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Tax

Work from home expenses

Work from home expenses

As the pandemic drags on, most office workers are being asked to continue staying home. While more businesses are opening for in-person transactions, those who really can work remotely are generally being asked to do so.

Employers may be seeing a decrease in some expenses as a result of having empty, or nearly empty, offices. No more need to keep the snack kitchen stocked or buy yet another birthday cake. While employees may be saving money on commutes, coffee breaks and haircuts, they also may be seeing some of their own home expenses rise. For example, the cost of having high-speed internet or the additional heating and cooling costs associated with being at home all the time. Some employees considering long-term work from home may also be contemplating whether or not they need to move to a bigger place, or at least buy themselves a proper office chair to use at the kitchen table. Some employers may even be fielding questions about reimbursement for these additional expenses. Let’s consider what employers might want to do.

Do nothing

In most cases, employers will have already violated the terms of the employee’s contract by requiring them to work from home. In most cases, this has gone okay. Employees have accepted the change as necessary in the circumstances and have not asserted constructive dismissals. The result of such a constructive dismissal claim is difficult to predict as the employer, through no fault of their own, could no longer provide the employee with an office to work in. We will be looking out for some pretty interesting constructive dismissal claims in the coming months!

Assuming that employees have accepted working from home, in most cases, it is likely acceptable for employers to NOT provide employees with any sort of work-from-home allowance.

Employee tax deductions

Employees are allowed to deduct some home office employment expenses from their employment income, for example, a portion of their rent, utilities, and internet. This is provided that the employee is not reimbursed by the employer for these expenses, and provided that the employee is “required by the contract of employment” to incur these work from home expenses.

An employee would be “required by the contract of employment” to incur the expense of high-speed internet if this is something that the employer required for employees working from home. Where an employee does not have access to the employer’s office, they will likely be considered to have been “required by the contract of employment” to work from home – even where this is not explicitly written in the original contract.

Work from home allowances or reimbursements

Some employers are choosing to provide employees with work from home allowances or reimbursing them for certain work from home expenses. Where employers are considering this they should ensure that they create clear and fair policies. Employers may want to consider if the policy is for the Covid-19 pandemic situation only or whether it will continue indefinitely. They will also want to consider what tools employees may need to work more effectively from home. Where employers are buying equipment for employees to use at their homes, ownership of the equipment should be addressed, and inventories of what is being bought, and where it should be kept.

Employers will also want to consider whether reimbursements or allowances will be considered as income to the CRA. Please contact us if you have any questions.

Source: https://bit.ly/2Pyb1su

Government updates on CERB and CECRA programs – July 31, 2020

Government updates on CERB and CECRA programs

On July 31, the federal government provided updates on the Canada Emergency Response Benefit (CERB) and the Canada Emergency Commercial Rent Assistance (CECRA).

During a press conference on July 31, the Prime Minister announced that the government plans to transition current participants of the CERB program to Employment Insurance (EI) when the CERB program comes to an end. In addition, the government proposes to amend the EI rules to create new benefits for current CERB recipients who would not otherwise qualify for EI. More details will be provided before the end of August.

On the CECRA program, the Finance Minister announced that the program will be extended by one month to provide assistance to eligible small businesses for August rent. No other changes to the program were announced.

Please contact us if you have any questions.

Source: https://bit.ly/3kbXqVM

CRA announces an extension to the payment deadline during the COVID-19.

News release

July 27, 2020

The Canada Revenue Agency (CRA) is closely monitoring the COVID-19 situation, and is committed to supporting Canadians throughout it. The CRA understands that individuals and businesses might be dealing with difficulties in meeting their financial obligations, including paying tax debts they may have incurred prior to the crisis. In addition to measures already announced, the CRA is extending the payment deadline and applying relief to interest on existing debt.

Payment deadline extension

The CRA is extending the payment due date for current year individual, corporate, and trust income tax returns, including instalment payments, from September 1, 2020, to September 30, 2020. Penalties and interest will not be charged if payments are made by the extended deadline of September 30, 2020. This includes the late-filing penalty as long as the return is filed by September 30, 2020.

