Tax Tip[] Residency

Understanding the U.S. Days Counting Test and U.S. Tax Residency

In most countries an individual’s tax residency is determined by their residential ties, which considers one’s own unique “facts and circumstances”.  In Canada, for example, there is no statutory definition of “residency” contained in the Canadian Income Tax Act.

In the United States, however, tax residency is a more rigid process.  If you are not a U.S. citizen nor a lawful permanent resident (i.e. green card holder) residency is determined by the number of days an individual is physically present in the country.  For this purpose, each part of a day in the U.S. is counted as a day, whether for business or pleasure (or both).  An individual who spends “too many days” in the U.S. may unintentionally become a U.S. tax resident.

Substantial Presence Test

How does the U.S. determine what is “too many days”?  This is computed under the “Substantial Presence Test” or “SPT”.  First the individual must have at least 31 days of physical presence in the current year.  If the individual has less than 31 days in the current year, the SPT does not apply. If the individual has 31 days or more then the SPT applies the following formula:

All of the days in the current year +
1/3 of the days in the preceding year +
1/6 of the days in the second preceding year

If the result is 183 days or more, then the individual meets the SPT and will be considered a U.S. tax resident, under US domestic tax law, unless an exception applies.

Exceptions to the Substantial Presence Test

There are a few exceptions to the Substantial Presence Test.  These include:

  • Closer Connection to Another Country – An individual who meets the SPT but who spends less than 183 days in the U.S. in the current year and who has a closer connection to another country can claim a Closer Connection Exception. To claim this exception, an individual must file Form 8840, “Closer Connection Exception Statement for Aliens”,  each year along with their U.S. tax return, or by June 15 if no U.S. tax return is required.  An individual who spends more than 183 day or more in the current year cannot use the Closer Connection Exception.  Those wishing to file as a U.S. nonresident, in determining any potential U.S. tax exposure, must then file under a tax treaty (see below).
  • Exempt Individuals – Individuals do not have to count the days that they are in the United States as an “exempt individual”. These are defined as:
    • An individual temporarily present in the U.S. as a foreign government-related individual under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas;
    • A teacher or trainee temporarily present in the U.S. under a “J” or “Q” visa, who substantially complies with the requirements of the visa;
    • A student temporarily present in the U.S. under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of the visa;
    • A professional athlete temporarily in the U.S. to compete in a charitable sports event.

    Exempt individuals must file a Form 8843, “Statement for Exempt Individuals and Individuals with a Medical Condition” along with their U.S. tax return, or if no tax return is required by June 15, in order to claim the exemption.

  • Medical Condition – Individuals who are unable to leave the United States because of a medical condition that arose while in the U.S. can exempt some of these days. To claim this exemption, the individual must file a Form 8843 along with their U.S. tax return, or by June 15 if no U.S. tax return is required.

If a Form 8840 or 8843 is not filed on time, an individual cannot claim an exemption from the Substantial Presence Test.  This will not apply if the individual can prove that he took reasonable action to become aware of the filing requirements and significant steps to comply with those requirements.

Canada-United States Tax Convention (1980) aka the “Treaty”

If an individual meets the SPT and does not meet one of the exceptions listed above, he is a U.S. tax resident under U.S. domestic law. What happens, however, if the individual spends more than 183 days in the current year alone?

Individuals who are also Canadian tax residents and who maintain residential ties closer to Canada, than the U.S., can use the residency tie breaker rules, contained in Article IV, to override U.S. domestic law.  This is done by filing a U.S. Form 1040NR, “U.S. Nonresident Alien Income Tax Return, by the due date along with a Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)” claiming an exception from U.S. taxes under the Treaty.  If there is no U.S.-source income to report, then there is no U.S. tax to pay.

