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TIM CESTNICK

Tim Cestnick is managing director at WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.

About three months ago, Czech race car driver Matej Kus, who could speak just a few basic English phrases, was knocked unconscious in a racing accident. After he awoke in hospital, he began speaking perfect English for a few days. And there are similar stories.

The most famous involved a Norwegian woman who suffered an injury from shrapnel in the Second World War, and came out of the hospital with a German accent. The term to describe the condition is "foreign accent syndrome" (go figure).

This should be a warning to Snowbirds: If you end up in the hospital south of the border, you might just wake up with a strong southern drawl, which could last up to a few weeks. On the other hand, you might wake up with tax issues that you never bargained for. Or worse, you might end up with both a southern drawl and tax problems. The accent should disappear after a while, so let's focus on those tax problems today.

the rules
If you're a Canadian citizen and resident, but spend time in the United States each year, you might be required to file a tax return south of the border. In a worst-case scenario, you might have to report your worldwide income to the Internal Revenue Service (IRS), which will mean reporting that income in both Canada and the United States at the same time. Now, foreign tax credits should ensure you don't pay tax twice - but all of this just complicates your tax affairs significantly.

Here's the deal: You'll be required to file a U.S. personal tax return if you're also a U.S. citizen, green card holder, or you simply spend a lot of time in the United States each year and meet the "substantial presence test" (SPT). It's the SPT that many Snowbirds should be concerned about.

You'll meet the SPT if the following formula adds up to 183 days or more and you spend more than 31 days in the United States in the current year: The number of days present in the United States in the current year, plus one-third of your days in the prior year, plus one-sixth of your days in the second prior year.

The bottom line? If you spend 122 days (about four months) or more in the United States each year for three consecutive years, you'll meet the test, and will be considered a resident in the United States for tax purposes. This will require you to file a U.S. personal tax return and report your worldwide income to the IRS - unless you can escape the requirement in other ways.

the escape

If you meet the SPT but maintain a closer connection to Canada than the United States, you can generally escape classification as a U.S. resident and the need to file a U.S. tax return by filing U.S. Form 8840, "Closer Connection Exception Statement for Aliens," on or before June 15 of the year following the year you met the SPT (by June 15, 2008, if you meet the SPT in 2007). You may also escape being considered a U.S. resident under the Canada-U.S. tax treaty, but claiming protection under the treaty is often more complex than filing Form 8840.

Don't ignore the issue of days spent in the United States. It's only a matter of time before Canadians will be subject to an automated entry/exit system at the Canada-U.S. border, which will track the exact number of days you spend in the U.S. The system already exists, but Canadians have been exempt from having to use the system in the past.

Don't count on this leniency forever.

tcestnick@waterstreet.ca