Moving to Canada from the United States can be an exciting endeavor, but it also involves complex tax considerations. In this comprehensive video, Karen Rogers Sim, Tax Manager at Cardinal Point Wealth Management, shares expert insights on how the Canadian and U.S. tax systems differ, what it means to be taxed in both countries, and which strategies can help you minimize your tax liabilities. She guides you through key concepts like filing an “entry return,” the Canada–U.S. Tax Treaty’s role in preventing double taxation, and how to handle worldwide income reporting. You’ll also learn how to manage U.S.-based accounts—from 401(k)s, Roth IRAs, and 529 plans to stock purchase plans—when transitioning to Canadian residency. Beyond income tax planning, Karen highlights the significance of currency exchange fluctuations and delves into the nuances of maintaining tax compliance with dual residency status. Whether you’re moving for work, retirement, or a new adventure, this video will equip you with valuable strategies to avoid potential pitfalls, including the Net Investment Income Tax (NIIT) and other unexpected costs. Let Cardinal Point’s cross-border advisors guide you toward a well-informed move, so you can confidently embrace your new life in Canada with peace of mind.
Transcript
Moving to Canada is an exciting adventure. Although it may seem like you are just moving next door and things will be pretty much the same, you may find a surprising number of differences beyond the accents, eh? The Canadian and U. S. tax systems are very different. As an American living in Canada, you will face complex tax obligations on both sides of the border. Simply moving north with your U. S. financial vehicles without advanced planning could be a costly mistake. It’s not just about steering clear of the negative results of an unplanned move. Cross-border advisors also look for the financial opportunities and tax minimization strategies you will have in your new country and help you make the most of these. The team at Cardinal Point Wealth Management has deep expertise in cross-border tax planning.
We have offices in Canada and in the United States, and many of our team have professional credentials in both countries. Canada imposes taxes based on residence. You will report your worldwide income to Canada from the first day that you are a tax resident. This first return is called an entry return. It includes certain types of Canadian source income, such as employment or real property income, for the entire year. But worldwide income only for the portion of the year that you are a tax resident. On the other hand, the United States taxes its citizens and green card holders on worldwide income no matter where they live. As a U. S. person, your tax filing obligation continues until you are no longer a U. S. person. That could mean until you die.
Since you are reporting worldwide income to both countries at once, you can probably see that there is a very real potential for double taxation. However, with good planning, foreign tax credits, the Canada-US Income Tax Treaty, and help from our cross-border tax advisors and specialists, double taxation can be minimized. The Canada-US Tax Treaty is a key tool in cross-border tax planning. The treaty clarifies which country has the right to tax your income first and to what extent. The treaty has 31 articles covering everything from business profits to pensions to taxes imposed by reason of death. A provision of note for retirees is that Social Security income, which includes Canada Pension Plan and Old Age Security, is only taxable in the country of residence. Your U. S. Social Security is only 85% taxable in Canada to mirror what it would be if you were a U.S. resident.
Effective cross-border tax planning considers factors like your residency, citizenship status, the tax treaty, your income sources, and your goals. Each category of your income needs to be considered. How is it taxed in Canada? How is it taxed by the US? What does the treaty do to arbitrate between the tax authorities and protect you from double taxation? Then there is the big question: what can you do before you move north to arrange your financial affairs to attract the least overall tax? Every situation is different and poses unique challenges. There is no one-size-fits-all to cross-border tax planning. Even the US state you are moving from and the Canadian province you are moving to matter. At Cardinal Point, we have deep experience in this area.
Our goal is to guide you through the complex tax laws, ensuring compliance while optimizing your financial situation. The biggest challenge is caused by each country’s different approach to financial structures and different taxation of similar income streams. Revocable living trusts are a case in point. The U. S. sees them as disregarded entities, while Canada sees them as separate taxpayers. When moving to Canada, managing U. S.-based accounts requires careful attention. For instance, transferring a 401(k) to a Canadian retirement plan is not a straightforward process and could trigger significant taxes if not done correctly. Similarly, your employee stock purchase plan, your ESPP, may be subject to different tax rules in Canada affecting how your stock gains are taxed. If you have a 529 plan, its benefits may not be fully recognized in Canada.
So it is crucial that you understand how to continue using it for education, health savings accounts, HSA’s are another tricky area moving them to Canada without a strategy in place can lead to unexpected taxes before you move to Canada with a Roth IRA consider making an election with the competent authority to continue deferring the income although you will no longer be able to contribute to the Roth while a Canadian resident. By addressing these specific account challenges and others early, you can avoid costly mistakes and ensure a smoother transition to your new life in Canada. Additionally, determining whether you can be a tax resident of both countries is essential, as dual residency can complicate your tax obligations. These complexities highlight why cross-border tax planning with Cardinal Point Wealth Management is critical.
I would like to clear up a common misconception. Paying tax to both the US and Canada in the same year does not equate to double taxation. The US will have the first right of taxation on certain types of income, but Canada will give a foreign tax credit for taxes properly paid to the US. The US will also give a foreign tax credit for taxes paid to Canada on income where Canada has the right of taxation. At the end of the day, if you add up the taxes paid to both countries, it should total no more than if you had only paid tax on your income to Canada, with a couple of exceptions. Currency exchange rate fluctuations will cause capital gains to be calculated differently in both countries.
This is something that can be planned for and managed with various strategies. The buzz phrase here is stepping up your basis. Get ready for the 150-page US tax return and the multi-page separate filing to FinCEN, that’s Financial Crimes Enforcement Network. As a resident of Canada, you will have Canadian bank and investment accounts. You may have a Canadian retirement savings plan, a TFSA, an FHSA, RESPs for the grandchildren. You may even have a business or two in Canada. All of these are foreign from the perspective of the U.S. and have to be reported on various forms, even though they rarely result in additional taxes. Penalties for late-filed, non-filed, or incomplete reports are painfully large. The Canadian tax return is much thinner. The foreign asset reporting, foreign from a foreign perspective this time, is also more streamlined on Form T11. 35. Canadian penalties are much lower but still avoidable. Even though you may have prepared your own tax return in the past, consider this a don’t try this at home situation. Be prepared to engage with qualified cross-border tax professionals for at least the first three years of your transition and at Cardinal Point Wealth Management, we can help you arrange your affairs so you have fewer foreign reporting headaches.
There is more to a cross-border move than retirement accounts and income taxes. Under the Canada-US Totalization Agreement, also known as the Social Security Agreement, if an employer requests you move temporarily to Canada for their convenience, you can arrange to stay as a contributor to US Social Security for up to five years. Working with a cross-border financial advisor isn’t just about compliance. It’s also about peace of mind. Our cross-border financial and tax specialists at Cardinal Point Wealth Management understand the intricacies of both tax systems and can create a personalized strategy that aligns with your financial goals. It can be complex and challenging without a guide. Don’t let taxes overshadow and sour your move to Canada. With the right plan, you can focus on enjoying your new adventure without the stress of unexpected tax bills. Whether you’re moving for work, starting a business, or planning for retirement, the cross-border planners and specialists at Cardinal Point will help you make fully informed decisions every step of the way.
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