On a dull winter day, the prospect of lingering longer in another country (preferably a sunny one) is pretty enticing. With the proper preparation, you can enjoy that long-term stay – at any age, for any reason.
“Snowbirds heading to the United States should monitor the length of their stay in order to mitigate their tax-reporting requirements,” says Chartered Accountant Dennis Tmej, Tax Partner with PKF Hill LLP in Toronto.
Pay Attention to U.S. Tax
“Snowbirds – retired Canadians who will remain residents of Canada and do not have a green card or U.S. citizenship – should determine the length of their stay to avoid becoming U.S. residents for tax purposes.”
If you spend 31 days or more in a particular year, and 122 or more days each year over a period of three consecutive years (including that particular year), you could end up becoming a resident for U.S. income tax purposes and be subject to U.S. taxes.
It’s easy to exceed this limit, find yourself in tax trouble and ruin a perfectly good vacation.
“While you shouldn’t pay tax twice on the same income,” Tmej explains, “you are still dealing with two tax regimes, in Canada and the U.S. You’ll be further ahead tax-wise if you follow both reporting systems. It’s critical to protect your position as a Canadian resident, avoid dual residency, and find out how to claim exceptions, including the ‘closer connection exception’ and relief under the Canada U.S. Tax Treaty.”
Tax raises its head in other instances too. Even assuming you avoid U.S. tax residency, you can still attract IRS (Internal Revenue Service) interest if you work part-time or as an independent contractor in the U.S. to supplement your income.
Owning a Home in the U.S.
If you own a home in the U.S., you will be subject to the U.S. income and estate tax regimes. If you rent it, you are earning U.S. rental income and are subject to a 30 per cent withholding tax on the gross rent. By filing a special election, you can pay tax at a graduated rate on the net income only.
Should you decide to sell your home, as a snowbird you are subject to a withholding tax of 10 per cent of the sale price. However, if arrangements are made to hold the money in escrow, which involves disclosing your net sale position to the IRS, you will likely pay less tax because it will be assessed on the net profit.
Also ensure that you have an estate tax plan – without one, upon your death, your estate could be subject to taxes as high as 45 per cent on the gross value of your U.S. property.
Finally, be sure to obtain extended medical coverage – and remember that it’s eligible for a Canadian tax credit. Now, there’s some good news!
Preparing to Volunteer Abroad
It’s not only snowbirds who get ready for lengthy sojourns in other countries.
Chartered Accountant Matthew Sale, Deloitte & Touche LLP in Mississauga, recently embarked on a different kind of getaway – as a volunteer for three months in Mozambique. His long-term stay, which came courtesy of Deloitte’s progressive work policies and his own desire to make a difference, involved extensive preparation.
Under a new fellowship program offered by Deloitte in partnership with CUSO-VSO ([url=http://www.vsocan.org/volunteer]http://www.vsocan.org/volunteer[/url]), Sale volunteered as a consultant and ended up organizing the finances of the Lurdes Mutola Foundation ([url=http://www.flmutola.org.mz]http://www.flmutola.org.mz[/url]), which provides girls in rural Mozambique with opportunities for secondary education.
Be Organized
As Sale explains, preparing for his international posting involved detailed organization, including a rigorous assessment by CUSO-VSO and a full weekend of training.
“You need a passport, work visa, immunization and out-of-country medical insurance. On the financial side, take some local currency plus your bank card and major credit cards to use at the ATMs. Getting money is no problem in cities but can be troublesome in the countryside.”
Emotional preparation is critical in anticipation of possible isolation and loneliness. “Take your computer to keep in touch,” he advises, “and use e-mail, blogs and Skype for inexpensive phone calls over the Internet.”
What else? “Pre-pay your bills, carry minimal luggage, and get ready to hit the ground running,” he advises.
“Ten days after training, I was in Mozambique, on the job. All my preparation paid off, and the financial system I designed and implemented was successful in managing the Foundation’s finances and attracting more funding. I also gained a new perspective, shared skills, and worked with colleagues in a different country. This kind of value just can’t be measured in dollars and cents.”
Brought to you by the Institute of Chartered Accountants of Ontario