Interest on Existing Tax Debt

The CRA is also waiving interest on existing tax debts related to individual, corporate, and trust income tax returns from April 1, 2020, to September 30, 2020 and from April 1, 2020, to June 30, 2020, for goods and services tax/harmonized sales tax (GST/HST) returns. While this measure for existing tax debts does not cancel penalties and interest already assessed on a taxpayer’s account prior to this period, it ensures that a taxpayer’s existing tax debt does not continue to grow through interest charges during this difficult time. This measure provides immediate relief to impacted taxpayers.

Filing returns

The previously extended filing due dates for individual, corporate, and trust income tax returns remain unchanged. However, recognizing the difficult circumstances faced by Canadians, the CRA will not impose late-filing penalties where a current year individual, corporation, or trust return is filed late provided that it is filed by September 30, 2020.

The CRA encourages everyone to file their individual, corporate and trust returns as soon as possible, even though payment deadlines are being extended. This is particularly important for individuals receiving credits and benefits, such as the Canada Child Benefit.

To ensure Canadians continue to receive their benefits and credits during the COVID-19 pandemic, the CRA temporarily suspended interruptions for those who were unable to file their income tax and benefit return by the June 1 deadline. Currently, if a 2019 individual tax return has not been assessed, the CRA is calculating benefits and/or credits for the July to September 2020 payments based on information from 2018 tax returns. However, if 2019 individual tax returns are not received and assessed by early September 2020, estimated benefits and/or credits will stop in October 2020 and individuals may have to repay the amounts that were issued as of July 2020. The CRA has helpful information and a step-by-step guide to help Canadians complete their taxes. The CRA tax processing system is fully operational and returns are being processed quickly to support Canadians in getting their refunds and ensuring continuity of their benefits.

COVID-19 measures

The Government of Canada previously announced fiscal measures to help Canadians during this period, some of which affect tax-filing and payment deadlines. Below are some of the important changes that were announced:

  • Extensions to tax-filing and payment deadlines
  • New emergency credits and measures (Canada Emergency Response Benefit (CERB), Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Student Benefit (CESB))
  • A one-time special payment to the GST/HST credit and a one-time increase to the Canada Child Benefit (CCB) payment in May
  • Reduced minimum withdrawals for Registered Retirement Income Funds (RRIFs)
  • Electronic signatures for authorization of certain forms
  • Deferring GST/HST remittances and customs duty payments until June 30th, 2020

Please contact us if you have any questions pertaining to your specific circumstances.

CRA’s tax audit of U.S. real estate transactions

CRA’s tax audit of U.S. real estate transactions

By David Rotfleisch

On June 25, Canada Revenue Agency (CRA) announced that it would carry out a tax review of six years of U.S. real estate transactions in order to find any tax non-compliance from Canadian taxpayers. CRA is looking for “real estate and property data in bulk form, in order to identify current and historical records, mortgage transactions, property taxes, real property records and deeds.”

To accomplish this, CRA will carry out a tax audit of “records on Canadian property transactions in the U.S., including municipal addresses, names of owners, square footage, sales histories and property tax assessments.”

A Canadian taxpayer who is reassessed through this audit can face substantial tax penalties on top of interest, not to mention the professional and legal fees required to respond and object to the audit. There is also a possibility of prosecution for tax fraud or tax evasion. This article will break down the typical issues that could come up in a tax audit of undeclared real estate property or unreported real estate transactions.

Unreported foreign property

The first issue that CRA could be looking for is the T1135 Reporting Requirement for a foreign property with a value of over $100,000 Cdn. This is a reporting requirement a Canadian taxpayer must comply with, regardless of whether the taxpayer is generating income from his or her foreign property.

A Canadian taxpayer who held U.S. real estate directly or through a trust is subject to this T1135 requirement depending on the fair market value of the U.S. property over time. The penalties for failure to comply with the requirement could be steep. If a taxpayer only failed to file the required form in the past 24 months, then the penalty is calculated as $25 per day for a maximum amount of $2,500.

However, if a taxpayer has not filed the T1135 form for more than 24 months when the taxpayer is required by law to do so, the penalty could be five per cent of the cost of foreign property. The calculation of this penalty could be different if the property has been transferred or loaned to a trust, or the property is in the form of shares or bonds from a foreign corporate affiliate.

Unreported rental income

As a general rule, Canadian tax residents must declare and report their worldwide income. The Income Tax Act uses the Foreign Tax Credit mechanism to ensure income generated from another jurisdiction is not double taxed. However, if a Canadian taxpayer failed to report his or her U.S. rental income, the taxpayer can be subject to reassessments and tax penalties from the CRA, even when taxes had been paid to the U.S. government.

