A frequent question we hear from Canadians thinking of a move to the U.S. is this: What will be the tax consequences for my Canadian investments?
Let’s look at a case study to see how this plays out. Meet Diane, a Canadian client who is moving to the U.S. for a job opportunity. As we help Diane plan with her cross-border transition, she has questions about what to do with her Canadian investments. Should she use her sister’s Canadian mailing address for her Canadian investment accounts? What are her tax obligations to the Canadian Revenue Agency (CRA) after she leaves Canada?
For starters, we recommend that Diane change her mailing address to her U.S. residence and not a Canadian relative’s address. Once she leaves Canada and sets up residential ties to the U.S., Diane is deemed a non-resident of Canada. As such, she must notify her Canadian financial firms of her non-residency status for tax purposes and also establish that her current country of residence is the U.S. This helps ensure that the proper amount of Canadian tax will be deducted from her investment earnings.
As for her Canadian tax obligations once she resides in the U.S., the CRA sums it up this way:
“After you leave Canada, you are a non-resident for income tax purposes provided you have severed your residential ties with Canada. As a non-resident, you pay tax on income you receive from sources in Canada. This applies in the year you leave Canada and for each year afterwards, provided you remain a non-resident for income tax purposes.”
Once she becomes a non-resident of Canada, Diane will pay tax on the Canadian income she receives, also known as the Part XIII tax. According to the CRA, the most common types of Canadian income subject to Part XIII tax are:
- rental and royalty payments;
- pension payments;
- old age security pension;
- Canada Pension Plan and Quebec Pension Plan benefits;
- retiring allowances;
- registered retirement savings plan payments;
- registered retirement income fund payments;
- annuity payments;
- management fees.
But what about interest income generated from Canadian holdings? Such interest is typically exempt from Canadian withholding tax if you’re a non-resident and the payer isn’t related to you. In Diane’s case, the Canadian institutions from whom she receives income must deduct tax from the income paid to her, generally at a non-resident tax rate of 25% on Canadian income, but this can vary according to the source of income. This deducted tax fulfills her tax obligation to CRA for this income, and it is not necessary to report the income by filing a Canadian tax return.
If you’re a non-resident of Canada and have concerns about the tax consequences for your Canadian investments, the cross-border experts at Cardinal Point Wealth Management are here to help.
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