Retiring Abroad: Tips for Snowbirds

The winter has arrived, and Canadian Snowbirds are once again heading south, chasing warmer weather. According to a 2023 snowbirdadvisor.ca report, 85% of Canadian Snowbirds spend their winters in the United States, so here are some important tips.

The Canadian CRA and U.S. IRS have a tax treaty – one of the functions of this treaty is to determine which country Canadians are deemed a resident for tax purposes. The agencies use a “substantial presence” formula; if snowbirds spend more than 182 days in the U.S. based on a three-year rolling average, they can be taxed as U.S. citizens. The formula totals the sum of the amount of days spent in the U.S. in the current year, plus 1/3 of the days in the previous year, plus 1/6 of the days in the year before that.

In addition to being deemed a tax resident of the U.S. for staying too many days, there are other negative potential outcomes. One could be permanently banned from the U.S. going forward, potentially lose provincial health care coverage, and/or potentially trigger unwanted tax in Canada if the CRA deems you to no longer be a tax resident of Canada.

When Snowbirds own property in the U.S., another layer of tax considerations presents itself. According to the same snowbirdadvisor.ca report, roughly half of Canadian snowbirds in the U.S. own real estate. The capital gain on the sale of real estate is taxable to the IRS, therefore resulting in withholding tax on the sale of the asset, even if the owner is not deemed a tax resident of the United States. Additionally, if the property is rented out during the year, the rental income is also subject to tax.

Tax considerations can also be affected by where a Snowbird chooses to reside. Recently we came across an article in the Globe & Mail which looks at retirement to different states from not only the perspectives of climate, cost of living and health care, but also delves deeper into the idiosyncrasies of US state taxes and how that can affect a retiree’s decision. The states they looked at specifically are Tennessee, Florida, South Carolina, Nevada, Arizona, Hawaii and California.

The differences from state to state can be quite stark. For example, in Arizona, a retiree from Canada who makes a withdrawal from their RRSP, and pays 15% withholding tax to the Canadian government, can use that as a tax credit against state taxes. On the flipside, in California, not only are RRSP withdrawals taxable, but they are the only state that doesn’t recognize the RRSP as a tax sheltered investment vehicle – this means that gains, dividends and interest realized inside the RRSP would also need to be reported on the state tax return. Another example to be aware of is that in Texas, there are no state taxes but property taxes are very high.

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