This upcoming CRA tax audit will probably involve auditors looking for unreported U.S. rental incomes from Canadian taxpayers. This could take several forms. CRA could reassess a Canadian taxpayer for failing to disclose any rental income when CRA believes U.S. rental income had been generated.

However, even when a Canadian taxpayer had been reporting their U.S. rental income, CRA could take issue with either the total revenue generated by a rental property or with the expenses claimed by the taxpayer in relation to the rental property. A tax audit over deductions can be particularly frustrating, given that CRA tax auditors have the power to make a wide range of assumptions when it comes to expenses, while the taxpayer can have difficulty producing the required documentation regarding claimed expenses in the past.

Unreported real estate sales

Finally, CRA will be looking into U.S. real estate sales of properties owned by Canadian taxpayers, and specifically unreported sales of U.S. residential homes owned by Canadian taxpayers. When the sales of these homes do not qualify for the principal residence exemption, the proceeds will be fully taxable as either income or capital gains. CRA’s power to tax U.S.-based income is subject to the U.S.-Canada Tax Treaty.

While unreported sales of non-principal residence homes will certainly be on CRA’s radar, another crucial issue that could affect many Canadian taxpayers is the failure to report the sales of a principal residence located outside Canada after 2016.

CRA’s position is that it is entirely possible for a Canadian tax resident to claim principal residence exemption on a home located outside Canada. This can often be the case for Canadian taxpayers who work in the U.S. for up to several months a year. They could own homes in the U.S. and still be considered a Canadian tax resident under the U.S.-Canada Tax Treaty.

A taxpayer in such a situation might have been assured that he or she did not need to report the sales of their U.S. principal residence to the CRA. Such advice, if given for real estate transactions after Oct. 3, 2016, would be wrong. Canadian taxpayers are required to report the sales of their principal residence to the CRA. Failure to report can incur a maximum penalty of $8,000.

Furthermore, a taxpayer with unreported principal residence transactions might also have to defend the position that it indeed the sale of a principal residence. This could involve a costly and time-consuming tax audit response and objection process any taxpayer would want to avoid.

CRA’s intention to conduct a tax audit was announced through a tender notice titled Bulk United States (U.S.) Real Property Data (re: Canadian residents). As of the date of this article, the tender is still active, which could mean CRA has yet to find a U.S. vendor to provide CRA with its desired U.S. real estate data.

If CRA has no existing knowledge of the tax owing by a Canadian taxpayer, this taxpayer may qualify for the Voluntary Disclosure program if other criteria are also met. A timely voluntary disclosure application could result in substantial savings in penalties and interest and would avoid prosecution for tax fraud or tax evasion.

Please contact us if you have any questions pertaining to your specific circumstances.

CRA’s tax audit of U.S. real estate transactions | REM | Real Estate Magazine https://bit.ly/39pfZkk

IRS Steps Up Cryptocurrency Tax Enforcement Efforts

IRS Steps Up Cryptocurrency Tax Enforcement Efforts

By Marcus E. Dyer, CPA, Esq., Withum – July 20, 2020

When the first versions of cryptocurrency were formulated back in the 1980s, scant evidence of concern could be found from the government. In 2017, after the Treasury Inspector General for Tax Administration criticized the IRS for failing to develop a coordinated virtual currency strategy, the IRS announced concern over “massive” underreporting of income generated by cryptocurrencies.

Today, a question appears at the top of Schedule 1 of Form 1040 inquiring if the taxpayer engaged in any virtual currency transactions during the year. This article ad­dresses the current efforts the IRS is making to stay ahead of the cryptocurrency curve and promote compliance with income tax laws applicable to virtual currency. 

How is Cryptocurrency Taxed?  

The IRS explains the taxation of cryptocurrency in Notice 2014-21. It says virtual currency is treated as property, not as currency, for U.S. federal tax purposes. Generally, this means payments made using virtual currency to independent contractors are taxable, and self-employment tax rules generally apply. Wages paid to employees using virtual currency are taxable to the employee and must be reported by an employer on a Form W-2. Transactions involving an exchange between cryptocurrency and other property are taxable as gains or losses. 

