Substantial Presence Test – Tracking your days
You can be deemed to be a U.S. resident for tax purposes and taxable in the U.S. on your worldwide income, if you spend too many days in the U.S. So it is crucial that you track your days of presence there. In fact, the U.S. has established the “Substantial Presence Test” which takes into account the number of days spent in the U.S. over the current taxation year and the two previous years. This test even includes days visiting for a simple shopping trip! To meet this test, you must be physically present in the U.S. on at least:
a) 31 days during the current year, and
b) 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
All the days you were present in the current year, and
• 1/3 of the days you were present in the first year before the current year, and
• 1/6 of the days you were present in the second year before the current year.
On December 7, 2011, former Prime Minister Harper and President Obama released the Beyond the Border Action Plan for Perimeter Security and Economic Competitiveness. As part of this Action Plan, Canada and the U.S. committed to establishing a coordinated entry and exit information system, which permits sharing information so that the record of a land entry into one country can be utilized to establish an exit record from the other. As part of this initiative, both countries now have information systems that track the number of days an individual is present in each country.
This information should be readily available and can be verified on the U.S. Department of Homeland Security website. You will need your passport number.
As a Canadian tax resident, should you determine that you fall under the U.S. Substantial Presence Test, you could still be exempt from U.S. taxation on your worldwide income. In fact, the Canada-U.S. income tax treaty sets out rules for deciding whether Canada or the U.S. has the right to claim you as a tax resident of their country when you are deemed to be a resident of both countries. The tax treaty allows you to determine which country you have a closer connection to by considering your actual residential ties. In order to demonstrate your closer connection to Canada when you are otherwise deemed to be a resident of the U.S. under the Substantial Presence Test, you must file Form 8840 – Closer Connection Exception Statement for Aliens with the IRS every year by June 15.