Avoiding Cross-Border Financial Planning Pitfalls

What’s the quickest way to turn traditional financial planning upside-down? Place a border in the middle of your tax and financial life. Financial, tax and estate planning can be a difficult undertaking for most individuals and couples.  Imagine the added complexities of planning between two countries; it requires proper advice to know where the minefields are.

Every day, we see the unique tax and wealth management challenges of those whose lives, assets and relationships straddle both sides of the U.S./Canadian border.  For some, assets remain in Canada while work and life are grounded in the U.S.  Other clients are U.S. citizens who live and work in Canada.  Some even own assets in one country even though they spend no time there.  Fortunately for our firm, my colleagues and I can closely identify because we live these types of lives.  We’ve spent years helping clients gain from the good and avoid the bad (or even ugly) outcomes of cross-border financial planning.

With recent gold medal victories for Canadian Olympic hockey teams (men and women), some might suggest Canadians shouldn’t fear the Americans anymore.  But with the passage of the Foreign Account Tax Compliance Act (FATCA) and the Act’s looming implementation later this year, there are plenty of Americans in Canada who live in fear of their own country.

U.S. citizens are considered to be residents of the U.S. for income, gift and estate tax purposes—regardless of where they live, die, generate income or hold assets.  Therefore, these individuals have an obligation to file U.S. income tax returns annually on worldwide income. Further, they must provide specific information on a variety of additional IRS compliance forms related to their ownership or interest in certain kinds of assets.  They also need to ensure that their estate planning is properly attended to given their U.S. citizenship or marriage to a U.S. citizen.

We often find that most domestic U.S. or Canadian-based financial advisors are not aware of the specific cross-border planning requirements these individuals or couples face.  It’s important to highlight a few common mistakes that are made in cross-border financial planning:

• The Residency Factor: With the recent signing of FATCA, Americans who live and work abroad can no longer afford to keep their heads in the sand.  If you were born in the U.S., you are a U.S. resident for income, gift and estate tax purposes. If you were born in Canada to two U.S. citizen parents, you are a U.S. citizen.  If you were born in Canada to one U.S. citizen parent, you may be a U.S. citizen depending on certain conditions.  These so called “Accidental Americans” have their own set of planning requirements.
• Parting with Your U.S. Citizenship: Given the greater planning complexities of U.S. citizens who live or work abroad, it’s not uncommon to hear the suggestion that they just give up their U.S. citizenship or return their Green Card.  These days, plenty of folks are doing just that.  In fact, the U.S. Treasury Department recently published the names of individuals in the Federal Registerwho renounced their U.S. citizenship or gave up their long-term residency by turning in their Green Cards.  This happened a record-breaking 2,999 times in 2013, a 221% increase over the prior year’s total.  Keep in mind, giving up one’s citizenship or Green Card is not an easy undertaking.  There can be some rather tedious and daunting income tax implications, and one’s ability to return to the U.S. down the road for lifestyle reasons could be compromised. 
• Think Twice About U.S. and Canadian Tax Planning: Some traditional tax savings opportunities that might be utilized in Canada or the U.S. (or the specific state you reside in) may not work in cross-border situations and could even cause you greater problems.  For example, putting money in a Canadian retirement account, such as a Registered Retirement Savings Plan (RRSP), might reduce your Canadian tax, but it doesn’t do a thing to reduce your U.S. tax.  In fact, it might even cause you to pay additional U.S. tax as the level of net tax paid in Canada might be lower and not sufficient to reduce your overall U.S. tax.

Life across borders can catch you off guard and come at a hefty price if you aren’t prepared. In future columns, we’ll expand on the topics above and share other cross-border planning mistakes we often see in our practice.

Terry Ritchie is the Director of Cross-Border Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada.  Terry has been providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services to affluent families for over 25 years.  He is active as an author, speaker and educator on international tax and financial planning matters. www.cardinalpointwealth.com