written on behalf of Feigenbaum Law
By now, COVID-19 has impacted people in nearly every aspect of life, from employment, to travel, to health. In many cases, one aspect of life can impact another. Take for example Canadians who haven’t been able to return home from the United States due to travel restrictions and now face a risk of becoming U.S. Residents for U.S. income tax purposes. This is becoming an increasing concern as the two countries are expected to extend the current border closure until at least June 21st. Fortunately, the IRS has recently announced some relief for those affected.
The Substantial Presence Test
The IRS uses a test known as the “substantial presence” test to determine whether someone who is not a citizen or permanent resident of the U.S. nonetheless qualifies as a “resident for tax purposes.” In short (there are exceptions) the test states that anyone who has been in the United States for a certain number of days during three consecutive years may be deemed a resident for tax purposes. To qualify, a person must have been present in the U.S. for:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days they were present in the current year, and
- 1/3 of the days they were present in the first year before the current year, and
- 1/6 of the days they were present in the second year before the current year.
For example, if you lived in the United States for 140 days in 2020, 120 days in 2019, and 120 days in 2018, your total number of days for the test would be 200 days (calculated by adding 140+40 (1/3 of 120) +20 (1/6 of 120)).
60 Days of Grace
Following COVID-19, the IRS has recognized that some individuals may have been forced to stay in the United States for longer than they originally intended, therefore putting them over the 183-day threshold. As a response, the announcement states that an eligible individual who intended to leave the United States during the COVID-19 Emergency Period (February 1, 2020 – April 1, 2020) is eligible for a 60-day grace period for the purpose of applying the test. In order to qualify, individuals must have intended to leave but were not able to for reasons which include:
- restricted movement by a government authority;
- cancelled flights and disruptions in other forms of transportation;
- shelter in place orders,
- border closures; and
- those who felt unsafe travelling during that period.
The inability to leave the United States will be considered a medical condition for exemption purposes, but will not be treated as a pre-existing medical condition. The relief is not available for those who have started the process of obtaining a green card. As stated earlier, U.S. citizens and residents are also not able to qualify.
How to Apply
Those who wish to apply for the exception must file a Form 1040-NR for the 2020 calendar year and also attach a Form 8843, Statement for Exempt Individuals with a Medical Condition. If an individual is not normally required to film a Form 1040-NR, they will not have to fill out a Form 8843, but are encouraged to retain all records related to their inability to travel. Furthermore, individuals who qualify for other exceptions to the substantial presence test, such as the closer connection test, are not required to fill out the form.
Of course, the grace period of April 1, 2020 is already over. There is no indication that the grace period will be extended any further, so those still inside the United States and unable to return home should contact a tax lawyer at their earliest convenience. We will of course be sure to update our readers on any developments.
As always, we recommend that people consult with an experienced U.S. tax lawyer before navigating the complex world of U.S. and Canadian tax law. Contact Feigenbaum Law for a custom solution to your personal tax planning needs. Our team’s unparalleled knowledge of the U.S. and Canadian tax systems make us leaders in this field. Contact us about making your transition across the border as smooth as possible. We offer services to clients in the U.S., Canada and around the world. Contact us online to learn more about how we can help or call us at (416) 777-8433 or toll-free at (877) 275-4792.