Issues to consider when visiting or investing in the U.S.
To summarize these complex issues in one Tonic article is impossible, to say the least. We outline 4 main issues below, for your consideration and further exploration.
1. Determining Canadian/U.S. Residency Status
If you are a Canadian resident who spends a considerable amount of time in the U.S., you may be surprised to know that your presence in the U.S., even if you are there only vacationing, could create U.S. tax and reporting obligations on your worldwide income if your U.S. residency status is “U.S. resident alien”.
In order to determine your U.S. residency status, the Internal Revenue Service (IRS) applies a test known as the “substantial presence test”. This test averages the number of days you were present in the U.S. during the past three-year period, beginning with the current year.
Fortunately, there are circumstances where Canadian residents may avoid the status of U.S. resident alien and thus avoid the requirement to file a U.S. resident tax return (Form 1040). However, failure to understand the U.S. tax obligations imposed by the IRS can result in unpleasant surprises and costly penalties.
The full article provides Canadians who frequently travel to the U.S. with a basic understanding of U.S. residency under U.S. tax laws and potential ways to avoid U.S. tax and reporting obligations associated with being considered a U.S. resident alien. Be sure to consult with your own tax advisor before acting.
2. Healthcare Coverage
It's not a question of being able to afford travel insurance. It's more a question of whether you can afford to travel without it. When you're travelling, even a minor accident or sickness can become a major expense and inconvenience. Having travel insurance will go a long way toward ensuring you enjoy your time away. If you were to review your government health plan, you will find that you only have limited coverage against emergency medical expenses incurred outside Canada. Even within Canada, but outside your home province/territory, you may incur emergency medical expenses that are only partially covered or not covered at all.
3. Owning and Renting Property in the U.S.
Each year, many retired individuals escape from the long and cold Canadian winters by flocking to popular warm climate destinations in the U.S. such as Florida and Arizona.
While some Canadian snowbirds choose to rent their vacation or retirement home in the south, others choose to purchase their own condo or other U.S. real estate property. Though owning your own U.S. vacation or retirement property may have its advantages, you may be surprised when you factor in the numerous tax requirements and other considerations that can substantially increase the complexity of owning a home in the U.S. Those additional issues may include U.S. tax on rental income, potential U.S. withholding taxes should you sell your real estate property and U.S. Estate Taxes upon death. Additionally, it is important to be aware of your potential dual tax filing requirement that may require you to file both a Canadian and a U.S. tax return (even for taxation years for which there is no tax payable in the U.S.). While foreign tax credits are available to reduce or eliminate potential double taxation, it is not always possible to avoid any incremental taxation.
Whether you are a Canadian resident who either already owns real estate property in the U.S., or if you are contemplating such a purchase, raise your awareness of key U.S. tax implications and other considerations by addressing questions such as: What are my tax obligations on renting/selling U.S. real estate property? What are the tax implications on death? Are there any strategies available to minimize tax? Is my Canadian Will and Power of Attorney adequate to cover my U.S. real estate property?
4. U.S. Estate Tax Issues
The U.S. has a wealth transfer tax regime that imposes taxes on your right to transfer your assets upon your death. Did you know that even Canadians who die owning U.S. assets – such as stock of a U.S. corporation, a yacht in Florida, or a ski chalet in Colorado – may be subject to U.S. estate tax even though they are not U.S. residents, citizens or green card holders?
A more in-depth look, would explore the U.S. estate tax exposure that may exist for Canadian residents should they die in 2012 owning U.S. property, and highlights common estate planning strategies that you may be able to use to minimize or eliminate your exposure.
Feel free to visit our website www.susangottlieb.com and click on the tab “Snowbirds Beware” for the full article on each of these 4 issues. Also be sure to consult with a professional cross-border tax advisor regarding your particular circumstances.
Susan Gottlieb CIM, FCSI, is a Vice President and Investment Advisor with RBC Dominion Securities Inc. Member CIPF, susangottlieb.com