Cost of Sunshine?
On December 7, 2011, Prime Minister Harper and President Obama released the Beyond the Border Action Plan for Perimeter Security and Economic Competitiveness. As part of the Action Plan, Canada and the United States committed to establishing a coordinated entry and exit information system, including a system which permits sharing information so that the record of a land entry into one country can be utilized to establish an exit record from the other.
The main reason behind the Entry/Exit Initiative was to enhance national security and support law enforcement.
However, in a 2014 memo recently released under the Access to Information Act, it is expected that the federal government will use the border entry/exit-tracking system to avoid paying hundreds of millions of dollars in social benefits to those individuals that should not be receiving them.
It estimates savings over five years of:
$48 million by Employment and Social Development Canada for the old age security program;
$21 million by Employment and Social Development Canada for the employment insurance program;
$125 million to $250 million by the Canada Revenue Agency for the child tax benefit program.
This initiative has a direct impact on snowbirds that spend much of their time in the US.
During this time of year, many snowbirds are beginning to pack up their belongings to make that annual trip south to warmer weather. The last thing they are thinking about is the impact this time away will have on their Canadian benefits. However, snowbirds may want to pay closer attention to the social benefit rules to ensure their payments are not affected. Gone are the days where it was easy to overstay your time in the US with little or no fear of the Canadian authorities ever knowing how much time you spent outside of Canada. The new border tracking system will give the government the ability to keep a close eye on the amount of time each individual spends outside of the country, providing crucial information to assist in reducing or eliminating paying certain benefits. One example surrounds the Old Age Security (OAS) benefit.
The OAS benefit is determined based on years of residency in Canada. People residing in Canada must have resided in Canada for at least 10 years after turning 18. People residing outside Canada must have resided in Canada for at least 20 years after turning 18. After 40 years of residency over the age of 18, Canadians over age 65 are entitled to the maximum government pension. Canadians who are not residents in the country for the requisite 40-year minimum after the age of 18 may be subject to a reduced benefit. Previously a snowbird may have chosen to omit the information relating to their time outside of Canada when applying for the OAS benefit. However the border entry/exit-tracking system can assist the federal government to determine if the residency is less than 40 years. In this case 1/40th of the maximum benefit will be deducted for every lost year of residency below the limit. The good news is that benefits are not lost or reduced for individuals already receiving OAS benefits and who decide to spend time outside of Canada. In fact, Service Canada will even deposit OAS benefits into foreign bank accounts.
Employment insurance (E.I.) is another benefit that the federal government is looking for savings using the border entry/exit-tracking system. Usually, you cannot receive EI regular benefits while outside Canada (given certain exceptions). The border entry/exit-tracking system will assist in enforcing this rule and if it is determined an individual has been incorrectly collecting benefits the department will calculate the overpayment and request repayment.
Another area of focus relates to the child tax benefit program. As a non-resident of Canada, you are not eligible to receive the Canada child tax benefit. Having access to the amount of days outside of Canada can assist the Canada Revenue Agency in making a determination if one is eligible or not.
Although much of the recent attention has focused on social benefits, the implications of the entry/exit tracking system are far more reaching.
As many snowbirds can tell you, spending too much time in the US can also have negative tax implications. Depending on your personal situation, if you exceed a specific number of days in the U.S. (182 days) you may be subject to US tax on your worldwide income. With this comes some adverse tax and reporting consequences. There are exceptions to this rule and there are certain mechanisms, including the Canada-US treaty that can help you avoid being considered a US resident for tax purposes. In the past many individuals would not even breach the topic as it was easy to fly under the radar with respect to the tax authorities knowing where you were. The entry/exit tracking system provides valuable travel information to the IRS and many Canadians may become forced to file US tax returns. Therefore, special attention must now be paid on the amount of time spent in each country to avoid the taxman knocking on your door.
Snowbirds and Canadians in general, are proud of their health care system. However, health coverage can be jeopardized if you spend too much time outside of Canada. For example, under the Ontario Health Insurance Plan (OHIP), you may be temporarily outside of Canada for a total of 212 days in any 12 month period and still maintain your OHIP coverage as long as your primary place of residence is still in Ontario. In the past many individuals would fail to report any absences beyond the 212 day period and would continue to maintain continuous OHIP coverage. It is not certain that the federal government would provide the provinces with access to the tracking data, but you would have to assume that if it has not yet been agreed, it may only be a matter of time.
The entry/exit tracking system could even extend to the realm of immigration. To maintain Canadian permanent residency, a person must be in Canada for at least two years within a five-year period. Many individuals arrive in Canada and return to their home country, often circumventing the system by leaving and returning to Canada through the U.S. by land thus showing no record of their absence. The entry/exit tracking system will provide a new tool to the immigration department to assist in these situations.
Both Canada and the U.S. remain dedicated to the full implementation of the entry/exit initiative, to enhance security through a common approach to perimeter screening. The good news for travelers is that, in Canada, legislative and regulatory changes are required before this initiative can be fully implemented. This will give snowbirds and other Canadian travelers some time to fully grasp and adjust to the implications of this initiative.
Provided by and for more information please contact:
Senior Tax Manager, Expatriate Tax
T: 416-214-7833 x162
Arun (Ernie) Nagratha, CPA CA, CPA (Illinois)
T: 416-214-7833 x102
Wayne Bewick, CPA CA, CFP, CPA (Illinois)
T: 416-214-7833 x101