When contemplating a cross-border move or an expansion of a business, it is imperative to consider both immigration and tax requirements to ensure accomplishment of objectives and compliance with Federal, State, Provincial, and local regulations and requirements.
Every day, we meet with clients to discuss utilizing the E-2 Treaty Investor Nonimmigrant Visa Program to expand their Canadian businesses to the United States or to allow Canadian investors to live and work in the United States on an intermittent or full-time basis. As part of these discussions, we develop strategic planning to meet the client’s objectives and to ensure compliance with US and Canadian immigration and tax requirements.
The E-2 Treaty Investor Nonimmigrant Visa Program permits a citizen of a treaty country, or a company deemed a “national” of a treaty country under the regulations, to make a significant investment in a new or existing US enterprise and then employ the primary E-2 investor and other treaty country citizens in that US enterprise in executive, managerial, or essential skills capacities. Generally, E-2 visas are approved in five (5) year increments which are indefinitely renewable as long as the E-2 enterprise and E-2 applicant continue to meet the eligibility requirements for the E-2 Treaty Investor Nonimmigrant Visa Program.
Despite holding a nonimmigrant visa status such as E-2 nonimmigrant status, an individual can still be considered a “resident alien” for tax purposes. Resident aliens, regardless of immigration status, are treated in the same manner from a US income tax perspective as if they were US citizens or Lawful Permanent Residents (commonly referred to as “green card” holders). This means that such an individual will need to file a US income tax return with the IRS reporting all of his or her income, whether earned within or outside of the United States. The incidences of individuals becoming resident aliens for tax purposes are increasing as more US visitors look to extend their non-immigration statuses to stay in the United States for a longer period given the difficulties posed by the COVID-19 pandemic.
To determine if an individual is a resident alien, the individual must consider the “substantial presence test.” The substantial presence test is satisfied if a calculated formula results in 183 days or more over a three-year period. In this formula, days of presence in the second preceding year count for one-sixth; days in the preceding year count for one-third; and days in the current year count fully. As an example, say you are a Canadian citizen who travels to the United States every year for 130 days each year. Over the course of three years, your US presence for tax purposes would be 195 days (the sum of = 130 + (130 x 1/3) + (130 x 1/6)), resulting in you being a resident alien and subject to tax by the United States on your worldwide income.
The good news is that, if after calculating your presence in the United States you find yourself to be a resident alien, you still may be able to “override” the substantial presence test in one of two different ways and remain a non-resident for US federal income tax purposes.
- Closer Connection Exception: To qualify for this exception, you can be “substantially present” in the United States by virtue of the three year formula but are not allowed to have actually spent more than 182 days there in the calendar year in question. For individuals with such a day count who maintain tax homes outside the United States, US domestic law allows the filing of IRS Form 8840 (without a Form 1040-NR if the person has no US income) to demonstrate a “closer connection” to another country.
- Treaty Tiebreaker: The second option is available if the closer connection exception is not. This exception lies in most US tax treaties, including the Canadian Treaty (Article IV), and it allows individuals to continue to remain non-resident of the United States even if they spend more than 182 days there in a single calendar year. To invoke a treaty’s protection, the individual must file IRS Form 1040-NR, and attach to it Form 8833, the form for disclosing a treaty-based return position. This protection still requires filing US information returns (FBARs, etc.) as US tax treaties generally only provide relief from taxation and not international information reporting. However, it enables the individual to remain taxable as a non-resident of the United States—i.e., taxable only on any US income, if any.
It is also worth mentioning that residency definitions are different for US federal income tax and US federal estate tax and are also different for federal taxes and state taxes. Tailored tax advice is always advisable for an individual contemplating applying for an E-2 visa.