Things to consider when becoming a snowbird

First, keep your Canadian resident status, then consider housing, banking and insurance issues.

Matthew Elder 9 October, 2015 | 5:00PM

Retirement is synonymous with lifestyle, and for many Canadians that means spending at least part of the winter in warmer climes, notably Florida, Arizona and other areas of the southern United States. Becoming a so-called snowbird requires a lot of planning in regard to taxes, medical coverage (both provincial medicare and private insurance), housing, banking and other issues.

Here's a brief rundown on what you need to consider before becoming a snowbird – in particular, how to ensure you are not legally considered a resident of the United States.

How to "fail" the Substantial Presence Test

Rule one for the typical snowbird is to ensure you retain your Canadian resident status, for both taxation and social services purposes. Generally speaking, if you spend up to six months in the United States -- and the rest of the year in Canada -- you are considered a Canadian tax resident. The six-month period is the total for the year. But if you spend more than six months south of the border, you may be deemed to be a U.S. tax resident and be required to pay U.S. estate taxes on all of your worldwide assets, even if most of them are still in Canada. (What's more, you may no longer qualify for provincial health insurance.)

However, the definition of a U.S. overstay isn't really six months plus a day, says Robert Kerr, chairman of Kerr Financial Corp. in Montreal. In fact, depending on how much time you spent in the U.S. during the two previous years, it could be less. Your residency status is calculated using the substantial presence test, which requires you to total the following:

  • the total number of days you spend in the United States during the current year;
  • one-third of the days from the preceding year; and
  • one-sixth of the days from the year before that.

If the total is 183 days or more, you will be deemed by the substantial presence test to be a U.S. resident in the current year. In many cases, snowbirds pass the substantial presence test and are viewed by the Internal Revenue Service (IRS) as U.S. tax residents. However, if you can demonstrate, using IRS Form 8840, that you have "closer connections" to Canada, you may be considered a U.S. non-resident for tax purposes. In order to claim the Closer Connection Exemption, the following criteria must be met:

  • You spent less than 183 days in the U.S. during the current year;
  • Your "tax home" is located outside the U.S.; and
  • Most of your economic and social ties are in Canada (for example: personal belongings, social, political, cultural or religious organizations to which you belong, the jurisdiction where you vote, the province where you hold a driver's licence, etc.)

"If you are unable to claim the Closer Connection Exemption, you may be able to rely on the Canada-U.S. tax treaty by filing IRS form 8833," Kerr says. "In fact, under the relevant treaty provision, an individual will be considered a resident in the country where he or she has a permanent home available to them."

If the individual has a permanent home available in both countries, he or she will be considered a resident of the country where their personal and economic relations are closer -- referred to as the "centre of vital interests."

"If the centre of vital interests cannot be determined, the individual will be considered a resident of the country where they have a habitual abode (generally where the individual spends the majority of their time)," Kerr says. "Where the individual has a habitual abode in both countries, the individual will be considered a resident of the country where the individual is a national. Where the individual is a national of both countries, or neither country, the individual's residence will be determined by the competent authorities for each country."

Medical coverage

As a Canadian resident, provincial medicare will remain the mainstay of your health coverage. But you also will need out-of-country medical insurance, purchased from a private insurer or a major bank. Among major private insurers are Medipac (endorsed by the Canadian Snowbird Association), Manulife (in connection with McLennan Group and the Canadian Association of Retired Persons), Ingle Insurance, Kanetix and Medi-Quote. Just as when you buy out-of-province vacation medical insurance, circumstances such as your age, pre-existing medical conditions and where you live will affect the cost of this essential, supplementary protection.

A good policy, combined with provincial medicare, will in many cases cover the costs, often without having to apply for reimbursement, of doctor visits, hospital stays, ambulance, prescription drugs, and even emergency transportation home. It is important to shop around, not just for a good premium but to ensure you have the correct coverage according to your circumstances.

Housing and finances

Be sure to address everything connected to your everyday living needs. Some snowbirds prefer to own a home in the United States, but be aware that there are a host of issues to consider: the challenge of buying in a very different market from home; securing mortgage financing, if necessary; state and municipal taxes, including so-called non-resident levies; property insurance (including, where necessary, hurricane coverage); and ensuring the property is maintained and protected during the off-season when it is vacant. Renting out a home you own presents U.S. income-tax issues, as does selling the property. Many snowbirds decide it is less complicated -- and sometime more cost effective -- to rent instead of owning their southern home.

You'll need to set up a U.S. bank account to manage your everyday expenses. That isn't as simple as opening an account with a Canadian bank that has U.S. retail presence, such as TD or RBC, because those technically are separate institutions from their Canadian-located brethren. Wherever you set up an account in the United States, you will need to discuss with your banks on both sides of the border how to transfer money back and forth. Many snowbirds keep U.S.-dollar accounts -- both banking and investments -- in Canada, which avoids currency-exchange fluctuations and conversion costs.

And remember; if you decide to keep a U.S.-based investment account, you will have to file tax returns or other paperwork with the IRS (see this article for more details).

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Matthew Elder

Matthew Elder