Canada: Snowbird Tax Traps

Last Updated: April 28 2014
Article by Samantha Prasad

This year's cold and lengthy winter had me constantly daydreaming of beaches and warmer weather. I certainly envy those lucky ones who head south at the first sign of snow.

The only thing that makes me a little less envious is the knowledge that those Canadian snowbirds down in Florida, enjoying the sun and sand for months at a time, also have to deal with the potential tax traps that Uncle Sam has carefully laid out for them.

Living Abroad:

Although you may consider yourself a resident of Canada, and you've duly filed your Canadian tax each spring, be aware that if you spend a substantial portion of the year in another country, you may be found to be resident in that country for tax purposes.

This can, in turn, lead you to more tax headaches than you imagined. For example, if you are found to be resident in the U.S. for tax purposes, you will be taxed in the U.S. on your worldwide income in much the same manner as a U.S. citizen. That means you will be required to file a U.S. tax return and pay U.S. tax on your income from all sources.

Specially, you will be resident in the U.S. if you meet the lawful permanent resident (or green card) test, or the "substantial presence" test. Under the first test, if you have a green card, you will be treated as a U.S. resident, regardless of whether you are physically present in the U.S. The second test, however, requires a little more analysis.

"Substantial Presence"

Under the "substantial presence" test, you will be considered a U.S. resident if you spend a substantial portion of the year in the U.S. This test is calculated (generally) as follows:

  • You have been in the U.S. for more than 30 days in the current year; and
  • If the total number of days you spent in the U.S. during the current year, plus one- third of the days you spent there last year, plus one-sixth of the days you spent in the year before that, equals or exceeds 183 days.

You can, therefore, spend up to 120 days each year in the U.S. without crossing this threshold test. When calculating the number of days, you should know that a partial day in the U.S. counts as a full day, although you can exclude days that you were in transit in the U.S. (for less than 24 hours) on your way to another foreign country.

As well, you may be able to exclude days spent as a teacher, trainee, student, or professional athlete competing in certain charitable sporting events.

If you meet the above "substantial presence" test, you will be subject to U.S. tax and filing requirements, even though you may also be a Canadian resident and pay Canadian taxes.

In case you are considered a U.S. resident, you can try to extricate yourself from the U.S. by either claiming the "closer connection exception" allowed under the U.S. Internal Revenue Code, or claiming a treaty exemption under the Canada-U.S. Tax Treaty.

To claim the "closer connection exception" under the Code, you have to establish that you:

  • Maintain a permanent home in Canada (no need to own; you only need continuous access), as well as personal belongings
  • Have family in Canada ✎Are employed or carry on business in Canada
  • Do banking and hold investments in Canada
  • Vote in Canada
  • Participate in social or religious organizations in Canada

You cannot, however, claim this exception if you spend more than 183 days in the U.S. in the current year or if you have applied for a green card.

The "Tie-breaker" Rules

If you can't claim the closer connection exception, there are "tie-breaker" rules under the Canada-U.S. Tax Treaty which take you through a series of tests.

First, if you have a home avail- able to you only in Canada, you can claim residence here. However, the likelihood is that you may also own property in the U.S., so you would have to look at the next test.

This next test focuses on where your centre of vital interest lies (i.e., where your personal and economic relations are closer to) and claim residence in that jurisdiction. Note that there is no hard or fast test to answer this question. Rather, you need to show that all sorts of factors go into proving that your centre of vital interests lies in Canada.

Next, if your centre of vital interests cannot be determined, you will be resident where you have your habitual abode. If that happens to be in both countries (or in neither), then you will be deemed resident in the country of which you are a citizen. Finally, if you are a citizen of both countries (or neither), then the U.S. and Canada will mutually settle the question for you.

Note: You will be subject to certain filing requirements in the U.S. in order to claim any of the above exemptions. Care should be made to ensure you have filed the appropriate forms and that they have been filed by the deadlines.

Rental Income

If you own a second home in the U.S., chances are that you may be renting it out during the off-season to help offset costs (especially if the home is sitting empty for that part of the year).

However, if you do this, be aware that in the U.S., with- holding tax of 30 per cent normally applies to the gross rent paid to you. Unfortunately, this withholding tax is not reduced by the Canada-U.S. Tax Treaty (unlike withholding taxes on interest and dividends).

You can avoid this tax by voluntarily filing a U.S. tax return and electing to pay the tax on the net rental income. It may be advisable to take advantage of the net rental income election if you incur expenses in respect of your U.S. rental property, such as mortgage interest, maintenance, insurance, property taxes etc., by deducting these expenses. Yes, you can deduct mortgage interest payments in the U.S. on your home or vacation property.

This election can apply for future years and to all of your rental real estate in the U.S. On your U.S. return (1040NR) you would show the income and expenses, as well as the amount of tax withheld.

This may also allow you to receive a refund for any taxes withheld (to the extent the withholding amount exceeds the tax payable). To make the net income election you must file a 1040NR, including a statement declaring that you are making the election. It should include the address of the property and your percentage ownership.

The 1040NR is due by June 15th of the year following the calendar year in question (subject to any extensions). Once the election is made, you should provide Form 4224 to your ten- ant and the 30 per cent with- holding will not be required.

