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Tax, currency tips for snowbirds returning from U.S.
Springtime in Manitoba: It's the time of year when countless snowbirds take wing from their warm, southern winter quarters and migrate to their traditional nesting grounds on the Prairies.
Few coming back will regret having spent their winter days engaged in balmy leisure by swinging golf clubs, donning swimming trunks and slathering on copious amounts of suntan oil.
After all, it's been a pretty tough winter to endure in this latitude, unless, perhaps, you're a penguin or polar bear -- or you have antifreeze pumping through your veins.
But Canadians who spent the frigid months down south this year also had an extra benefit: a currency exchange rate that hovered near par for the entire winter. Those pumped-up loonies packed a real punch when it came to purchasing U.S. goods and services, and some snowbirds may be gleefully returning with a few extra greenbacks to spare.
Around half a million Canadians are estimated to spend at least 30 nights in the United States each year. Not surprisingly, this year was a particularly popular one for making the trek south, says Lawrence Barker, executive director of the Canadian Snowbird Association.
"My sense is that there was an increased number that went," Barker says. "For some people, because they have better buying power, they could either stay longer, for up to six months, or when they were there they could be a little more liberal with their spending, as opposed to, say, having to eat at home all day."
Some Canadians this year also took advantage of the invigorated loonie to scoop up some real estate at a time when housing values in many U.S. states were collapsing.
But spending considerable time in the United States comes with a few complications for your financial affairs.
Terry Ritchie, a cross-border financial planner with Transition Financial Advisers Group (www.transitionfinancial.com), knows this well. He's the co-author of the best-selling book, The Canadian Snowbird in America: Professional Tax and Financial Insights into Temporary Lifestyles in the U.S. He's also co-written two other books on such matters, including The American in Canada: Real-Life TaxandFinancial Insights into Moving to and Living in Canada, which hits bookshelves next month.
He has a warning to returning snowbirds everywhere: Know your obligations, and stay clear of offending the U.S. taxman.
"Generally, what we find is that snowbirds are coming back before the end of April, primarily to get their Canadian tax filings squared away," says Ritchie.
If you've just returned, or are contemplating travelling south next year, there are a few important things to keep in mind.
For starters, there are three circumstances under which there may be U.S. tax-filing requirements, Ritchie notes.
First, if a Canadian has spent four months in the United States for each of the past three years, he or she may be deemed a U.S. resident for income tax purposes under the U.S. Substantial Presence Test. If you meet this test, you could be taxed in the U.S. on your worldwide income. Therefore, you'll need to fill out IRS form 8840, known as the closer-connection exception statement.
"If you fill out that two-page form, then that is going to be your 'out' to suggest to the IRS that you have a 'closer connection' and more significant ties to Canada," Ritchie explains. "But if you don't file that form, conceivably the IRS could come back and deem you to be a U.S.-tax resident and tax you on your worldwide income."
Second, if a Canadian owns a property in the United States and rents it out anytime during the year, he or she is required to file IRS Form 1040NR, otherwise known as a non-resident alien income tax return, along with a Schedule E. You'll have to report gross rents, plus deduct any reasonable expenses and take a depreciation deduction.
The third obligation is to report any gain or loss on a property that is sold by a Canadian, in which case the IRS wants you to fill out a Schedule D along with your 1040NR tax form.
You can relax, however, if you still need some time to put your papers together. All these forms are not due until June 15.
Ritchie notes that it's important for Canadians to be aware they cannot use their social insurance numbers on U.S. tax forms. Instead, they will need to get a U.S. Individual Taxpayer Identification Number (ITIN), which substitutes for not having a U.S. Social Security number. "I have seen situations where Canadians will go ahead and put a SIN number on a tax form, thinking that will fly, but it will screw things up big time for them," Ritchie says.
Walter Boni and his wife Nancy were among the Winnipeggers who snapped up some real estate in the United States this year, buying a two-bedroom condo just outside Las Vegas. For them, it was a smooth transaction, in part because they did their research on how to not raise the ire of Uncle Sam.
Because they are renting out the unit, the couple had to fill out the non-resident alien income tax return. "But that's not posing a problem; it's being done by a local firm here in Winnipeg, so they will fill out the return and send it in," says Boni, a Winnipeg realtor.
"I think the most complicated stuff is learning the system -- learning how to set up accounts down there, what you are required to have, and how to set up tax payments to be done there.
"For us, it's been a lot of fun."
Even if out of the country for several months, Ritchie notes that Canadians can still bring back a maximum of only $750 in goods duty- and tax-free -- the limit that kicks in after seven days' absence from Canada. You also can't cross the border on your way back north with more than $10,000 in U.S. cash without having to declare that to both U.S. and Canadian authorities.
"And so we generally recommend if you want to bring money back into Canada, you do it through the bank wiring," Ritchie says. You could accomplish this by getting your U.S. bank to transfer money to an affiliated Canadian bank.
But a better idea is to use a wholesale currency exchange firm, such as Custom House Currency Exchange or HiFX, which usually offers much better rates than the big banks, Ritchie suggests. Acting as a sort of middleman, they will convert U.S. dollars taken from a U.S. bank account into Canadian and then transfer the funds to a bank account on this side of the border.
If converting Canadian dollars into American, another option is to go through the Canadian Snowbird Association. It pools the funds of all its participants at the start of each month and offers bulk-purchase exchange rates. However, it's designed for people wanting to convert money on an ongoing basis rather than on demand, and no service is available for converting U.S. cash back into Canadian.
Ritchie has one other important piece of advice for returning snowbirds: Get any U.S. medical receipts in order. If you have a health claim that needs filing in Manitoba, you are required to submit the original bills to the out-of-province claim section at Manitoba Health within six months of receiving care.
"So the point is if you do have any claims that you might feel would be eligible for reimbursement by Manitoba Health, you should go ahead and take care of that filing process right away upon return," Ritchie says.
