For a country that traditionally has eschewed high taxation, the United States nonetheless has a long fiscal reach beyond its borders. You don’t have to be a U.S. citizen, or even a resident under most conventional definitions, to be on the radar of the Internal Revenue Service (“IRS”). Moreover, unlike Canada, the United States imposes an estate tax, and the rules that determine one’s liability for this tax are different from those for income tax.
The determination of whether you are a resident of the U.S. for income tax purposes is crucial because it determines whether you are liable for U.S. income tax on your worldwide income or only on your U.S.-source earned income. In addition, depending on your residency status, onerous additional tax filings related to your ownership in shares of a Canadian private company, TFSAs, RESPs, or non-U.S. mutual funds held in non-registered accounts may apply.
If you are a “resident alien” under U.S. tax legislation, you will be liable for U.S. income tax on your worldwide income. Under U.S. domestic law, you are a resident alien if you:
• are a U.S. citizen;
• are a lawful permanent resident (i.e. hold a green card); or
• meet a “substantial presence test”, which is determined by a formula based over a three-year period. Refer to the Kerr article https://kerrfinancial.ca/tracking-days-u-s/
If you meet the substantial presence test, you could still escape the IRS’s reach if you can prove you have a “closer connection” to another country. To do this, you must file IRS form 8840 (Closer Connection Exception Statement for Aliens) each year. Nonetheless, if you don’t qualify under the closer connection exception, the Canada-U.S. tax treaty includes rules to determine in which country you are taxable. Furthermore, state income tax residency rules should be considered depending on where you spend your days in the U.S.
The U.S. imposes a tax on estates of U.S. citizens and “domiciliaries” based on the value of their worldwide assets owned at death. “Domicile” is defined under U.S. estate tax law. Generally, a non-U.S. citizen is considered to be domiciled in the U.S. if that individual lives in the U.S. with no present intention of leaving the U.S. The law looks to a set of facts and circumstances, which include your statements of intent on your visa and green-card applications, your tax returns and wills, the size of any residences in the U.S. and abroad, the location of family members and business interests, country clubs, etc.
If you are not a U.S. citizen or a domiciliary for estate tax purposes, estate tax would only be payable to the IRS on certain U.S.-based assets, such as real estate and other tangible property, as well as shares or debt issued by U.S. corporations. State estate tax may also be levied. Estate tax exemptions and deductions vary for U.S. citizens and domiciliaries versus non-U.S. domiciliaries, but various planning options are available to minimize your exposure to U.S. estate tax.
U.S. estate and income tax law is extremely complex and the IRS unquestionably has a long reach within and beyond its borders. However, with proper planning and an understanding of your U.S. residency status, tax costs can often be minimized and, in some cases, simply avoided.