Sale Proceeds

If you decide to sell your "home away from home", a with- holding tax of 10 per cent of the gross sale price is normally payable under the Foreign Investment in Real Property Tax Act ("FIRPTA") at the time of sale.

In addition, you will still be required to file a U.S. tax return for the year of sale as the U.S. has the right to tax non-residents on the sale of real property in the U.S. The tax withheld under FIRPTA may be offset against the U.S. income tax payable on any gain realized on the sale (or refunded if it exceeds the income tax liability) that you will have to report in your U.S. tax return. Note, however, that the tax under FIRPTA may be reduced or eliminated in certain circumstances:

There is no withholding requirement where (a) the purchase price for the property is under US$300,000, and (b) the property is acquired by the purchaser as a home, with actual plans to reside in it for at least 50 per cent of the time that the house is occupied in the first two 12 month periods after purchase. The withholding tax can be reduced if you obtain a with- holding certificate from the IRS on the basis that the expected U.S. tax liability on the gain will be less than 10 per cent of the sale price. The certificate will indicate the reduced amount of tax that should be withheld.

On a sale of your real estate, you will need to provide an Individual Taxpayer Identity Number ("ITIN") to the transfer agent, even if there is no with- holding tax due.

The sale cannot close with- out both the vendor and purchaser providing an ITIN. In addition the IRS will not issue a receipt for the withholding tax paid unless both the vendor and purchaser provide an ITIN. An ITIN can be obtained by filing Form W-7 with the IRA. This can be at least a six week process.

As mentioned above, if you sell your real estate, you will have to file a U.S. tax return to report the gain (with a credit that may be claimed for tax withheld under FIRPTA). If you have owned the property since before September 27, 1980, you can take advantage of the Canada-U.S. Tax Treaty to reduce the gain.

In this case, you will only have to pay tax on the gain that accrued since January 1, 1985 (this does not apply to business properties that are part of a permanent establishment in the U.S.). To claim this treaty benefit, you have to make the claim on your U.S. tax return and include specific information about the sale.

Any U.S. tax paid on the sale of the property will generate a foreign tax credit which you can use to reduce your Canadian tax on the sale (courtesy of the Treaty). Note: This tax credit may be limited if you use your principal residence exemption to reduce your Canadian gain.

U.S. Estate Tax

If you continue to own the U.S. property until you pass away, you will be subject to U.S. estate tax, which in the past has ranged from 18 per cent to as high as 55 per cent (Back in 2010, the U.S. estate tax regime was repealed for that one taxation year).

Currently, the U.S. estate tax rate ranges from 18 per cent (where value is less than US$10,000) up to 40 per cent (on amounts exceeding US$1,000,000) on the fair market value of your U.S. property.

However, there is currently a US$5.34 million exemption available for U.S. estate tax for U.S. residents/citizens. Fortunately, under the Treaty, Canadians are allowed similar treatment, although you must prorate the value of your U.S. property against the value of your world- wide estate.

Essentially, Canadians are able to take advantage of a unified credit which can reduce or even completely shelter the U.S. estate tax payable. This credit uses as a baseline the U.S. estate tax that would be payable on US$5.34 million of assets, being $2,081,800. Accordingly the unified credit is calculated as being equal to the greater of US$13,000 and US$2,081,800 times.

So, if your U.S. assets represent 20 per cent of your world- wide assets, you would be entitled to a credit equal to US$416,360 ($2,081,800 times 20 per cent). Note: The Treaty also provides for a marital credit where property is left to a surviving spouse

Avoiding U.S. estate tax has become a highly discussed topic in Canada over the years. The CRA's announcement in 2004 clamping down on so-called "single purpose" corporations meant that U.S. estate-tax- avoidance strategies have had to be rethought.

For example, the use of non- recourse debt may reduce the value of the property for estate tax purposes in the U.S. since the lender's only recourse is to foreclose on the property.

So if a non-recourse debt is outstanding at the time of death, the debt may reduce the value of the property, dollar for dollar, thereby reducing the value of the property for U.S. estate tax purposes. Accordingly, one may want to consider speaking to your financial institution about putting a non- recourse debt in place.

An alternative option could also involve holding the U.S. property through a trust. This has become a more popular alter- native. A Canadian resident trust would be formed and structured in such a way that while the U.S. property is in the trust, no U.S. estate tax is payable.

The downside, however, is that since a Canadian resident trust is deemed to sell all of its assets on every 21st anniversary of the trust, there could be a Canadian capital gain tax hit if the property has grown in value.

Accordingly, for Canadian purposes, it is important that the property be distributed out of the trust prior to its 21st anniversary. Therefore, the use of a trust real- ly only defers U.S. estate tax to future generations who are beneficiaries of the trust. Note – even though the trust would be a Canadian trust, you should obtain U.S. tax advice to ensure it contains the proper drafting to avoid U.S. estate tax during the lifetime of the trust.

On a happy note, if the U.S. situs property is a true rental investment (and not a personal use property), owner- ship of the property in a Canadian holding company may still be an option – but if the property is personal use, then this option could result in Canadian tax to you.

My advice: even though it would never occur to you to talk to your tax advisor when buying a U.S. home, doing so could help you properly structure the ownership of the U.S. property and avoid, or at least defer, U.S. estate tax.

Originally published in The TaxLetter, MPL Communications Inc.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Samantha Prasad
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions