Canadian Snowbird Running a U.S. Business: Substantial Presence, the Closer Connection Form 8840, and Effectively Connected Income

A snowbird's U.S. tax exposure has two independent triggers, and the business one is the one snowbirds forget. Trigger one — residency: the substantial presence test counts days — a Canadian present in the United States at least 31 days in the current year and 183 days over three years (all current-year days, one-third of the prior year's, one-sixth of the year before — the IRS's page) meets the test and is a U.S. resident for tax purposes, taxable on worldwide income, unless an exception applies; a snowbird spending five months (about 150 days) each winter meets it from the second year (150 + 50 = 200, rising to 225 once three years count — 150 + 50 + 25). The closer connection exception: a snowbird who meets the substantial presence test but spent fewer than 183 days in the United States in the current year, kept a tax home in Canada, has not applied for a green card, and has a closer connection to Canada (permanent home, family, personal belongings, bank accounts, driver's licence, voter registration, provincial health coverage — the NR73 guide's residential ties, from the other side) files Form 8840 by the return's due date (June 15 of the following year for a snowbird with no U.S. wages subject to withholding, April 15 if there were such wages — extensions included) and is treated as a nonresident; a snowbird who spent 183 days or more in the current year can't use it and relies instead on the treaty's tie-breaker (Article IV — the treaty guide) on Form 8833 with a Form 1040-NR — which works for income tax but leaves the person a U.S. resident for some other purposes (the IRS treats such a person as still a U.S. person for the FBAR — a 2023 district court decision, Aroeste, disagreed — though Form 8938 is not required for the part of the year covered by a timely Form 1040-NR with Form 8833). Days: every day in the United States counts (any part of a day), except days in transit and a few others; the snowbird keeps a travel log (the passport stamps and the flight records); the CBP's travel history is what the IRS can see. Trigger two — the business: separately from residency, a nonresident alien engaged in a U.S. trade or business is taxed by the United States on the income effectively connected with it (graduated rates on the net — Form 1040-NR), regardless of the days; so a Canadian snowbird who, while in Florida, consults for a Florida client, manages and repairs a Florida rental portfolio as a business, operates a Florida LLC's business, or buys and sells Florida real estate as a dealer has effectively connected income — even if the Form 8840 keeps them a nonresident; the treaty's business profits article protects business profits only where the Canadian has no U.S. permanent establishment (Article VII — a snowbird with a Florida office or a fixed place used for the business may have one; a winter home from which the business is regularly carried on can itself be a fixed place of business — a facts-and-circumstances question), and the treaty's independent personal services protection (for a consultant without a fixed base) was folded into the business profits article by the fifth protocol, whose Article V(9) deems a permanent establishment where the consultant is in the United States 183 days or more in any twelve-month period and that U.S. work produces more than half the business's gross active revenue, or where services on the same or connected projects for U.S. customers span 183 days or more in a twelve-month period (the treaty guide); personal services performed in the United States by a nonresident are U.S.-source income where performed. The common snowbird businesses. Rental property: a snowbird's Florida rental is passive investment income by default (30 percent withholding on gross rent by the property manager — the property management deductions guide's foreign owner point) unless the snowbird elects under section 871(d) to treat it as effectively connected and be taxed on the net (the W-8ECI to the manager, Form 1040-NR each year — the mirror of Canada's section 216 — the T776 guide) — nearly always the right election. Consulting: a Canadian consultant who works for U.S. clients from Canada has Canadian-source income (not U.S. taxable — the W-8BEN guide); the same consultant who performs the work while wintering in Florida has U.S.-source income for the days worked in Florida — taxable in the United States unless the treaty protects it (no fixed-place permanent establishment, and below Article V(9)'s 183-day services threshold), and the client should receive Form 8233 claiming the treaty exemption for the Florida-performed services (a W-8BEN covers only the work done from Canada) (the W-8BEN guide) — the day count for the work matters. The Florida LLC or corporation: a snowbird who forms a Florida entity to run a business (a vacation rental operation, a small shop) is operating a U.S. trade or business — the entity's classification decides who files (the Canadian resident owning a U.S. LLC guide's mismatch), and the snowbird is a U.S. taxpayer on its income. The Canadian side — keep it intact: the snowbird remains a Canadian resident, taxed on worldwide income in Canada, with the foreign tax credit for U.S. tax on the U.S.-source effectively connected income; the provincial health coverage requires presence in the province for a minimum number of months (Ontario requires 153 days in any twelve-month period, so an Ontario snowbird can be away up to 212 days; other provinces set their own limits), which usually limits snowbirds to six or seven months away anyway; the Canadian return reports the U.S. rental and business income (T776, T2125) and claims the credit; and Form T1135 applies to U.S. property held for income above the threshold (the T1135 guide — a U.S. rental property is specified foreign property). The U.S. estate tax: a Canadian's Florida real estate and U.S. business assets are U.S.-situs property for U.S. estate tax — the treaty's prorated unified credit protects most snowbirds — Article XXIX B allows the credit for the US$15 million (2026) exemption in proportion to the U.S.-situs share of the worldwide estate, so a snowbird whose worldwide estate is under US$15 million generally owes none (the inheritance guide's cross-border section), but a wealthy snowbird's Florida condo and U.S. stocks can create estate tax exposure. The bookkeeping: the day log; Form 8840 by June 15 each year once the substantial presence test is met; the Form 1040-NR for effectively connected income (rental on the 871(d) election; business income); the W-8ECI to the property manager; the Canadian return with the foreign tax credit and T1135; the provincial health coverage's day count. The errors: Form 8840 never filed (the snowbird is a U.S. resident by default — worldwide income taxable, and a late 8840 is accepted only if the snowbird shows by clear and convincing evidence reasonable steps to learn of and comply with the requirement — Reg. 301.7701(b)-8(d)(2)); a rental's gross rent withheld at 30 percent for years with no 871(d) election (overpaid, recoverable only within the refund period); consulting done in Florida reported as Canadian-source; a Florida LLC formed without considering the classification mismatch; and a winter extended past 183 days without realizing the closer connection exception was lost.

