Exceptions to the US Residency Substantial Presence Test
You will be considered a United States (US) resident for tax purposes if you meet the substantial presence test for the calendar year. This test boils down to counting your days in the US. You can also be considered a US resident if you have a lawful permanent residence (a green card) in the United States.
To meet the substantial presence test, you must be physically present in the US on at least:
1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
However, there are certain exceptions to this “presence” rule, including:
- days you commute to work in the US from a residence in Canada if you regularly commute from Canada;
- days you are in the US for less than 24 hours when you are in transit between two places outside the United States;
- days you are in the US as a crew member of a foreign vessel; and
- days you are unable to leave the US because of a medical condition that develops while you are there.
Also, there are also several categories of exempt individuals, which include:
- an individual temporarily present in the US under certain foreign-government-related visas;
- a teacher or trainee temporarily present in the US under a J or Q visa
- a student temporarily present in the US under an F, J, M, or Q visa; and
- a professional athlete temporarily in the US to compete in a charitable sporting event.
In general, these individuals can exclude days in the US for the purposes of the substantial presence test. To do, an individual would need to file IRS form 8843.
Even if you do not qualify for one of the exceptions noted above, you may still be treated as a non-US resident if you can meet the closer connection exception or if you qualify as a resident of another country under an income tax treaty. The more common exception is to have a closer connection to a foreign country, which is determined on the basis of an individual’s circumstances. Form 8840 must be filed with the IRS to claim this exception.
Given that US residents are required to file annual US income tax returns and report their worldwide income, Canadian individuals should be aware of the US residency rules, especially if they are spending significant time across the border. Those spending time in the US should consider whether they qualify for an exception to the substantial presence test, such as the closer connection exception.
Please contact us if you have any questions pertaining to your specific circumstances.