Many Canadian retirees head to warmer locales for the colder months, with Florida remaining a popular destination. If you’re new to the snowbird lifestyle, you may not be familiar with the tax and financial implications associated with spending time down south. It’s important to be informed. You don’t want to be caught with unforeseen costs because you’ve under-planned or overstayed your welcome – we’ve got tips for you to consider.
Have adequate insurance in place before you go
If you remain in Canada for most of the year, you’ll probably be able to maintain your provincial health insurance. Rules on this vary across the country, so look into what applies in your home province before taking off to the beach. In addition to maintaining your Canadian health insurance, consider purchasing or maintaining travel insurance, home insurance (in Canada), rental insurance on your vacation property and health insurance to help cover your needs while abroad. Be aware of taxes on rental income.
Canadians who rent out their home in Canada while they are away
If you rent out your Canadian residence while out of country, be aware that you’ll incur taxes on all rental income generated from that Canadian home. While it’s not a “cross border” tax issue, Canadians who earn rental income in Canada will have to report this income on their Canadian return.
They can deduct the portion of their mortgage interest, property taxes, insurance, maintenance and other costs that apply to the rental period against the rental income earned.
Canadians should be careful when renting out their principal residence while they are away, as doing so can prevent the gain on the eventual sale of the property from being a tax-free transaction.
If a Canadian is going to be renting their home on a regular basis, the CRA could consider the property to have had a “change in use”. Canadians should be sure to file the proper “no change in use” election with the CRA to avoid their principal residence from being viewed as a rental property.
Canadians who earn rental income from U.S. real estate
Canadians who rent out their personal U.S. vacation home less than 15 days each year are not required to report the rental income to the IRS. However, Canadians who earn rental income from the U.S. from investment properties, or if they have rented their personal vacation home for more than 15 days, will have to file a tax return each year to report the income earned to the IRS.
There may be a state tax return required as well, depending on where the real estate is located. Florida does not have a personal income tax, but states such as Arizona or California do.
Even if there is a net loss on the rental property, the taxpayer should still file with the IRS to claim that loss for the year. In the year the property is sold, the losses will be used to offset some the gain a taxpayer will have to pay tax on.
Taxpayers can deduct mortgage interest, property taxes, insurance, maintenance and other costs against the rental income earned. Again, the individual would need to obtain a US Individual Tax Identification Number (aka “ITIN”) in order to file the return with the IRS.
Canadian snowbirds will also have to report the rental income from U.S. real estate on their Canadian tax return regardless of how many days the U.S. property is rented to others. All of the amounts will be converted to Canadian dollars. They should claim a foreign tax credit for any income taxes paid to the IRS or any state government on the rental income.
Understand the substantial presence test
If you remain in the United States for 31 days in a year and 183 days during a three-year period as determined by a formula, you will have met the substantial presence test which may have U.S. tax implications.
There’s a catch, though – the Internal Revenue Service (IRS) uses a weighted formula to determine the number of days spent in the U.S. There are exemptions to this rule – review the IRS web page on this subject to help ensure that your personal travel habits do not result in unplanned international taxation.
If you meet the substantial presence test you may still qualify for the closer connection exception. Essentially, if you can establish that Canada is your tax home and you had a closer connection to it than the U.S., you may not be treated as a U.S. resident for tax purposes. A closer connection to Canada would be based on significant contacts including the location of your permanent home, your family, your vehicle(s) and its registration(s), other personal belongings and where you conduct your personal banking activities. If you qualify for the closer connection exception, you will need to file a closer connection exception statement with the IRS.
Finally, if you meet the substantial presence test and do not qualify for the closer connection exception, the Canada-U.S. Tax Convention (the Treaty) provides a series of “tie-breaker” rules to avoid being considered a U.S. resident. However, even if the rules under the Treaty result in Canadian residency, you may still be required to make certain U.S. tax filings.
Your particular situation should be discussed with your accountant and tax advisor. It’s a lot to take in, but with some pre-planning, the trip south may be worth it to avoid all of that shoveling and cold. Safe travels!
Author: Emma Lynch, Wealth Counsellor, Wealth Stewards
This tax tip is a publication of DSK on developments in the area of taxation. The material is general in nature, is current as of published date, and should not be relied upon to replace the requirement for specific professional guidance. These posts should not be considered advice to be acted upon without further professional consultation, as each reader’s personal financial situation is unique.