May 2017


Tax Planning Update – U.S. Closer Connection, Form 8840

U.S. tax rules contain a mathematical formula to determine tax residency. This formula involves counting the number of days that you are physically present in the U.S. over a three-year period. This residency formula is called the Substantial Presence Test (SPT). Based on the SPT formula, if you exceed 182 days, you are deemed to be a resident of the U.S. for income tax purposes. With respect to 2016, the SPT formula takes all of the days in the current year (2016), 1/3 of the days in the previous year (2015), and 1/6 of the days in the second previous year (2014). You total the results from this formula, and if you were in the U.S. for at least 31 days in 2016, and at least 183 days based on the three-year formula, then you are deemed to be a U.S. resident in 2016 for U.S. income tax purposes.

The Closer Connection Exception:

If you meet the SPT but you were in the U.S. for less than 183 days in 2016, you may file a form with the Internal Revenue Service (IRS) to report that you have a closer connection to Canada and are thus exempt from the U.S. residency designation.

Due date:

This form must be submitted to the IRS by June 15 of the year following the tax year in question (June 15, 2017 for 2016).

Form completion:

We can help you determine if you need to complete this form for 2016 if you provide us with the number of days that you were present in the U.S. in 2016, 2015 and 2014.

Please contact your Lipton adviser if you have any questions in connection with this or any other matter.

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