The Substantial Presence Test for US Residence

Generally, a US-resident individual has many annual compliance obligations, including the filing of US tax returns and, subject to certain thresholds, the disclosure of non-US bank accounts and financial assets. One common way for an individual to become a US resident for tax purposes is through the “substantial presence” test. Fortunately, there are several exceptions to the test—but being present in the United States for less than 183 days in any calendar year is not generally enough, contrary to the belief of many.

Under the substantial presence test, an individual is considered a US resident if he or she is physically present in the United States for at least

1. 31 days during the current year, and

2. 183 days during the three-year period that includes the current year and the two years immediately before that, counting

   1. number of days present in the current year,

   2. one-third of the days present in the first year before the current year, and

   3. one-sixth of the days present in the second year before the current year.

The first exception, which is implicit in the rule itself, is based on limiting the number of days of physical presence in the United States. Thus, an individual who is present in the United States for 150 days of each year is a US resident under this test, because the number of days calculated in the formula is 225 (150 + (1/3) × 150 + (1/6) × 150). Conversely, a person who is present in the United States for 120 days of each year is not considered a US resident pursuant to the test, because the number of days is 180 (120 + (1/3) × 120 + (1/6) × 120). However, it is risky for an individual to come this close to having the test apply, since many people forget to include travel days and vacation days in the calculation. As of June 30, 2014, days spent in the United States are tracked more accurately through a new automatic system at border crossings. Individuals can access their number-of-days data on a US government website (www.cbp.gov/I94).

The submission of form 8840, “Closer Connection Exception Statement for Aliens,” to the IRS may be an option to avoid certain US filing requirements if an individual may otherwise be a US resident pursuant to the substantial presence test. By filing this form, the individual confirms that he or she has closer personal, social, and economic ties to Canada than to the United States, and he or she may not need to file a US tax return. The filing deadline is April 15 or June 15 of the year following the tax year-end date, depending on the individual’s situation. An individual who is present in the United States for 183 days or more in the current year cannot file form 8840.

An individual who spends 183 days or more in the United States may be able to rely on the Canada-US treaty’s tiebreaker rules to avoid being considered a US resident. The individual must complete form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)” and file it with the completed form 1040NR (“U.S. Nonresident Alien Income Tax Return”). Form 8833 is also due on April 15 or June 15, depending on the individual’s situation. Note that the difference between form 8833 and form 8840 is that the latter does not require an accompanying US income tax return.

One other exception to the substantial presence test should be considered: an exempt individual is allowed to exclude days of presence in the United States on which he or she was a foreign government-related individual, a teacher or trainee, a student, or a professional athlete competing in a charitable sports event. Days of presence are also excluded for someone whose medical condition prevented him or her from leaving the United States; form 8843, “Statement for Exempt Individuals and Individuals with a Medical Condition,” must be filed with or without the US non-resident tax return by April 15 or June 15, depending on the individual’s situation.

Keep in mind that many other circumstances—for example, the ownership of a US rental property (whether it is rented on a part-time or a full-time basis), investment in a US corporation, and investment in a US partnership—can trigger the requirement for US tax filings.

Leona Liu
Ernst & Young LLP, Ottawa
[email protected]