The downside of this is that the Treaty only reduces or eliminates any potential U.S. tax. It does not eliminate any filing obligations the nonresident may have.  Individuals who are considered U.S. nonresidents, by way of a Treaty, are still subject to the foreign reporting requirements of a U.S. resident.  Keep in mind that anything Canadian is considered “foreign” in this context.  Some of these additional filings may include:

Foreign bank accounts – FinCEN 114, “Report of Foreign Bank and Financial Accounts

Foreign corporations – Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations

Foreign partnerships – Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships

Foreign trusts – Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

Foreign trusts – Form 3520-A, “Annual Information Return of Foreign Trust With a U.S. Owner

Foreign mutual funds – Form 8621, “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

If an individual becomes a tax resident and is unable to claim an exception or use the Treaty, then he will be required to report his worldwide income to the U.S. and comply with all foreign reporting required of U.S. persons.  While foreign tax credits may offset some or all of the U.S. tax payable, it can still be a timely and expensive process.

It’s important to keep in mind that the Substantial Presence Test, the exceptions, and the Treaty override are all related to U.S. federal tax residency rules.  Each individual state has its own residency rules as well.  These should be reviewed as well.

Cadesky U.S. Tax can analyze your unique situation and help you keep onside with the U.S. tax residency rules.  Please contact us for an appointment to discuss your situation.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

U.S. Citizens in Canada

“U.S. status could eliminate many Canadian tax benefits.”

Canada taxes individuals on their worldwide income only if they are resident in Canada. The United States taxes its citizens and green card holders on their worldwide income, no matter where they are resident. Many U.S. citizens or green card holders who are resident in Canada are not aware that their U.S. status could eliminate many Canadian tax benefits.

Two common examples of items that are tax-free in Canada but not in the United States are:

  • capital dividends; and
  • capital gains exemption on shares of a qualifying small business corporation

Imagine the dismay where someone uses their capital gains exemption merely to increase the cost base of shares they own, only to find that a tax bill has been created.

There are a number of other items where there can be significant differences between the Canadian and U.S. tax rules depending on how the planning is implemented. For example, a tax-free rollover under subsection 85(1) of the Income Tax Act may not be tax free for U.S. purposes without proper U.S. planning and compliance.

Canadian-resident U.S. citizens or green card holders with Canadian investment companies can be subject to punitive income tax rules in the U.S. relating to corporate investment income, as well as penalties for not filing certain information returns. Even ordinary Canadian mutual fund investments can create U.S. tax problems.

The U.S. estate tax regime also applies to U.S. citizens and people domiciled in the U.S., no matter where they reside at the time of death, and captures all of their worldwide assets.

This short discussion illustrates a significant issue. If a Canadian taxpayer is a U.S. citizen or green card holder, common Canadian planning cannot be taken for granted. Non-compliance will not make these issues go away. It can make matters worse as various U.S. deductions that provide relief from double taxation are dependent on filing tax returns within certain time limits.

U.S. citizenship or status must be identified and addressed or the tax results can be serious.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Can You Be Resident in More Than One Place?

“An individual’s residency often depends on his ties to a country.”

Mr. Hauser, an Air Canada pilot, claimed to be a non-resident of Canada, and resident in the Bahamas (2006 FCA 216 and [2005] 4 CTC 2260).

The Tax Court held that he was dual resident. This was confirmed by the Federal Court of Appeal. The CRA agreed that he was a resident of the Bahamas, so that was not an issue.

Mr. Hauser’s ties to Canada were extensive, even after he and his spouse moved to the Bahamas. They included:

  • His continued employment by Air Canada from his Toronto base;
  • A joint bank account in Ontario, to which his salary was deposited;
  • Follow-up medical and dental visits to Ontario practitioners;
  • Spending nights at his mother-in-law’s home in Ontario, where he kept clothes and uniforms;
  • Using his mother-in-laws’ address as his mailing address;
  • Purchasing a car in Ontario, which was later sold;
  • Spending many days in Canada during the period under appeal – over 180 days, for example, in 1998 and 2000, according to calculations made by the Court.

There is no tax treaty between Canada and the Bahamas, so an individual can be held to be resident in both jurisdictions.