Key takeaways

• Two independent U.S. triggers: residency (the substantial presence test — 183 weighted days over three years) and business (effectively connected income — taxed regardless of days).
• Form 8840 keeps a snowbird who meets the test but spends under 183 days in the current year a nonresident — filed by June 15 every year; at 183 days or more, only the treaty tie-breaker on Form 8833 remains.
• A Florida rental is passive by default (30 percent on gross rent); the section 871(d) election and a W-8ECI to the manager tax only the net on Form 1040-NR.
• Consulting performed while in Florida is U.S.-source income for those days — taxable unless the treaty's business profits and services rules protect it.
• A Florida LLC run by a Canadian raises the classification mismatch; a fixed place used for the business can create a permanent establishment.
• Canada still taxes worldwide income — the U.S. tax is a foreign tax credit; provincial health coverage and T1135 set their own limits and filings.

The snowbird's U.S. business file

Day log (three-year weighted count); Form 8840 by June 15 or the Form 8833 tie-breaker. Effectively connected income by source: rental (871(d) election, W-8ECI), consulting (days worked in the U.S., treaty position, Form 8233), entity business. Form 1040-NR. Canadian return: foreign tax credit; T776, T2125; T1135. Provincial health coverage days. U.S. estate tax exposure. The day log and Form 8840 are the two items that keep everything else a nonresident's problem.

Worked example

A retired Ottawa engineer and his wife spend mid-November through April in Naples (about 165 days a year): they meet the substantial presence test from their second winter and file Form 8840 each June (a permanent home in Ottawa, their family, their Ontario health coverage — 200 days in Ontario each year); they are nonresidents. Their Naples condo is rented for the six months they're in Canada: the property manager has their W-8ECIs, so no 30 percent withholding; they each file Form 1040-NR with the section 871(d) election reporting half the net rent (after depreciation, the HOA dues, the management fee — the U.S. tax is small); in Canada they report the rent on T776 and claim the U.S. tax as a foreign tax credit, and file T1135 (each spouse's half of the condo's cost exceeds C$100,000). The husband also consults for a Tampa engineering firm — 40 days of work performed in Naples this winter, and 30 days from Ottawa: the Ottawa days are Canadian-source; the Naples days are U.S.-source, but he has no U.S. fixed place used for the business and is under the treaty's services threshold, so he claims the treaty exemption on Form 8233 with the firm and on his Form 1040-NR with Form 8833 (40 days is far below Article V(9)'s 183-day services threshold), paying the tax in Canada. A neighbor who stayed 190 days one winter lost the closer connection exception for that year and had to rely on the treaty tie-breaker — with a Form 8833 and a question about his FBAR obligations he hadn't expected.

Official sources

The IRS explains: “To determine if you meet the substantial presence test for 2025, count the full 120 days of presence in 2025, 40 days in 2024 (1/3 of 120), and 20 days in 2023 (1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2025.” — Internal Revenue Service, Substantial presence test, https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

Publication 597 explains: “Article IV provides definitions of residents of Canada and the United States, and provides specific criteria for determining your residence (a tie-breaker rule) if both countries consider you to be a resident under their domestic tax laws (a dual-resident taxpayer).” — Internal Revenue Service, Publication 597 (10/2015), Information on the United States–Canada Income Tax Treaty, https://www.irs.gov/publications/p597

Practitioner note

A Canadian snowbird's U.S. tax exposure has two triggers, and they're independent: the day count that makes a snowbird a U.S. resident unless Form 8840 is filed every June, and the business done while in Florida — the rental managed as a business, the consulting performed from the winter home — that is effectively connected income regardless of the days. Our desks keep the three-year day log, file the 8840 before the deadline, put the property manager on a W-8ECI so the rent is taxed on the net, count the consulting days worked in Florida, and keep the Canadian side — the foreign tax credit, T1135, and the provincial health days — intact.

See also: For related guidance, see the closer connection exception and Form 8840 for snowbirds and the substantial presence test explained; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk and Canadian Tax Desk handle Canadian snowbird tax planning — substantial presence day counts and Form 8840 closer connection filings, treaty tie-breaker positions on Form 8833, Form 1040-NR returns for rental and business income, section 871(d) elections and W-8ECI, consulting source-of-income analysis, Canadian foreign tax credits and T1135, and U.S. estate tax exposure. See pricing or book a call.