Canadian citizens who fly south for the winter need to have some understanding of the problems they may face when they spend extended periods of time south of the border. There are problems, which present themselves both before and after death. This article will deal primarily with estate or tax planning, but there are often difficulties that arise because of declining health issues or chronic disorders, which may trap the ailing snowbird in a tangle of legal issues flowing from the failure of the foreign jurisdiction to recognize documents that have been carefully prepared in accordance with Ontario law. An example of such a document is a power of attorney for personal care. This kind of document appears in some form throughout all the legal jurisdictions in North America, but different rules apply to their enforcement, as some treat powers of attorney as expressions of individual wishes and others as binding instructions in the event of incapacity. If you plan to reside for substantial periods of time in the south, it would be important for you to explore your own needs with a local attorney. This can be done at the same time as you discuss the estate and tax planning issues, which flow from your extended stay.
Generally speaking, if you own real estate in a state or a province outside of Ontario it is the law of that jurisdiction, which applies to your real property rights. Moveable property is usually governed by the law of the domicile of the owner of the property, which can be loosely defined as the place which you call home.
Each state or province in which property is located may have different rules applying to individuals who are temporarily residing within their borders. The definition of a “resident” varies from place to place so it will be crucial to determine how the local rules apply to you. In addition to your property rights, the local rules will also determine whether or not there are any tax implications of your holding or selling property in that foreign jurisdiction.
Since most of our snowbirds are senior citizens, the rules applicable to gifts and estate taxes also have to be investigated. The goal of the snowbird in tax planning should be to avoid becoming subject to the U.S. income tax regime, as the interrelationship of Canadian and U.S. tax regimes is extremely complicated and may result in some double taxation.
Let me illustrate: U.S. citizens are taxed on their worldwide income. Likewise, U.S. residents are taxed on their worldwide income; however, non-residents of the U.S. are taxed by the I.R.S. only on U.S. sourced income, which would flow, for example, from a rental property within a U.S. jurisdiction. The key question therefore arises as to when you become a U.S. resident. You can achieve this status quite easily by obtaining a “green card” to work in the U.S. You can also achieve it by physically residing in the U.S. for a specific period of time. The formula is very detailed but basically, if you have resided for 31 days in the U.S. in the present year and 183 days within the three-year period including the present year, then you may be qualified as a U.S. resident and required to pay taxes on your worldwide assets. Within these rules there is an exception for persons who have exceeded the 183-day test and become eligible as a U.S. resident for tax purposes but who are able to claim an exemption because they have a closer connection to another country. For example, their principal place of business is in their country of origin.
Many of these rules are set out in the Canada-U.S. Income Tax Treaty so obviously you need the assistance of an expert in the tax rules of both countries before making a decision as to where you will file your income tax return.
If you have been receiving income from a U.S. property for several years and not declaring it in either jurisdiction, you may have a problem in both places. Both governments, as a matter of policy, deal more leniently if you confess your non-payment of taxes before you are caught. One event, which often seems to come to their attention, is the sale of your U.S. property. I am told by a Florida attorney that the I.R.S. may impose a punitive tax when it learns of a tax filing default in this manner. New regulations relating to homeland security have resulted in a greater exchange of information between U.S. immigration and the I.R.S. It is apparently now possible to determine when you are in the country and how long you have been there. It should be pointed out, however, that if you qualify as a non-resident of the U.S. you might not owe any tax in the ultimate result, which should come as a relief to you.
In addition to income taxes, the U.S. has federal legislation governing gift and estate taxation. This is another world entirely because we do not have this kind of tax in Canada, although of course we do have our capital gains tax. A gift is really a transfer of property on a gratuitous basis or for less than its fair market value during your lifetime. In this situation, even if you are a non-resident of the U.S., any transfer of real or personal property may be taxable based upon the fair market value of U.S. assets transferred. Taxable gifts after 1976, which have not been previously declared may also be included in your estate for tax purposes after your death. Steps should therefore be taken to minimize this tax now but you will need to have recourse to a U.S. attorney or accountant where your property is located in order to implement your plan. The news is not completely bad, because there are applicable tax credits for non-residents of the U.S. under the Canada-U.S. Tax Treaty and you may be able to do some effective tax planning by rearranging your various U.S. assets between you and your spouse, but only an expert could advise you on this.
I usually try to find some humour in the subjects that I write about, but taxes are not funny and the people who collect them are also not funny, so I would advise you to avoid exercising any comedic instincts in your encounters with the tax authorities by reporting that a “hurricane destroyed all of your records”. This probably won’t explain why you have chosen not to file a tax return for several years.
Snowbirds need to look at their flight plans before they get their wings clipped.