Snowbirds - US Gift and Estate Taxes Going Up Soon?

Excerpted from Knowledge Bureau’s Cross Border Tax Course

The term "Snowbird" refers to a person who is ordinarily resident in Canada but spends part of the year in the U.S.  There are a significant number of such individuals. It is estimated over a million Canadians travel south for the winter – mostly between the ages of  50-69 - to popular sunny states like Florida, Arizona, New Mexico and California as well as other sunny destinations in Mexico, Panama and Costa Rica. Many businesses cater to such individuals in Canada and in the foreign countries they visit and buy properties in.  This is especially true of tax, legal and financial advisors, too, because there are costly tax traps to avoid.  

A person who spends part of the year in the U.S. or other countries abroad, for vacation purposes or health reasons will generally not be considered to have given up Canadian residence, and therefore will still be treated as a factual resident in Canada.

Due to the amount of time spent in the U.S. by snowbirds, they are likely to be deemed to be residents of the U.S. under the “substantial presence test”.  For this reason, most snowbirds will be required to file IRS Form 8840, “Closer Connection Exception Statement for Aliens”, claiming closer ties to Canada for each tax year.

Visitors from Canada are “deemed” to be travelling into the U.S. on a B2 Tourism Visitor Visa even if you don’t have the paperwork to prove it. This visa allows an individual to travel in the U.S. for up to six months per entry.  Technically the amount of time is at the discretion of the border officer. If you want to stay longer than six months, you will have to apply for the real thing.

In today’s society, many snowbirds go a step further and instead of just vacationing in the U.S., they actually purchase a vacation home in the state they like to visit.  Purchasing U.S. vacation property can open the Canadian snowbird up to all kinds of U.S. tax issues.

One issue is an ongoing one and relates to U.S. estate tax. The exemption from the U.S. estate tax is calculated on the market value of the property of the deceased whereas in Canada only the gain on the deemed disposition at death is taxed.  As a result, if you hold U.S. real estate when you die, depending on the value of the U.S. property, the portion of your estate that is situated in the U.S. may be subject to a tax at a 40% rate (depending on the estate tax rules in the year of death) if the FMV is over the applicable estate exemption allowed in that year. 

The current 12.92 million estate tax exemption is temporary; indexed annually and about to end?  That’s the big question for certain Canadians who may be subject to the tax if it goes back down to $5.49 million (inflation adjusted) starting in 2026 if the higher levels are not made permanent by Congress.  Planning ahead would pay off now. 

Another issue is the creation of U.S. sourced income if the individual decides to turn their vacation home into a rental property. Generally, a 30% withholding tax applies to the gross amount of rent paid to a non-resident of the U.S. on real estate located in the U.S. However, to avoid this withholding tax deduction, a Canadian can make an election to file a U.S. tax return and pay tax on their net rental income by attaching a declaration to a timely filed income tax return and completing a form W-8ECI (elect to treat the income as “effectively connected” with a trade or business in the U.S.)

Make a Difference.  Before travelling or buying property abroad, Canadian residents are wise to understand the tax implications by consulting a cross border tax specialist.  To learn more about this, enrol in the Knowledge Bureau’s Cross Border Course to earn a vocational certificate in the subject and 30 CE Credits.