Canadian residents are taxable on their world-wide income and capital gains. For most Canadians, this isn’t much of a concern since all of their income and property is in Canada. However, if you have property in or income from another country, you may have to deal with tax reporting and payment in that other country. The United States is a country with which many Canadians have dealings, and Florida is a state in which many Canadians spend time and own property.
If you are born in the US, have US citizenship or green-card, spend long periods of time in the US, or own property in the US, you may have to deal with the Internal Revenue Service and have filing and tax-payment obligations. The Canada-US tax treaty is meant to neutralize many of the potential problems for people who are tax residents of both Canada and the US, but this treaty doesn’t cover all of the issues that may arise.
US citizens (and double residents), just like Canadian residents, are required to pay tax on their world-wide income. The Canada-US tax treaty contains resident tie-breaker rules that try to assign a single residency location to people who are otherwise residents of both countries. However, the test is far from clear but and it is possible that the IRS and the CRA each take the position that you are a resident of the country. If this happens, you will have to prove your residency under the treaty, and this can be costly. It’s always best to be proactive and make sure you clearly fit one of the tie-breaker rules so you’re always the resident of either only Canada or the US. These rules can be complex, and expert tax assistance is often required.
Even if you are not a US resident, the IRA can deem you to be a resident. The most common situation is one that many Canadian snow-birds may face. If you spend too much time in the US, the IRS will deem you to be a tax resident under US law. The US uses a “substantial presence” test to add up the number of days you spend in the US over a period of three (3) years, and if these days over the past three years add up to 183, you will be deemed to be a US resident for tax reasons. If you are deemed to be a resident, you may have tax filing obligations and may face penalties that can be as high as $60,000 per failed reporting (in addition to criminal charges). Where you are deemed to be a US resident because of your length of stay, you have to file a Form 8840 and prove to the IRS that you have a closer connection to Canada than the US. The test mirrors that in the tax treaty, and considers a number of factors such as the location of your permanent home, the location of your family, social connection, cultural connections, business activities, and so on.
There are special tax problems when you own property in Florida (or other US states). Not only does having two properties you spend a considerable amount of time at make it harder to meet the treaty tie-breaker rules for residency, but there are also other tax issues. If you rent out your property for any period of time, then you have to file and pay income tax in the US, and any money that comes to you in Canada is subject to a 30% withholding tax on the gross amount (not deducting any expenses). To avoid this high rate, you would need to file an election to pay tax on net income and a tax return. Where you sell your property, the funds coming to Canada face a 10% withholding tax which is set off against the capital gains tax payable in the US (and the obligation to file a tax return in the US). You also have to pay property taxes and, if you pass away and still own the property, estate taxes in the US. All of these issues can make tax and estate planning very complex and difficult.
If you have property or income connections to the US or another country besides Canada, talk to a tax expert to figure out your international tax obligations.
