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Search Results for: Registered Education

Canada & U.S. Education Savings Options

June 10, 2015 By Cardinal Point Wealth

“The Simpsons” is a funny show, and that’s despite—or maybe because of—the fact that it often tackles the issues that make us most anxious.

Take the episode in which Bart terrifies Homer with a campfire story about college costs for Maggie. The scene ends with Homer shrieking, “No! No! Noooo!”

I suspect that Homer speaks for many of us parents. We may not howl like the Simpsons patriarch, but the price tag for higher education definitely does nothing for the quality of our sleep.

  • The average undergraduate tuition for a full time Canadian student in 2015 is $5,959. That more than doubles—to $12,959 per year—for medical studies. And it more than triples, to $18,187 annually, for dentistry school. Between 2011 and 2015, tuition increased an average of 4% annually.
  • In the United States, a public two-year college tuition now costs $3,347 per year, a public four-year college tuiton costs $9,139 per year and a private, four-year college program costs $31,231 annually.
  • In addition to those figures you can add $800 to $1,000 per year for books and $10,000 or more for possible room and board.

college-savings-planStill, there’s wide agreement that college is worth it. Nine in 10 American parents believe a college education is an important investment in their child’s future, according to a recent national study conducted by Sallie Mae and the research firm Ipsos. Interestingly, just 48% of respondents are actively saving for that education.

Assuming that you’re part of the 90% who value college education, and that you’re committed to saving to fund at least part of your child’s education, what are the options?


Canada

Registered Education Savings Plans (RESPS)
By far, the Registered Education Savings Plan (RESP) and associated grants available for contributions make this savings plan the best option for Canadians. That explains why a 2009 survey found that 66% of Canadians saving for a child’s education contributed to a RESP. (The second most-common approach, used by 28% of respondents, was to contribute to a dedicated savings plan or account).

RESPs’ benefits include:

  • A minimum of 20% Canada Education Savings Grant on annual deposits of $2,500 from the year the child is born until December 31 of the year the child turns 17. Account holders can earn up to $7,200 in these grants per child.
  • Additional Grant and deposits for low-income families.
  • Saskatchewan and Quebec residents receive additional Grants.
  • Deposit up to $5,000 annually per child and receive Grants if you have not deposited in the past.
  • Set up a family plan, and if one child does not attend post-secondary schooling, the Grant can be used by the other children named on the account.
  • Choose your own investments.
  • Tax advantaged investing. You can invest in a variety of vehicles and your deposits and Grants grow tax deferred until withdrawn. Contributions are withdrawn tax free. And Grant and investment income is taxable to the child on withdrawal; factor in credits and personal exemptions, and the withdrawal could be tax-free.

Bear in mind that withdrawals can only be made while the child is attending post-secondary education.
Unfortunately, the IRS does not yet recognize the tax-deferred status of RESP accounts for Americans. For this reason it is not advisable for American citizens or green card holders living in Canada to be a subscriber of an RESP account. In this case, or if you have maximized your Grant room, an In Trust For Account may be a second option for saving.

In Trust for Accounts
“Informal trusts” are created at financial institutions and used to invest funds on behalf a minor.
This type of account is particularly useful if you deposit Canada Child Tax Benefits, Universal Child Care Benefits or a child’s inheritance, as the growth and income on these deposits will be attributed to the child rather than the account owner. If contributions are made from other income sources, secondary income (income earned on income that has already been taxed to the account holder) can be moved to a separate account that will be taxed in the hands of the child.

The child may take control of the account once he or she reaches the age of majority. ( This does not occur automatically). At that point, the account can be moved into the child’s name for education funding, or it can be left intact, with the accountholder responsible for additional deposits or disbursements for schooling or other expenses.

With either option, be aware of fund management and commission costs, which can erode your college savings. Your investment advisor can help you choose quality investments that will meet your savings objectives.


United States

College and State 529 “Qualified Tuition” Plans
Unlike RESP accounts in Canada, the U.S.-based 529 plan varies on both the state and college level. These plans number in the thousands, making research essential.
There are two types of 529: the pre-paid tuition plan and the college savings plan. Here are a few facts about each:

Pre-paid tuition plans

  • Enable us to purchase credits for future education (and at times room and board) at a specific college or university.
  • Lock in prices, covering tuition and mandatory fees. Some plans allow a room and board option.
  • Invest in a lump sum or by installments based on the child’s age and years of tuition purchased.
  • Most offer a state guarantee.
  • Most require state residency.

