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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
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31 days during the current year, and
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183 days during the three-year period that includes the current year and the two years immediately before that, counting
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number of days present in the current year,
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one-third of the days present in the first year before the current year, and
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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
leona.liu@ca.ey.com
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