Canadian residents probably do not give much thought to Obamacare, otherwise known as the Affordable Health Care Act in the United States. The program will have little or no impact on most Canadians. But in some circumstances, Obamacare will extend across the border to a small percentage of individuals living in Canada.
Specifically, Obamacare may be relevant to Canadian residents who are also U.S. citizens or and U.S. permanent residents (green card holders), as well as Canadians who are present in the U.S. long enough during a calendar year to qualify as resident aliens for U.S. tax purposes.
Before discussing these impacts, it is helpful to understand Obamacare's basic provisions. The Act requires certain individuals to maintain a minimum level of health care coverage, and certain business groups to provide health care coverage to their employees. Further, certain additional taxes were implemented on wages and investments to cover the related costs. The taxes were implemented in 2013, the minimum health care coverage for individuals is required for 2014, and employers are required to comply with these new rules by 2015. This article focuses on the minimum health care coverage for individuals and what is required for those normally living outside the U.S.
U.S. citizens and U.S. residents (including children) are required to comply with the new rules unless they qualify for one of the exemptions included in the regulations. Fortunately, one of those exemptions is for a U.S. citizen who is a bona fide resident of another country for the entire year. This exemption should apply for the majority of U.S. citizens living in Canada throughout the year. However, they may not be completely "off the hook." The draft instructions for Form 8965 indicate that, in order to avail themselves of this exemption, they must file the form with their U.S. tax return each year and claim the full year exemption. Failure to file may result in penalties, otherwise known as the shared responsibility payment, discussed below.
The exemption above applies only to U.S. citizens, not U.S. residents. Another exemption applies to both U.S. citizens and U.S. residents. This second exemption requires the taxpayer to have been outside the U.S. for at least 330 full days during a 12-month period. In these circumstances, the taxpayer may claim an exemption for any month during the tax year that is included in the 12-month period. For example, picture a U.S. resident who moved to Canada in June of 2014 and lived in the U.S. for three full years prior to coming to Canada. If this individual remains outside the U.S. for 330 days between June 2014 to June 2015, they could be exempted from the minimum health care coverage for the months of June to December on their 2014 U.S. tax return. For the most part, this rule applies to U.S. citizens or U.S. residents coming to Canada during the year, or departing from Canada during the year. In these circumstances, the taxpayer must monitor the time spent back in the U.S. to avoid the requirement to maintain the minimum level of health care coverage under the Act.
A U.S. resident is defined under U.S. law to include an individual who spends a significant amount of time in the U.S. (To review the definition and how to avoid being a U.S. resident, refer to the Collins Barrow U.S. Tax Alert from May 2014 entitled "Mitigating U.S. Tax Exposure through the Closer Connection Statement.") It is possible for a Canadian who spends a significant amount of time in the U.S., and who did not take steps to avoid being treated as a U.S. resident, to be subject to the Obamacare regime and to be required either to make the shared responsibility payment (penalty) or to maintain the minimum level of health care coverage as required by U.S. law. The draft instructions to Form 8965 indicate exemption from coverage when Form 1040NR is filed. Those who file form 1040NR need not file Form 8965. Presumably then, a Canadian resident under the Canada-U.S. Tax Treaty who files form 1040NR with a treaty statement declaring Canadian residency would be exempt from the provisions of Obamacare even if they would otherwise be deemed a resident of the U.S. under U.S. tax law. Many snowbirds should consider filing Form 8840 declaring that their residential ties are closer to Canada, they would not be considered residents of the U.S., and are therefore exempt from filing Form 8965.
Those who do not fall under one of the exemptions (there are other exemptions, such as low income thresholds or hardship provisions, which are not discussed here) will be required to maintain a minimum level of health care coverage, or make the shared responsibility payment on their tax returns. This "penalty payment" starts on the 2014 U.S. tax return as the greater of $95 per person or 1 per cent of household income. In 2015 the penalty increases to $325 per person or 2 per cent of household income, and in 2016 it jumps to $695 per person or 2.5 per cent of household income, whichever is greater.
Therefore, U.S. citizens will want to make sure they file Form 8965 to claim the exemption if they are entitled to it, or check with their medical insurance provider to make sure their plan meets the minimum standards as required by U.S. law if they don't meet the exemption. U.S. residents, including Canadians who spend a significant amount of time in the U.S., will want to monitor the days they spend in the U.S. and ensure the appropriate U.S. tax filings are made each year. If they do not meet one of the exemptions, they must comply with the Obamacare rules. The penalties are steep enough – and getting steeper each year – that ignoring the Obamacare regime could prove to be costly to the unsuspecting individuals who get caught under these rules and ignore the required tax filings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.