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Canadian snowbirds can build a messy tax nest

Is the weather cold enough for you yet? Some people will do just about anything to find warmer weather this time of year. Take Charles McKinley, 27, of New York City, who actually shipped himself by air freight to his parent's home in DeSoto, Tex., in 2004. He did it to save air fare. As it turns out, Mr. McKinley had a UPS charge card -- the only card he had access to -- and wanted to get home badly enough that he shipped himself in a crate.

Snowbirds understand the desire to head south too. And many snowbirds spend in excess of four months each year in the United States, which can cause tax filing issues. Let me give you an overview of what to consider if you're one of these folks.

The test

If you spend enough time in the United States each year, you might just meet the "substantial presence test" (SPT) under U.S. tax law. If so, you'll be deemed a U.S. resident for tax purposes, and you may have to file a U.S. tax return and report your worldwide income for the year. If this U.S. tax filing is required, you'll pay tax in the United States, and will have to claim a foreign tax credit on your Canadian tax return for the amount of the U.S. taxes you pay. This will do nothing but shift tax revenue from Canada to the United States, complicate your tax affairs, and cost you no small sum to hire a professional accountant to prepare your tax returns.

Now, what is this SPT? It works this way: Add up all the days you are present in the United States in the current calendar year, plus one-third of the days in the prior year, plus one-sixth of the days in the second prior year. If the total comes to 183 days or more, and your days in the United States in the current year are at least 31, then you've met the test. If you do the math, you'll meet the SPT if you're present in the United States, on average, for 122 days (about four months) each year for three consecutive years.

By the way, if you're present in the United States at any time in a particular day (the number of minutes or hours doesn't matter), you must count that day as one full day you were present south of the border. There are a couple of notable exceptions to this rule for those who are just passing through the U.S. en route to a destination outside the United States, or those who are cross-border commuters and return home to their Canadian residence every day after work. (The rules are simplified here, so visit a tax pro if you think an exception might apply to you.)

The relief

So, you've met the SPT. Now what? You may qualify for an exception to the rule that will require you to pay taxes in the United States. It's called the "Closer Connection Exception." Basically, if you have a closer connection to Canada than the United States (as many snowbirds do), you may get away with simplified U.S. tax filings. To qualify for this exception, you must be present in the United States for less than 183 days in the year in question, and must maintain a tax home in Canada during the year.

To take advantage of this exception, you must still file forms with the Internal Revenue Service in the United States. Specifically, you must file U.S. Form 8840, "Closer Connection Exception Statement," and attach it to Form 1040NR. These should be filed each year by June 15 for the prior calendar year. You'd be wise to visit a tax pro to make sure this is done right.

Tim Cestnick is a principal with WaterStreet Group Inc. and author of Winning the Tax Game among other titles.

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