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What Every Canadian Snowbird Should Consider Before Buying a “Nest” in the U.S.

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When it comes to real estate, it’s been said that the three most important words are: location, location, location. For southern-bound Snowbirds, owning a home in the U.S. offers the opportunity to return to a favorite place each year, a home away from home. This allows you the certainty of knowing where you will spend your vacations and how many of your friends and family can join you there. And as the seasons pass, your vacation home will likely appreciate in value—an incentive to purchase, rather than rent, your winter getaway. If you are considering buying a “nest” in the U.S., you’ll want to take into account two key factors: choosing the right ownership structure and allocating your time across the border.

The time to decide how to structure ownership is before making your purchase. Establishing a Canadian corporation as the legal owner will help avoid U.S. estate taxes; however, rental revenue and capital gains will be taxed at the U.S. corporate tax rate of up to 35%. A Canadian partnership significantly reduces the tax burden of U.S. property that earns rental income, but will be subject to estate taxes. Still other options are setting up a Canadian trust or a hybrid trust. Each type of ownership comes with a different level of tax exposure. For this reason, it’s important to (a) understand the tax implications for you and your family, considering your “world wide” assets, and (b) establish the corporation, partnership or trust before you buy a home in the U.S. With careful planning, you can relax and enjoy your vacation home with peace of mind.

Once the purchase is complete, you will likely want to spend as much time as possible enjoying your vacation getaway. While most of us think of 183 as the magic number—days spent in the U.S. per calendar year—in fact it’s wise to keep the number 3 in mind. The IRS’ “substantial presence” test considers the time you spent in the U.S. over a three-year period, according to this formula:

  • 100 percent of days in the current year; plus
  • 1/3 of days in the prior year; plus
  • 1/6 of days in the second preceding year.

If the average number of days spent per year, over the three-year period, exceeds 183, this may trigger a U.S. tax residency, subject to U.S. taxes. If “substantial presence” is established, you may still have the option to file for a “Closer Connection” exemption with the IRS. Keeping track of your travel dates every year is the best protection.

Of course, our closest connections are with friends and family. With careful planning, a snowbird getaway will be a great place to spend time with your loved ones, year after year.

John McCord is the Director of Private Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada. John specializes in providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services.

This piece is for informational purposes only.

Covering Your Assets: Risk Management and Your Cross-Border Move

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In a recent blog post, we looked at important issues to consider when making a cross-border transition to Canada or the U.S. We touched upon the need to review risk exposure to ensure your current risk management strategies remain appropriate and new strategies are implemented as needed.

riskassessmentRisks are a part of everyday life, but some risks can have a devasting impact on what you’ve worked so hard to accumulate over your lifetime. Events such as a sudden illness, a car accident, or the death or disability of a working spouse can lead to a severe reduction of your assets. But what specific questions should you ask to help ensure you’re protected? Here are a few to consider:

  • When making a transition to the United States or Canada, what coverage will your current healthcare insurance provide? Will you be out of network? Will you need that coverage?
  • If you’re an American transitioning to Canada, will Medicare cover you or are you eligible for Canada’s universal healthcare system? If you’re a Canadian moving to the U.S., can you keep your Canadian coverage or will you be eligible for the U.S. healthcare system, including Medicare? How will recent changes to U.S. healthcare affect your specific situation?
  • Your life insurance coverage may be sufficient prior to your move, but what effect could the exchange rate have on any death benefits you’re paid after your move? Will your life insurance needs be higher or lower after your cross-border transition?
  • The same issues that apply to life insurance also apply to disability insurance. Will your policy still pay if you make a cross-border transition?
  • How will a cross-border move to the U.S. or Canada impact your auto and homeowner insurance coverage? What are the differences between U.S. and Canadian auto and home policies?
  • What are the cross-border ramifications if you can no longer perform certain daily living activities and require skilled nursing care?
  • As these questions show, making a cross-border transition brings with it the potential for new risk exposures. Will you be prepared?

Whether you’re planning a work-related move to Canada or seeking to adopt a “snowbird” lifestyle in the U.S., it’s always prudent to do the requisite planning ahead of time. The cross-border specialists at Cardinal Point Wealth Management can help you work through the specific areas of risk exposure when making a move to the U.S. or Canada.

Terry Ritchie is the Director of Cross-Border Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada.  Terry has been providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services to affluent families for over 25 years.  He is active as an author, speaker and educator on international tax and financial planning matters. www.cardinalpointwealth.com

U.S. and Canadian border services to collect biographical data

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This Investment Executive article offers a reminder that a new set of U.S.-Canadian border rules will soon be enforced, which could lead to tax and immigration issues for Canadian snowbirds. It suggests that Canadian financial advisors caution their snowbird clients that overstaying the limit in the U.S. could result in U.S. tax residency status and potential problems when crossing the border. In the article, Cardinal Point’s Terry Ritchie warns, “If you’re not keeping track, or you’re fudging the number of days, you’re compromising all the good things you want to go down there for.”

When visitors enter and exit at all border crossings starting on June 30, U.S. and Canadian border services will collect biographical data. This will provide both sides of the border with definitive information regarding residency, instead of relying on visitors to self-report. The number of days an individual spends in the U.S. is an important part of the U.S. “substantial presence” test (SPT). Those who meet the SPT may be considered U.S. residents and may be subject to U.S. income and gift taxes. To learn more about the formula behind SPT, read the full article here.

A checklist for U.S.-bound snowbird clients

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In the second part of this two-part series on advising snowbird clients, Terry Ritchie of Cardinal Point looks at four important items that should be on a snowbird’s checklist as they prepare to head south for the winter. First, get familiar with the residency requirements for healthcare benefits in your jurisdiction; some require specific minimum periods to be eligible for publicly funded health care when in Canada. Second, snowbirds should travel with a “border kit” that serves as proof that you’re a Canadian tax resident (click on the article link for specific documents to include).

Third, Ritchie warns against attempting to time the currency market when converting cash. If you plan to make the cross-border lifestyle a long-term situation, make sure you have U.S. dollars hedged for that purpose. Finally, review your estate planning situation, as Canadians who die owning more than $60K in U.S. real estate and securities held personally require the executor to file a U.S. estate tax return.

Clients who winter in the U.S. may soon be able to stay longer

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This article from Investment Executive features Cardinal Point’s Terry Ritchie and focuses on proposed legislation in the U.S. that would increase how long Canadian “snowbirds” can spend in the U.S. Under the Jobs Originated Through Launching Travel Act, snowbirds could stay in the U.S. up to 240 days per year (the current limit is 180 days). This proposed “retiree visa” is under consideration, so the limit is still 180 days.

Snowbirds should be aware of other restrictions and regulations that may impact them, including tax obligations. Under the”substantial presence test,” they may need to file an income-tax return with the IRS. Snowbirds should also be aware that U.S. income, including renting or selling U.S. property, may change their taxable status. In addition, they will soon be held more accountable for their visits, as Canada and the U.S. will implement a plan in June 2014 giving both governments easier access to information on when travelers enter/exit both countries. Get all the details in the full article found here.