Snowbirds and Aliens: How spending too much time in the U.S. may put your financial privacy at risk
Winter in Canada can be an enchanting and beautiful time of year. As the months roll by, however, the long nights and frigid temperatures can produce feelings of despair that Winter will never end. It is no wonder then, that hundreds of thousands of Canadian ‘snowbirds’ ride out the worst of winter across the border in warmer U.S. climates. While the opportunity to golf in January is certainly enticing, some important legal issues that accompany extended stays in the U.S. should be examined prior to departure. This is particularly important for anyone that may hold power of attorney over the assets of a relative.
Any Canadian that spends enough time in the U.S. to be considered a ‘resident alien’ should be aware that they may become subject to a wide array of American legislation that they could otherwise avoid as short term tourists. Much of this legislation centers on taxes and will not be addressed in detail here. The focus in this article will be certain reporting requirements mandated by The Bank Secrecy Act. This piece of legislation can compel disclosure of financial information to the U.S. Department of Treasury.
Who is considered a resident alien?
Canadians will be deemed to be resident aliens in the U.S. if they maintain a ‘substantial presence’ in that country. A person who has not spent at least 31 days in the U.S. during the current calendar year will not be substantially present. For those who have spent more than 31 days in the U.S. in the current year, a mathematical formula is engaged to test their status. This formula calculates how many ‘substantially present days’ (SP days) a person has been in the U.S. during the last three years. If the number of SP days is higher than 183, the person is considered to have a substantial presence in the U.S. and is deemed a resident alien. The number of SP days must not be confused with calendar days! The SP day is merely a mathematical construct created by bureaucrats.
The test to calculate SP days can be slightly confusing. The illustrative example below will assist in understanding how it is applied:
Tom is a Canadian citizen who lives in Saskatoon. He vacations in Arizona from January 1st until May 10th every year and has been doing so for the past decade. If we don’t account for leap years, this means he spends 130 calendar days in the U.S. every year.
Under the substantial presence test, every calendar day that a person spends in the U.S. during the current calendar year counts as an SP day at a 1:1 ratio. Since Tom spent 130 calendar days in the U.S. during 2017, all 130 days count as SP days.
Every calendar day that a person spent in the U.S. during the previous calendar year counts as an SP day at a 1:1/3 ratio. Since we know Tom spent 130 days in the U.S. during 2016, we calculate his 2016 SP days as (130 x 1/3) = 43.33.
Finally, we know that in 2015 Tom was also in the U.S. for 130 calendar days. The calculation for SP days from two years previous is at a 1:1/6 ratio. Therefore, we calculate (130 x 1/6) = 21.67.
Once we have calculated the SP Days for the three year period, then we add them together (130 + 43.33 + 21.67) and discover that Tom would be considered substantially present for 195 days. This exceeds the limit of 183 days; therefore Tom is deemed a resident alien.
Please note there are some exceptions to this test. Further information about the substantial presence test can be downloaded from the IRS website.
You’re a resident alien. Now what?
Any person who qualifies as a resident alien and who has a financial interest or signing authority over any financial account outside the U.S. with a value exceeding $10,000.00 USD must file a “Report of Foreign Bank and Financial Accounts (FBAR)”. The definition of “financial account” captures things such as bank accounts, term deposits, insurance policies with cash values, mutual funds, etc. It covers a wide variety of financial instruments. In addition to having to disclose account values, the FBAR requires a detailed listing of all associated names, addresses, and account numbers. The U.S. government keeps a database of this information.
A financial interest in, or signing authority over, a financial account are not the same thing. As with the definition of what qualifies as a financial account, what qualifies as a “financial interest” is also very broad in scope. A financial interest could potentially include such things as funds being held in trust for the benefit of another, owning shares in a corporation, or holding power of attorney over the assets of another. “Signing authority” is the power to directly control what happens to an account, whether verbally or in writing. It is very common for a person holding power of attorney over the assets of another to have set up signing authority with any institution holding those assets. It is important to note that even if a power of attorney has never been used, and is only in place for some future occurrence, if the dollar value of the underlying assets qualifies, it constitutes signing authority and attracts FBAR reporting requirements.
What are the drawbacks to FBAR reporting?
Any person who is required to file an FBAR is responsible for knowing the law and following it in its entirety. Even negligent or non-willful breaches of the reporting requirements can attract thousands of dollars in fines. In addition to possible financial penalties for non-compliance, one must consider the amount of time and energy that it takes to collect and report the information required under an FBAR.
Another major concern is that anyone holding a power of attorney over another may inadvertently be exposing the grantor of that power to having their information distributed to a foreign government. A resident alien snowbird who has been granted power of attorney over an aging parent is a common example. Under this law the financial information of the parent would need to be disclosed, even if they have never been to the U.S.! The current political climate in the U.S. can be described as tumultuous at best. It is not unreasonable to expect that most Canadians would not be comfortable having their intimate financial details held in an American government database.
What can be done to avoid this headache?
The most effective method of dealing with the issues discussed above is to know what you are up against before it becomes a problem. A legal professional can help guide you through the process of determining the possibility of avoiding FBAR reporting or how to comply in the most efficient and cost-effective way possible. Professional advice on issues surrounding powers of attorney is also highly recommended.
About McKercher LLP:
McKercher LLP is one of Saskatchewan’s oldest, largest law firms with offices in Saskatoon and Regina. Our deep roots and client-first philosophy have made our firm rank in the top 5 in Saskatchewan by Canadian Lawyer magazine (2017). Integrity, experience and capacity provide innovative solutions for our clients’ diverse legal issues and complex business transactions.
This post is for information purposes only and should not be taken as legal opinions on any specific facts or circumstances. Counsel should be consulted concerning your own situation and any specific legal questions you may have.