Form 8840 for Canadian Landlords in New Hampshire

# Form 8840: Closer Connection Exception for Canadian Landlords in New Hampshire ## What Is Form 8840? Form 8840 (Closer Connection Exception Statement for Aliens) is an IRS form that allows foreign nationals—including Canadian citizens—to claim an exception to US residency status under the Substantial Presence Test (SPT). If you meet the SPT criteria but maintain a closer connection to your home country (Canada), filing Form 8840 allows you to be treated as a non-resident alien for US federal income tax purposes, even if your physical presence in the US would otherwise trigger resident status. This distinction is critical for Canadian landlords who spend extended time in the US—whether managing rental properties, overseeing renovations, or simply enjoying seasonal residency. Without Form 8840, you could face: - Full US federal income tax liability on worldwide income - Loss of Canadian residency for provincial tax purposes - Double taxation on rental income - Complications with your Canadian tax filing obligations ## Understanding the Substantial Presence Test The SPT is a mechanical calculation the IRS uses to determine who qualifies as a US resident alien. You meet the test if you were present in the US for: - **183 days or more** in the current year, OR - **111+ days** in the current year AND **333+ days** in the prior two years (using a weighted formula) Days of presence include any day you're physically in the US, even partial days. However, certain days don't count toward the SPT: - Days when you commute to the US from Canada (on established commuting patterns) - Days when you're in the US temporarily due to medical conditions - Certain days for treaty-exempt individuals (like Canadian teachers or students) - Days covered by a valid green card holder exclusion ## How Form 8840 Applies to New Hampshire Rental Property Owners New Hampshire presents a unique scenario for Canadian landlords. The state has **no state income tax** on wages, interest, dividends, or capital gains—though municipalities can impose property taxes. This favorable tax environment attracts significant Canadian investment in NH real estate, particularly in lakefront and ski properties in areas like Lakes Region, White Mountains, and the seacoast. If you own rental property in New Hampshire and visit to manage it, inspect units, meet with contractors, or simply reside seasonally, your US presence days accumulate rapidly. Many Canadian landlords don't realize that: - Site visits to rental properties count toward the SPT - Attending tenant meetings, hiring contractors, or reviewing accounts count - Simply being in New Hampshire on a given calendar day counts, regardless of how many hours A typical Canadian landlord with two extended visits to New Hampshire per year (say, 45 days each time) is already at 90 days. Add a week at Christmas, a long weekend in summer, and a quick property inspection, and you easily exceed 111 days across a multi-year period. While New Hampshire's lack of state income tax means you won't owe NH state tax regardless of residency status, **federal US tax consequences remain severe**. Rental income, capital gains on property sales, and other US-source income become subject to full federal taxation at rates up to 37%. ## Who Must File Form 8840 You should file Form 8840 if **all four conditions** are met: 1. You're a **resident alien** under the SPT (you met the test) 2. You **did not receive** a green card (or it wasn't effective) during the tax year 3. You have a **closer connection** to Canada (your home country) than the US 4. You want to be treated as a **non-resident alien** for that tax year "Closer connection" is the key phrase. The IRS presumes that if you spend more than 183 days in the US, you have a closer connection to the US. To rebut this presumption, you must demonstrate that your principal home, family, employment, and economic ties are in Canada. ## Step-by-Step: How to Complete Form 8840 **Part I: Identification and Presence Information** - Enter your name, address, Social Insurance Number (SIN), and date of birth - Check the box for "Alien resident of Canada" - Enter the tax year in question - List your US address (rental property address or the address where you stayed) **Part II: Closer Connection to Canada** This is where you build your case. You must provide evidence across multiple categories: **Permanent Home (Lines 1–3)** - Do you maintain a home in Canada? (Yes—provide address) - Did you maintain a home in the US available to you during the tax year? (If you own the rental property and used it, answer yes, but emphasize it was for business purposes, not personal residence) - The IRS heavily weighs whether you kept a permanent residence in Canada versus a temporary US residence **Family and Social Ties (Lines 4–7)** - Spouse location: Is your spouse residing in Canada? - Dependents: Where do your children live and attend school? - Professional and social affiliations: Are your memberships, clubs, religious affiliations in Canada? - Frequency of visits to Canada: List visits to Canada during the tax year For a Canadian landlord, document frequent returns to Canada, family events attended, and evidence of maintaining primary residency ties there. **Economic Ties (Lines 8–11)** - Does your spouse work in Canada? (List employer location) - Where is your primary employment or business? (If self-employed in Canada, state this) - Where do you file tax returns and pay taxes? - Bank accounts, investment accounts, and retirement savings location - For landlords: Where is your primary business located? If you have a property management company, accounting firm, or bookkeeper in Canada managing the NH property remotely, document this **Visa and Residency Status (Line 12)** - Confirm you do not hold a US green card, visa, or other long-term US residency permit ## New Hampshire-Specific Considerations **Property Tax and Rental Income Management** New Hampshire's effective property tax rate averages **2.09%** statewide, though rates vary by municipality (ranging roughly 1.5% to 2.8%). While you'll owe NH property tax regardless of residency status, federal Form 1040-NR filing (as a non-resident) means you report only US-source rental income. Key point: You can claim the New Hampshire property tax as a deduction on your US tax return (if you file one as a non-resident), but only if your total itemized deductions exceed the standard deduction. **Proving Your "Closer Connection" in New Hampshire** New Hampshire's lack of state income tax is actually helpful for your Form 8840 filing. You can argue: - You pay no state income tax to New Hampshire, reducing your economic ties there - Your principal income, employment, and tax obligations are in Canada - You maintain no permanent residence in New Hampshire (if true—rental properties you own but don't reside in have limited weight) However, be cautious: if you own multiple properties, maintain a permanent residence, or spend more than half the year in NH, the IRS will scrutinize your closer connection claim. **Days Counting Rules Near the Border** Canadian landlords managing NH properties often travel the short distance from Quebec, Ontario, or Maine. Commuting days generally don't count toward the SPT if: - You have a regular commute pattern from Canada - You return to Canada the same day or within 24 hours - The pattern is established and consistent Document your commute dates carefully if claiming this exclusion. ## Common Mistakes to Avoid **Mistake 1: Filing Too Late** Form 8840 must be filed by **June 15 of the year following the tax year in question**. This is not an April 15 deadline. Many filers wait until US tax filing season (April) and miss this deadline, jeopardizing the entire closer connection claim. **Mistake 2: Treating the Rental Property as a "Permanent Home"** If you own the NH rental property and live in it during visits, don't argue it's your "permanent home." The IRS will see through this. Instead, position it as a business investment property and emphasize your actual permanent residence in Canada. **Mistake 3: Insufficient Documentation of Canadian Ties** Simply stating you have a closer connection to Canada isn't enough. Support every assertion with: - Copies of your Canadian driver's license or provincial ID (not expired) - Utility bills showing a Canadian home address - Proof of Canadian employment or self-employment - Canadian bank statements - Lease or property ownership documents for Canadian residence - Tax returns filed in Canada for the prior two years - Provincial healthcare card **Mistake 4: Overlapping Residency Claims** Never file US Form 8840 claiming non-resident status while simultaneously claiming Canadian residency and provincial credits. Coordinate with a cross-border tax professional to ensure your Canadian T1 return and US Form 8840 tell a consistent