The Tax Court held that he was dual resident in Canada and the Bahamas. He was consequently liable to Canadian taxation on his worldwide income.

The Federal Court of Appeal unanimously upheld that decision; noting that Mr. Hauser’s presence in Canada was not “occasional, casual, deviatory, intermittent, or transitory.”

It is clear that, in the absence of a tax treaty with the other jurisdiction, a taxpayer cannot claim to be a non-resident of Canada merely by becoming resident elsewhere. He or she must cut all ties with Canada, which Mr. Hauser certainly did not.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Residency Test – Allchin Revisited

“Tax Court forced to take a second look at this case.”

The Federal Court of Appeal concluded that the Tax Court should have considered that Miss Allchin was a resident of the U.S. They sent the case back to the Tax Court to be heard by a different judge, to analyze the tiebreaker rules in the Canada-US Tax Convention. The Tax Court reheard the case, with some more evidence and allowed the appeal(2005 DTC 603). The Tax Court rehearing began with the assumption that the taxpayer was a resident of both Canada and the U.S. in accordance with the Federal Court of Appeal decision.

The judge reviewed the tiebreaker rules in Article IV (2) of the Canada-U.S. Tax Convention. The first test is that a taxpayer is resident in the state in which he had a permanent home available to him. In this case, the taxpayer owned a house in Windsor, and lived in a cousin’s home and in a friend’s condominium in Michigan in the years in question. She intended that her family would move to Michigan shortly after she started work in the U.S. The Court determined that the taxpayer had a permanent home in both Canada and the U.S. or in neither.

The second test under the tiebreaker rules is the location of the taxpayer’s centre of vital interests. The Court determined that the taxpayer’s economic activities were in the U.S., while her personal relations were in Canada. The Court held that a determination could not be made under the second test.

The third test is whether the taxpayer had an “habitual abode” in one of the countries. The judge made a detailed analysis of the words “habitual abode.” He graphed the number of days spent by the taxpayer in each of Canada and the U.S., based on evidence given by Ms. Allchin at the first hearing, and made a determination that the taxpayer’s habitual abode was in the U.S. This led to the conclusion that the taxpayer was not taxable in Canada and was only taxable in the U.S.

The analysis prepared by the Court should be helpful in future determinations of where an individual is resident when a tax treaty applies. However, the facts always determine where an individual is resident.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Residency Test

“Tax treaties should be considered in determining whether an individual is resident in Canada..”

In a recent court case (Allchin 2004 FCA 206), the Federal Court of Appeal examined the residency test that must be undertaken in order to determine if an individual is taxable as a resident of Canada.

In the case at hand, Ms. Allchin claimed to be a resident of the U.S. in 1993, 1994, and 1995. She filed U.S. tax returns as a resident of the U.S. and did not file Canadian tax returns during those years. Ms. Allchin had a greencard that entitled her to permanently live and work in the U.S.

At the Tax Court of Canada level, the judge determined that Ms. Allchin had not severed her ties to Canada. Therefore, the judge determined that she was taxable in Canada as a resident of Canada.

The Federal Court of Appeal stated that the Tax Court judge failed to consider that the taxpayer might be a dual resident. This would mean that she could be a resident of the U.S. without having severed her ties to Canada. The Federal Court of Appeal went on to say that “the judge should have examined whether she was also resident in the U.S. for purposes of the treaty.” The fact that the taxpayer was a green card holder and was required to pay tax in the U.S. regardless of her physical presence was a key factor that could not be ignored. The Federal Court of Appeal referred the case back to the Tax Court so that the Tax Court could analyze the tax treaty tie-breaker rules in order to determine where she was taxable.

This case is significant in that a tax court and, therefore, the CRA cannot only look at whether or not an individual is a resident of Canada. The CRA must determine if the taxpayer is a dual resident and, if they are a dual resident, then they must review the provisions of the Canada-U.S. Treaty. It is no longer enough to simply determine whether an individual is a Canadian resident.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.