Snowbirds: what you need to know.

Michael Callahan, CFP®, CIM®

James Smeaton, CPA, CPAC

Do you love the warm sunshine and find winter in Canada cold and unpleasant?

Like many Canadians, you may want to spend the winter months in a sunny and warm climate. When Canadians have the financial resources and flexibility to do so, they consider purchasing an apartment in the United States to spend the winter. Often, Canadians consider renting it out when they are not using it and then selling it a few years later. What Canadian migratory birds need to look out for?

Canadians who spend significant time in the U.S. or purchase property in the U.S. should be aware of a few important tax''moments.

Do Canadian migratory birds have to pay taxes in the U.S.?

U.S. citizens, permanent residents, and persons who meet certain residency requirements (including green card holders):

• May be considered U.S. persons for tax purposes by the IRS,
• Are subject to U.S. tax on worldwide income (income derived from any place or source),
must file all required U.S. tax returns on time.

U.S. persons (U.S. citizens and resident aliens) are considered U.S. tax residents and are subject to U.S. tax regardless of their permanent residence. Non-U.S. residents can potentially be considered U.S. tax residents if they''satisfy the Substantial Presence Test (SPT). The SPT takes into account the number of days an individual stays in the U.S. during a three-year period and, if the total exceeds 183 days, the individual can satisfy the SPT and potentially be considered a U.S. tax resident.

The close nexus exception

Canadians who satisfy the Substantial Presence Test (SPT) can use the Close Relationship Exception to remain non-US residents for tax purposes. The Close Relationship Exception requires that a person:

• was present in the U.S. for less than 183 days in a calendar year,
• had a tax residence (the person's predominant place of work, employment, or permanent residence) in Canada for the entire year,
• had a closer'. 'connection (permanent residence, social ties, driver's license, voting place, etc.) to Canada,
• has not taken steps or applied for permanent resident status (green card).

If these conditions of the Close Relationship Exception are met, the Canadian can remain a non-resident of the U.S. for tax purposes. His income from rental real estate in the U.S. will still be subject to U.S. tax, but not his income earned in Canada or any other country.

Do Canadians pay real estate taxes in the U.S.?

In general, Canadians have no restrictions on purchasing real estate in the United States, but there are a few things they should consider before buying real estate in the United States. For example, the u''Canadians have additional tax reporting requirements when the value of their foreign property, including U.S. real estate used for rental purposes, exceeds CAD$100,000 at any time during the year.

How do U.S. inheritance tax laws apply to Canadians?

Non-US residents are subject to US inheritance tax on US inherited property, including property located in the US or having a connection to the US, such as US real estate and stock in US corporations, in excess of $60,000. However, one of''The advantage of the Canada-U.S. tax convention is that it provides Canadian residents with potential tax credits that can reduce their U.S. inheritance tax liability if certain criteria are met. Even if no tax is due, a U.S. inheritance tax return must be filed with the IRS if a deceased non-U.S. Canadian resident owned property in the U.S. worth more than $60,000 at the time of death.

Do Canadians pay taxes on rental income in the U.S.?

By default, dirty U.S. rental income from U.S. real estate received by Canadian non-residents of the U.S. is subject to withholding tax of''30%.

It is possible to make a one-time election to treat income as effectively connected with a U.S. trade or business. If such an election is made, a nonresident receiving rental income in the U.S. may be taxed at progressive rates based on his or her net rental income. However, for property used personally part of the year, different rules apply and certain expenses may be prorated based on personal use. Each year, a tax return may need to be filed for a non-U.S. resident to report rental income. In addition, depending on the state in which the property is located, a separate tax return may be required for that''states.

Canadian tax residents are also responsible for reporting their worldwide income in Canada. Thus, net income from rental real estate in the U.S. must also be reported on a Canadian return. However, any U.S. federal and state taxes can generally be claimed as a foreign tax credit in Canada, which has the effect of reducing the tax liability in Canada by the amount of U.S. taxes paid, thereby avoiding double taxation.

Tax consequences of a subsequent sale of real estate in the U.S.

Canadians are subject to the rules of the Foreign Investment in Real Property Tax Act (FIRPTA). Under the FIRPTA rules, Canadian residents who have sold real estate in the U.S.,''Are generally subject to a 15% tax on gross sales. Note that there are exceptions to the 15% tax if:

• the value of the property is $300,000 or less,
• and the purchaser of the property or a family member plans to live in the property 50% of the time for two years after the sale.

There may also be additional state tax withholding requirements, depending on the state in which the property is located. In addition, non-U.S. residents must also have a valid U.S. tax identification number (ITIN) when selling real estate.

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Canadian migratory birds such as Vera who spend time in the U.S. or purchase real estate in the U.S. may carry