What Cryptocurrency Enforcement Challenges Exist?

In recently published guidance, the IRS addresses some of the common misunder­standings taxpayers have with respect to the taxation of cryptocurrency transactions. Common areas of confusion exist with re­spect to “coin-to-coin” exchanges, hard fork transactions and the determination of basis.

  • Currency-to-currency exchanges. Some taxpayers mistakenly believe coin-to-coin trades, such as Bitcoin for Ethereum cryptocurrency, is a nontaxable exchange of essentially the same kind of currency. According to the IRS, currency exchanges are subject to the same capital gains and loss rules of prop­erty exchanges generally.
  • Hard forks (chain splits). Taxpayer uncertainty abounds on a common cryptocurrency transaction called a hard fork. A hard fork occurs when cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger. Surprisingly, the IRS didn’t provide comprehensive guidance on this topic until 2019 in Rev. Proc. 2019-24.
  • Tracking basis. According to the IRS, tracking basis is essential for reporting crypto transactions accurately. Yet, the IRS suspects some virtual currency users have gone years without keeping track of basis out of confusion about its relevance or sheer negligence.

How the IRS Is Enforcing the Law

The IRS has developed a multi-prong approach to prevent the evasion of tax laws applicable to cryptocurrency. Elements of the strategy include data analytics, tax examinations, soft letters and criminal charges. 

  • Soft letters. In 2019, the IRS sent letters to more than 10,000 holders of cryptocurrency warning that audits and other enforcement actions may result if the taxpayer failed to report income from virtual currency transactions and corrective actions are not taken.
  • Data analytics. Since 2015, the IRS has contracted with Chainalysis, a company that provides data and analysis services to help the government identify cryptocurrency users with unreported income.
  • Tax examinations. In 2018, the IRS announced a Virtual Currency Compliance Campaign. Through this program, the IRS is conducting exhaustive issue-based examinations of tax returns designed to address noncompliance related to the use of virtual currency.
  • Criminal prosecutions. In extreme cases, taxpayers may be subject to criminal prosecution for failing to properly report income from virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return.

IRS Criminal Investigation reported in its Fiscal Year 2019 Annual Report that a key focus for the organization is cybercrimes, with an emphasis on cryptocurrencies.

Taxpayers who have traded or received cryptocurrency should make sure they have reported their income properly given the IRS’s increasing interest in virtual currency. 

Please contact us if you have any questions pertaining to your specific circumstances.

IRS Steps Up Cryptocurrency Tax Enforcement Efforts https://bit.ly/2WMxZAf

Corporate Income Tax Rates – 2019

Corporate Income Tax Rates – 2019

The federal general (and M & P) corporate income tax rate remains 15 percent. Provincial and territorial general (and M & P) rates remained mostly steady but decreased in Alberta and Quebec for December 31, 2019 year-ends. The general (and M & P) rate in Alberta decreased from 12 percent to 11 percent after June 2019 and will continue to decrease, to 10 percent after 2019, 9 percent after 2020, and 8 percent after 2021. Quebec’s general (and M & P) rate decreased from 11.7 percent to 11.6 percent after 2018 and will further decrease to 11.5 percent after 2019. The table below shows the 2018 and 2019 combined general, M & P, and small business rates.

The federal small business tax rate decreased from 10 percent to 9 percent after 2018; as a result, all combined federal and provincial/ territorial small business rates decreased in 2019. In addition, for December 31, 2019 year-ends, provincial and territorial small business rates decreased in New Brunswick, Nunavut, and Prince Edward Island (and in Quebec for the non-M & P small business rate only). The provincial/territorial small business rate in New Brunswick decreased from 3 percent to 2.5 percent after March 2018, and in Nunavut from 4 percent to 3 percent after June 2019. In Prince Edward Island, the small business rate decreased from 4 percent to 3.5 percent after 2018; and will further decrease to 3 percent after 2019. Quebec’s non-M & P small business tax rate decreased from 8 percent to 7 percent after March 27, 2018, and to 6 percent after 2018, and will further decrease to n5 percent after 2019, and to 4 percent after 2020. Small business thresholds remain unchanged in 2019 except in Manitoba, where the province’s small business threshold increased from $450,000 to $500,000, effective after 2018.

