representative of the U.S. Customs and Border Protection, he surprised them by asking why they had not filed their IRS Form 8840 for the last two years.
The surprise turned to shock when the border guard told them that, as a result, they are now subject to U.S. tax on their worldwide income.
The 8840 is a tax exemption form, which allows Canadians to have a "substantial presence" in the U.S. but still pay their taxes in Canada. The full name of the form is Closer Connection Exception Statement for Aliens.
In this context, "aliens" is us. The form asks you a series of lifestyle and personal questions to determine if you have a "closer connection" to Canada or the United States. Whichever country wins the closer connection duel gets your taxes.
For most Canadians who have a permanent home in Canada, who have most of their banking, investments, health care, driver's licence, car and voter registration, cultural and religious affiliations in Canada, there is usually no problem in establishing a closer connection to Canada.
In that case, there is no requirement to file a U.S. tax return, but there may continue to be an annual requirement to file the 8840 by June 15 each year.
If you spent more than 30 days in the U.S. in 2008, then this applies to you. The first step is to determine if you have a "substantial presence" in the U.S. Here's how you make the calculation for this year. Add together:
- Total number of days spent in the U.S. in 2008;
- One-third of the days spent in 2007; and,
- One-sixth of the days spent in 2006.
If the total is greater than 182, then the filing of the form 8840 is mandatory, separately for each spouse. If the total is 182 or less, then submitting the form is optional.
Don't count any days you regularly commuted to work in the U.S., partial days passing through on your way to another country, days you were unable to leave the U.S. due to medical reasons, or days spent as a teacher, trainee, student or as a professional athlete engaged in a charitable sports event.
OK, let's address the usual objection that people have to filing anything with the IRS -- they don't want the IRS to know about them. I understand that, and I hear all sorts of arguments against making your presence known.
Some people think this is just the first step in developing a database of future taxpayers, and the IRS will change the rules as soon as they get enough names.
Other people seem to have skeletons in their closets that they want to stay hidden.
My personal feeling is that anyone who continues to cross the border each year is going to eventually be asked about form 8840. The IRS and the U.S. Department of Homeland Security are getting closer to linking their computer systems, if for no other reason than anti-terrorism measures.
Joseph and Mary are not a real couple, but one of these days their story may be true.
To obtain your form, go to: www.irs.gov/pub/irs-pdf/f8840.pdf.
It then gets mailed to:
U.S. Department of the Treasury
Internal Revenue Service Center
Make a photocopy of your forms and carry them with you when you head for the border.
If the spring weather carries on the way it has in Western Canada lately, there may be another migration of snowbirds south this month.
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc., advising clients with $2 million to $10 million of investment assets. You can e-mail him at firstname.lastname@example.org