Tax Implications for Canadian Snowbirds

A popular lifestyle choice in retirement is to become a Canadian snowbird. This refers to individuals who live in Canada for part of the year and elsewhere for the other part of the year. But when you leave Canada for extended periods, it can affect your residency status which can have tax implications. If you’re committed to the Canadian snowbird lifestyle, don’t let your retirement bliss be disturbed by an unexpected tax obligation. Here’s everything you need to know about the tax implications of living the snowbird lifestyle in retirement.

Canadian Snowbirds

What are Snowbirds?

Snowbirds refer to individuals who live in one place for half the year, and in another place for the other part of the year. Normally, Canadians choose this lifestyle to escape the winter months and enjoy a warmer climate. In addition, the lifestyle is maintained in such a way as to reduce tax burdens and maintain residency in the desired location.

Many retired Canadians enjoy the snowbird lifestyle. It’s common practice to live in Canada during the summer months. During the winter, Canadian snowbirds will live somewhere warm, normally in the United States, but it could be anywhere. Common snowbird destinations include Florida, Arizona, California, Hawaii and Texas. 

Related Reading: Best Place for Canadian Snowbirds

Why are Canadians called snowbirds?

There is a small bird called the Dark-Eyed Junco which is known to migrate from colder regions to warmer regions in the winter months. Typically, they appear in the United States during this migration period. Since many Canadians mimic this behavior, they are also called snowbirds!

How long can Canadian snowbirds stay out of the country?

Canadian snowbirds can stay out of Canada for up to 183 days of the calendar year. This is roughly 6 months and is widely known as the 183-day rule. If you stay in the United States or elsewhere for more than 183 days in a calendar year, you risk losing your Canadian residency. This does not mean you lose Canadian citizenship. Residency only affects your tax obligations in Canada.

When you abide by the 183-day rule, you usually become a deemed resident of Canada. As a deemed resident, there are no tax implications. The only other requirement to consider is residency in another country, normally under the terms of a tax treaty. If you’re staying outside of the US, you may have to do some research to learn about the local laws and regulations. In some cases, if you’re considered a resident of another country, you may have to file and pay taxes in that country.

Fortunately, there is a tax treaty between Canada and the United States. If you received notification from the Internal Revenue Service (IRS) that you’re considered a US resident, or are not considered a Canadian resident anymore, you would be required to file a tax return in the US. If this happens, file a Form 1040NR (US non-resident tax return) and claim exemption under the Canada – US Tax Treaty. This form is due by June 15 for the previous tax year. By completing this form, you won’t have to file and pay taxes in the US, even when you stay in the US longer than 183 days.

What happens if you leave Canada for more than 6 months?

If you leave Canada for more than 6 months, you may be considered a non-resident of Canada. Losing Canadian residency can be problematic. You may have to pay taxes in the United States, or wherever you’re staying, and file a non-resident tax return in Canada, which is more complex than the routine annual return. In this case, paying Part XIII tax on income earned in Canada becomes a requirement. This is a tax on dividends, rental income, royalty payments, CPP benefits, OAS benefits, RRSP payments and any other income earned from Canadian sources.

Related Reading: CPP vs OAS: What are the differences?

Residential ties

In some cases, the Canada Revenue Agency may consider your significant residential ties to determine residency status. These will be considered after you lived outside of Canada for longer than 6 months. Significant residential ties to Canada include:

  • A home or real property ownership in Canada
  • A spouse or common-law partner located in Canada
  • Dependents located in Canada

Secondary residential ties include:

  • Own other property, such as cars, furniture, etc.
  • Social ties to religious organizations, memberships to recreational institutions, etc.
  • Active bank or credit accounts
  • Hold a valid Canadian driver’s license, passport or health card

If you have significant residential ties, you may be considered a factual resident of Canada for income tax purposes. This means you’re still a Canadian resident despite being out of the country for over 6 months. However, if you only have secondary residential ties, the argument for Canadian residency is a tough battle.

How long can a Canadian citizen stay outside of Canada without losing benefits?

Fortunately, Canadians won’t lose citizenship if they are out of the country for longer than 6 months. Residency and citizenship are not the same thing. In Canada, residency is what determines tax implications, not citizenship. Therefore, if you’re out of the country for an extended period of time, you might have to pay tax in another country, but you won’t lose citizenship.

With that said, you might lose access to some benefits that are reserved for Canadian residents while abroad. Some benefits have requirements that you must be located in Canada to be eligible. Although, whenever you return from your travels, your citizenship will kick in again and you’ll receive your full benefits.

Related Reading: Do you get severance pay when laid off in Canada?

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Tax Implications for Canadian Snowbirds

By this point, we’ve touched on the tax implications for Canadian snowbirds. As you can see, many of the implications arise from residency status – which is why it’s so important to maintain Canadian residency. Let’s explore some common questions about taxes for snowbirds below. 

Do Canadian Snowbirds pay US taxes?

In general, Canadian snowbirds structure their lifestyle in such a way that they don’t pay taxes in the US, only in Canada. By understanding the rules, you can bypass paying taxes in the US. Here’s what you need to know to avoid paying taxes in the US as a snowbird:

  • Do not stay in the US for longer than 183 days in a calendar year
  • Maintain significant residential ties in Canada, including one or more of the following:
    • Owning a home or real property in Canada
    • Have a spouse or common-law partner in Canada
    • Dependents in Canada

Keep in mind that you only have to abide by the 183-day rule OR the significant residential ties rule – not both. However, if you’re worried about losing your Canadian residency, it will help your case to abide by both rules.