Corporate tax rate table containing Federal and provincial tax rates for 2018 and 2019

Please contact us if you have any questions.

How To Reduce Or Eliminate US Withholding Tax For Canadians?

How To Reduce Or Eliminate US Withholding Tax For Canadians?

Have you heard of W-8BEN or W-8BEN-E? Read on to learn more.

U.S. companies that make payments to non-US contractors are typically required to withhold tax on those payments. The company, referred to as the withholding agent, is responsible for deducting and withholding that tax from the contractor’s income and paying it to the Internal Revenue Service (IRS).

If the withholding agent fails to do this, they can be held personally responsible for paying the tax owed by the non-US contractor. For this reason, US companies typically take every precaution to ensure that this obligation is being met.

Tax Treaties Can Help!

Residents of foreign countries can have their withholding reduced or eliminated if their country of residence has an existing Income Tax Treaty with the US.

Canada and the US have very close economic ties and many citizens and residents of the US work, invest and conduct business in Canada and vice versa. To avoid double taxation, the two countries signed a tax treaty.

The Canada-USA Income Tax Treaty ensures that residents of the U.S. and Canada are not taxed by each of the two countries on the same income in the same year.

Article VII of the tax treaty between Canada and the U.S. provides that business profits earned in the U.S. by Canadian residents are taxed in the U.S. only to the extent that those profits are related to a permanent establishment in the U.S.

A Canadian resident notifies the US Company that the tax treaty applies to their situation by filing Form W-8BENCertificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individual).

In brief, by providing a completed Form W-8BEN, you are confirming that you are:

  • Not a U.S. resident
  • The beneficial owner of the income for which Form W-8BEN is being provided
  • Claiming a reduced rate or an exemption from withholding as a resident of a foreign country with which the U.S. has an income tax treaty.

A W-8BEN is applicable only for individuals or sole proprietors. If you are a corporation, partnership, or another business entity, you’ll use Form W-8BEN-E.

If you need any help filling completing the W-8BEN or W-8BEN-E forms, please contact us for assistance.

2018 Budget Simplifies Passive Investment Rules

2018 Budget Simplifies Passive Investment Rule

The 2018 federal budget introduced measures to simplify the new taxation regime for passive investments held inside a private corporation. These changes bring some long-anticipated clarity to a significant aspect of Finance’s recent private corporation tax proposals. The new rules provide that the amount of income eligible for the small business tax rate will be reduced depending on the amount of investment income held. In addition, the budget proposes new rules for CCPCs to access refundable taxes on the distribution of certain dividends. The rules, which also include certain anti-avoidance measures, will apply for taxation years beginning after 2018.

In July 2017, Finance released a consultation paper and proposed rules to address certain tax planning involving private corporations, including income sprinkling using private corporations, the conversion of a private corporation’s income into capital gains, and the accumulation of surplus savings and other passive investments in a private corporation. In October 2017, Finance announced that it was abandoning its capital gains measures and that there would be no tax increase on passive investment income below a $50,000 annual threshold. At that time, Finance indicated that it would provide additional details on the passive investment regime in its 2018 federal budget.

Finance also indicated that it intends to proceed with its tax measures, released on December 13, 2017, to address income sprinkling. These rules will likely be included in one of the budget implementation bills.

The federal budget’s passive investment income rules propose to reduce the small business limit for CCPCs (and associated corporations) that have a certain threshold of income from passive investments. The limit applies on a straightline basis for CCPCs that have between $50,000 and $150,000 of investment income. The budget also reduces the small business deduction by $5 for every $1 of investment income above the $50,000 threshold, so that the business limit would be eliminated for investment income of more than $150,000. As a result, a corporation’s access to the small business deduction could now be restricted or eliminated entirely if the corporation
(or a corporation within the associated group) earns passive investment income in excess of $50,000.

The new business limit reduction will operate in tandem with the existing business limit reduction for taxable capital. Currently, the existing rules reduce the business limit for taxable capital between $10 million and $15 million employed in Canada of the corporation and associated corporations. The reduction in a corporation’s business limit will be the greater of the reduction under the new measures and the reduction under the existing taxable reduction provisions.

