Border shakeup could have tax consequences for snowbirds

Canadian and U.S.authorities are about to make a dramatic shift in the way they determine the residency of individuals who split their time between both countries, and snowbirds unprepared for the changes could face serious tax consequences.

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The 500,000 Canadian snowbirds who flock to the United States will be more likely to rent than buy their property as the loonie remains weak and housing prices rise.

“The goal is to make Canadians live up to the rule against spending more than six months in theU.S.,” says Matt Altro, chief executive of Montreal-based MCA Cross Border Advisors Inc.

The changes are part of the Entry-Exit Initiative and the Perimeter Security and Competitiveness Action Plan, a larger cooperative effort between theU.S.andCanadathat was announced in February 2011.

As of June 30, travellers will be required to swipe passports both when they enter and when they depart each country.Canadaand theU.S.will share the information.

The new system clamps down on Canadian snowbirds accustomed to playing fast and loose with residency rules. Currently, Canadians have been required to self-report their time out of the country and their resident status. Authorities from each country tracked individuals only when they entered the country, but not when they left. Because even that more limited amount of information was rarely shared, typically neither country knew how long someone had been within its borders.

“Now both countries will be able, for the first time and in real time, to independently determine the number of days spent in each country,” says Roy Berg, director ofU.S.tax law at Calgary-based Moodys Gartner Tax Law LLP. “What this means for Canadian snowbirds is that they must be much more vigilant than they have been in the past about counting and reporting their days in and out of each country. They won’t be able to fudge even a little bit.”

Once a Canadian resident loses his resident status, he is deemed to have disposed of his assets

Being in theU.S.and or out ofCanadafor too long can have serious consequences. The best known is that Canadians who lose their “resident” status lose their entitlement to provincial health care.

Disqualification criteria vary between provinces.Ontario residents, for example, lose their status if they are away for more than seven months in a year, while disentitlement occurs for Quebec residents who are out of the province for more than six months.

Canadians who lose their resident status are also subject to departure tax.

“Once a Canadian resident loses his resident status, he is deemed to have disposed of his assets, must recognize the deemed gain on those assets, and pay tax on that gain,” Mr. Berg advises.

A snowbird who is in theU.S.too long also risks becoming a deemedU.S.resident subject to tax on worldwide income. As well, a snowbird’s estate could become liable toU.S.estate tax, which taxesU.S.residents on the fair market value of their worldwide assets when they die.

While the new rules will certainly help governments keep track of traveller movements, they will also aid travellers to determine how long they’ve been in either country with precision.

In the past, the only way individuals could be sure of how many days they were present in both countries, or that their own count was consistent with governments’ counts, was by contacting both the U.S. Customs and Border Protection and the Canadian Border Services Agency for border entry data.

“Only after receiving both reports and cross-referencing them could someone be sure of how many days they were present inCanadaor theU.S.,” Mr. Berg says.

Typically, however, it takes 30 days to get a report from Canadian authorities and twice as long from theUS.

“The delay could cause substantial hardship for individuals trying to comply with CRA and IRS filing deadlines,” Mr. Berg says.

But ameliorative effects aside, what’s clear is that a sea change in enforcement practices is on the horizon.

“It is as though we have all been lulled into the quotidian task of grading our own homework and have been generously giving ourselves high marks, regardless of whether we deserve them or even have completed the assignment at all,” Mr. Berg says. “In 2014, the teacher will begin to grade our homework — and she knows the answers.”