This column is of special interest to snowbirds, but also to Americans who have moved to Canada. There is a positive change to Canada Revenue policy on transfers of 401K or IRA plans to Canada.
First, let's remind snowbirds about their obligation to the U.S. government and the IRS.
All Canadians who visit the U.S. do so under a B-2 visa, which is for "tourism, vacation and pleasure visitors." Canadians who establish a "substantial presence" in the U.S. have a reporting requirement to the IRS.
This applies to any Canadian who spent 31 days or more in the United States in 2011 and a total of 183 days during 2011, 2010 and 2009, counting all of the days of physical presence in 2011, one-third of the days of presence in 2010 and one-sixth the number of days in 2009.
If you spent more than 121 days each year, this applies to you, without even doing the calculation. That's the cut-off line, as illustrated here:
-- 2011 -- 121 days
-- 2010 -- 40 days (one-third of 121)
-- 2009 -- 20 days (one-sixth of 121)
The total is 121 + 40 + 20 181, and therefore, no "substantial presence." However, if this example showed 123 days in 2011, that would make the total 183, and therefore a "substantial presence."
Don't count days you commute to work in the United States or days you were unable to leave due to a medical problem that developed while you were in the U.S. However, travel days that include presence in the U.S. count.
People with this substantial presence would be required to file a U.S. tax return unless they are able to prove they have a "closer connection" to Canada than to the U.S. In that case, then no U.S. tax return needs to be filed.
You prove your closer connection to Canada by filing IRS Form 8840, the Closer Connection Exception Statement for Aliens. This asks which country issued your passport, the location of family members, your car registration, social, religious and political organizations, where you are registered to vote, where you do business and your own opinion about your connection.
If this shows you have a closer connection to Canada, then you're done. If it shows a closer connection to the U.S., then get a U.S. accountant.
This form must be filed by June 15 of each year, for those snowbirds with a "substantial presence" under the calculation. The form can be printed from the IRS website at www.irs.gov . It is then mailed to the Department of the Treasury, IRS Centre, Austin, Texas, 73301-0215.
American citizens living in Canada -- a completely different tax category -- still need to file a U.S. tax return each year, as we have mentioned several times. Although the media barrage has died down and the IRS has become a little more humane in its enforcement procedures, the rule still applies.
Good news for some people who have worked in the United States and then returned to Canada relates to folks with 401K or IRA retirement plans, and who are under age 59.5. It has always been the case these plans may be transferred to an RRSP under Paragraph 60 of the Income Tax Act.
However, the IRS imposes a withholding tax of 10 per cent. Starting in 2012, CRA has changed its policy to allow this as a foreign tax credit on the Canadian tax return, thus reducing Canadian taxes by the same amount.
Previously, CRA had disallowed this credit, calling the tax a "penalty" instead of foreign tax paid.
Just to confuse things further, a lump-sum withdrawal from an IRA or 401K -- as opposed to a withdrawal for transfer to an RRSP -- results in a 15 per cent U.S. withholding tax. This also earns a foreign tax credit on the Canadian return.
As always, if you are in any of these situations, obtain qualified professional advice before doing anything.
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Happy birthday Saturday to my wonderful wife of 29 years. Every time I think of buying a lottery ticket, I'm reminded I already won the big one, so why bother?
David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).