To determine a corporation’s investment income, the budget proposes a new concept, “adjusted aggregate investment income” (AAII). Generally, aa ii will include dividends from non-connected corporations and income from savings in a life insurance policy that is not an exempt policy but will exclude taxable capital gains (and allowable capital losses) from the sale of active investments and investment income that is incidental to the business. It appears that these exclusions are intended to continue to encourage venture capitalists and angel investors to foster Canadian innovation.

The budget also proposes to limit certain tax advantages that CCPCs can use to access refundable taxes on the distribution of certain dividends. Specifically, the proposals allow a refund of RDTOH only when a private corporation pays noneligible dividends; currently, a corporation can receive the refund upon the payment of an eligible dividend. The budget also proposes an exception for RDTOH that arises when a corporation receives eligible portfolio dividends. The corporation will still be able to obtain a refund of that RDTOH upon the payment of eligible dividends.

To address the refund of taxes associated with portfolio dividends, the budget proposes to introduce a two- RDTOH pool system under which a new “eligible RDTOH ” account will track refundable taxes paid under part iv of the Act, while the current RDTOH account, now redefined as “non-eligible
RDTOH,” will track refundable taxes paid under part I and part IV (on non-eligible portfolio dividends). A taxpayer will be able to obtain refunds from its non-eligible RDTOH account only upon the payment of non-eligible dividends. When a private corporation pays non-eligible dividends, the corporate dividend refund must come out of its non-eligible RDTOH account before it comes out of its eligible RDTOH account.

The budget also includes specific transitional rules for existing RDTOH balances. Generally, these rules state that a CCPC’s opening eligible RDTOH account will be the lesser of its existing RDTOH balance and 38.33 percent of its grip. Any remaining RDTOH balance for the CCPC will be added to the opening non-eligible RDTOH account balance. For all other private corporations, the existing RDTOH balance will be added to the opening eligible RDTOH account.

As a result of these changes, corporations will no longer be able to recover RDTOH through the payment of an eligible dividend, which resulted in a lower tax rate than Finance intended to apply. To recover RDTOH, the corporation may first be required to pay non-eligible dividends, which are generally taxed at higher rates than eligible dividends (for example, approximately 9.5 percent higher at the highest marginal tax rate in British Columbia in 2018)

Contact us to help you optimize corporate taxes when earning investment income.

Should you incorporate? Read on to find the answer.

Should you incorporate? Read on to find the answer.

To incorporate or not to incorporate? The answer really depends on your particular situation, but we will cover some of the main pros and cons so you can make a decision.

Limited Liability

One of the main advantages of incorporation is the limited liability of the incorporated company. Unlike the sole proprietorship, where the business owner assumes all the liability of the business that is being carried on when a business becomes incorporated, an individual shareholder’s liability is limited to the amount he or she has invested in the company.

As a sole proprietor, your personal assets could be on the line if there’s a legal claim against you by one of your customers, employees or contractors.

Taxes and Deferrals

If you are incorporated, you have more freedom to determine how much and how to get compensated for your efforts and contributions. You can get paid via salary or dividends and also leave the excess earnings in the corporation allowing for tax deferral. If you own Canadian-controlled private corporations or CCPC, the corporate earnings are subject to a beneficial corporate tax rate. Also, the first ~$30,000 of dividends generally, do not bear any personal level of taxation.

Losses

Generally, during the initial years, you may incur losses. If the business is incorporated, the losses would remain in the corporation and would be applied against future income.  As a sole proprietor, business losses would be deductible against all types of income.  Depending on your personal situation, carefully examine whether you want business losses to reduce your personal income tax or remain in your business, and time your incorporation accordingly.

Selling your business

It is easier to sell an incorporated business rather than a sole proprietorship. You may also be able to take advantage of the lifetime capital gains exemption if you sell shares of your business. On the disposition of a qualified small business corporation shares, the exemption is up to a lifetime limit of ~$800,000 of capital gains.

Incorporation comes with some disadvantages.  The setup costs in Canada could be as much as $2,000 (including legal fees) and you would also be required to file taxes annually, however, in many cases, the benefits of incorporation outweigh the administrative and set up costs. Contact us today to find out if incorporating your business makes sense for you.

Exceptions to the US Residency Substantial Presence Test?

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.

About the firm

Vlad Alyokhin, CPA, Professional Corporation
140 Yonge Street, Suite 320
Toronto, Ontario
M5C 1X6

T: 647-995-4491
E: vlad@alyokhincpa.com