Heading South

Understanding U.S. tax residency & the Substantial Presence Test

If you’re a Canadian snowbird and planning to spend an extended amount of time in the United States, you likely have several housekeeping items to arrange to be taken care of while you’re away, including mail collection and snow shoveling.

But did you know that keeping track of the number of days you spend in the U.S. should also be on your list? 

Why it’s important

Being meticulous about logging your time spent out of the country is important because under U.S. federal income tax law, a person that is physically present in the U.S. for a certain number of days is deemed to have tax residency in the United States under the Substantial Presence Test. This may mean you are required to file a U.S. federal income tax return and pay tax.

Here’s how it works

The Substantial Presence Test calculates the person’s deemed tax residency in the current year, as follows.

• Days present in U.S. in current year, plus
• 1/3 of days present in U.S. in preceding year, plus
• 1/6 of days present in U.S. in second preceding year.
• Note that partial days count as whole days in this test!

If the above total is 183 days or more, and you are present in the U.S. for at least 31 days in the current year, you are deemed a resident for U.S. federal income tax purposes in the current year.

While this is commonly referred to as the “183-day rule,” you should note that the calculation in the test occurs over a three-year period. Therefore, you may be a deemed resident of the U.S. even if you are present in the U.S. for less than 183 days in each calendar year of the test.

Let’s look at two examples: 

EXAMPLE 1: Let’s assume that you were in the U.S. for 120 days in the current year and in each of the two previous calendar years.  On December 31 of the current year, you want to calculate whether or not you are deemed to be a tax resident of the U.S.

Year	Days Present in the United States	Multiplier	Days for Substantial Presence Test
Current Year	120	1	120
CY-1	120	1/3	40
CY-2	120	1/6	20
Total	-	-	180

• And, importantly, the days you were present in the current year is at least 31.

Under this example, you are not a deemed tax resident of the U.S. for the current year. However, by adding a few days in any of the years of the calculation, you could easily find yourself with total days that are equal to or greater than 183.

EXAMPLE 2: Let’s assume you were in the U.S. for 122 days in the current year and in each of the two previous calendar years.  On December 31 of the current year, you want to calculate whether or not you are deemed to be a tax resident of the U.S.

Year	Days Present in the United States	Multiplier	Days for Substanial Presence Test
Current Year	122	1	122
CY-1	122	1/3	40 2/3
CY-2	122	1/6	20 1/3
Total	-	-	183

• And, importantly, the days you were present in the current year is at least 31.

Under example 2, you are deemed to be a tax resident of the U.S. for the current year.

Want to learn more? Talk to us. 

The U.S. tax code and the Canada–U.S. Tax Treaty offer several ways that you can overcome your deemed residency for U.S. federal income tax purposes under the Substantial Presence Test. 

If you’d like to learn more about these rules and how to avoid deemed U.S. tax residency, contact us for a copy of our education article or listen to our podcast.