If you didn’t abide by these rules as a Canadian snowbird, be sure to file Form 1040NR with the IRS by June 15th for the previous calendar year. On this form, claim an exemption under the Canada – US Tax Treaty. If you don’t file this form and are considered a resident of the US, you may have to pay taxes. Be sure to be wary of these rules in the future!

Do Snowbirds have to file US taxes?

No, Canadian snowbirds are not required to file US taxes so long as you abide by the 183-day rule and/or maintain significant residential ties in Canada. The same rules apply as we saw above with paying taxes. 

Related Reading: Tax Season in Canada

How long can a Canadian stay in the U.S. if they own a house?

Some people may think that you can stay longer in the US (or elsewhere) if you own a property and not face additional tax consequences. However, this is not true. The same residency rules apply even if you own a home in the location you’re staying at as a Canadian snowbird. In other words, the 183-day rule still applies to foreign home owners.

How are Canadian non-residents taxed?

If you are a non-resident of Canada, you must pay Part XIII tax on income from Canadian sources, including:

  • Dividends
  • Rental income
  • Royalty payments
  • Pension payments
  • CPP, OAS and other financial benefits
  • RRSP, RRIF, and other annuity payments
  • Management fees

In addition, you would have to pay Part I tax on the following Canadian sources:

  • Employment income earned in Canada or from a business carried out in Canada
  • Employment income from a Canadian resident for employment in another country
  • Employment income earned while considered a Canadian resident
  • Taxable capital gains when disposing of property 

Fortunately, you are eligible for the foreign tax credit as a Canadian non-resident. The tax credit is up to 15% of any foreign tax withheld at the source. It is in place to relieve the tax burden on Canadians who are living abroad. Keep in mind that the foreign tax credit cannot exceed Canadian tax liabilities on foreign income. To avoid double taxation, Canada has tax treaties with many countries including the United States, Mexico, many places in Europe, South America and Asia, and much more. 

As a non-resident of Canada, you will also be required to fill out a different tax package than what you’re used to. This is to account for the Part XIII tax which Canadian residents do not have to file and pay.

Do Canadian citizens have to pay taxes if they live abroad?

Unfortunately, you can escape the Canadian winters, but not taxes! The answer is yes, Canadians must still pay taxes if they live abroad. There are two types of taxes to consider:

  • Canadian taxes. If you still have Canadian residency throughout the year, you would complete your annual tax return as usual. If you are a non-resident of Canada, you would have to pay Part I and Part XIII tax but gain access to the foreign tax credit. 
  • Foreign taxes. This part can get tricky because tax laws vary greatly depending on where you’re staying in the world. However, keep in mind that you may have to file a tax return where you’re staying. Be sure to read up on the local laws to determine whether you have a tax obligation. 

Can you collect CPP if you live outside Canada?

Yes, you can collect CPP if you live outside of Canada. The plan is a member-contributed plan and rewards Canadians for their dedication to the workforce throughout their life. For this reason, you are entitled to the benefit no matter where you are in the world. Of course, you must be eligible for CPP payments before you can make the claim – but Canadian residency is not an eligibility criterion. And remember, if you are a non-resident of Canada, you must pay Part XIII tax on your CPP income!

Related Reading: CPP and Retirement Planning: How Much Will I Get?

Owning Real Property in the US

Some Canadian snowbirds choose to buy a second home or real property in the US. This could be a way to invest and facilitate a smooth lifestyle, instead of relying on hotels, Airbnbs or other similar arrangements. If this is part of your retirement plan, here’s what you need to know:

  • Anyone can own property in the United States, regardless of citizenship. 
  • Even if you solely own real estate, you have to abide by the laws in the US, including obtaining an appropriate visa, paying property taxes, and so on. 
  • There are mortgage products available to help Canadians purchase properties in the US. For example, BMO and RBC operate in the US and offer cross-border mortgages. You can also work with an American bank, but it can be more challenging to qualify as a Canadian. 
  • If you choose to rent out your property when you’re not there, you must abide by local laws. Some states or municipalities restrict short-term rentals, so be mindful of this. In addition, the IRS has an automatic 30% withholding tax on income earned by non-residents. Unfortunately, you cannot avoid or reduce this withholding tax. Furthermore, filing a non-resident tax return in the US will most likely become a requirement when earning rental income there.
  • In some states or municipalities, community fees apply. These are sort of like condo fees, but they apply to neighbourhoods and go towards the maintenance of the community. This is not customary in Canada so it could be a shock to snowbirds. 

Overall, it’s important to do your due diligence before finalizing a property purchase in the US as a Canadian citizen. Otherwise, you may face unexpected taxes, fees or even lawsuits.

Related Reading: Top 10 Retirement Planning Tips for Canadians

Living the Canadian Snowbird Lifestyle

If you’re planning to purchase a snowbird home in another part of the world, the laws can vary. Some places do not allow you to buy a property unless you have citizenship. And even if they do allow you to buy property, you may face a foreign buyer tax (similarly to how Ontario and British Columbia charge a tax on foreign buyers of real estate). Again, be sure to do your homework!

The Canadian snowbird lifestyle is appealing to many retirees, or soon-to-be retirees, and for good reason! However, you may be able to escape the cold winters, but taxes are unavoidable. Before you embark on your adventures as a snowbird, be mindful of your residency and potential tax obligations.

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