College Savings Plans

  • Do not lock in college costs.
  • Cover all expenses related to education (tuition, room and board, books and computers).
  • Feature high contribution limits.
  • Deposits are subject to investment market fluctuations.
  • Have no age limit; open to adults and children.
  • Do not have a residency requirement.

In both cases, the earnings in the 529 are free from federal tax and in most cases, as long as withdrawals are for eligible college expenses, state tax as well.

Unlike the Canadian RESP, where withdrawals can be used for any expense, 529 withdrawals must be used for eligible college expenses. If they are not, you will generally be subject to income tax on the withdrawal and an additional 10% federal tax penalty on the earnings.

Nearly every state offers a 529 plan (or plans), and it is up to each state to set the tax break or grant offered. Morningstar has surveyed 529 plans each year since 2004 and provides rankings based on costs, tax benefit and investment options. Whether to invest in a plan run thorough your home state or look elsewhere depends on a number of factors, including deposit limits and residency, as well as how highly your state’s plans are rated. Morningstar advises that, for those contributing around $1,000 annually, with savings of $25,000 or less, it usually best to stay in state. At present, residents of Arizona, Kansas, Maine, Missouri and Pennsylvania can invest out of state and still receive a tax deduction on their contributions (they may forgo other benefits if going out of state, though). However, the more you plan to invest, the less consideration should be given to state tax benefits and the more you should consider the quality and type of investments offered.

You can purchase 529 plans through a financial advisor or directly from the providers. Some direct-purchase plans, such as CollegeAdvantage 529 Savings Plan of Ohio, use passive and active investment options run by a variety of firms at a reasonable price, and are thus rated highly among direct investment options. Virginia’s CollegeAmerica Plan is the nation’s largest 529 plan, and is typically available through your investment advisor. With its high state tax deductions, it is consistently ranked by Morningstar as one of the best plans. A wealth of additional information can be found at www.529.morningstar.com .

Given the complexities of the 529 arena, it is understandable that many families choose the general savings account option for college savings. A general savings account, managed through your investment professional, can include a wide variety of investments and can be used for expenses other than college. For perspective, nearly half of college-saving families rely on general savings accounts, while 27% use tax-advantaged accounts such as 529 plans.


Whether those you are saving for are American or Canadian, the key is to get advice before deciding which savings vehicle to use. A professional can assist you in navigating government grants and available credits with an eye on reducing the overall cost of education and helping your savings last through to graduation day.

Source: Morningstar.com, Statistics Canada, Canada Revenue Agency

Filed Under: Articles, Canada-U.S. Financial Planning Articles Tagged With: 529 plan, Canada-U.S. financial planning, canadian resp, college funding, green card holders living in Canada, U.S. Education Savings Options

Cross Border Wealth Management: Navigating your RESP

September 11, 2023 By Cardinal Point Wealth

College funding for children is constantly on parents’ minds, as the cost of tuition continues to skyrocket with no end in sight. That has heightened parents’ and grandparents’ desire to maximize college savings, by utilizing financial tools such as the Registered Education Savings Plan (RESP) in Canada. But what happens if circumstances change and the family relocates to the U.S.? Or what if your son or daughter attends a university in the U.S.? How might your current RESP planning be impacted, and what strategies should you implement to overcome potential hurdles? This article speaks to these concerns while providing insightful examples to help you navigate the complexities of college savings in a cross-border context. 

college fund RRSP

Case Study Scenario #1: The RESP subscriber remains in Canada and the beneficiary attends a Canadian post-secondary education institution.

This is the simplest circumstance to dissect, since the RESP was designed for this specific scenario. As contributions, government grants, and earnings within the RESP accrue, buckets of income are formed. There are various withdrawal strategies available, based upon the beneficiary’s tax status, the number of remaining siblings who will attend college, and the subscriber’s utilization of accumulated income payments (AIP) to fund their RRSP (up to certain thresholds). For more information surrounding the basic mechanics of the RESP please read Cardinal Point’s article: Cross-Border Transition Planning – RESPs.

As post-secondary educational costs are realized, the taxation of RESP withdrawals is as follows:

  • Original contributions (used for Post-Secondary Education or PSE) are non-taxable
  • Grants and investment earnings (Education Assistance Payment or EAP) are taxable to the beneficiary and subject to certain withdrawal restrictions

Depending on the beneficiary’s part-time employment opportunities, it’s possible that they may owe taxes on some portion of the EAP bucket.

Case Study Scenario #2: The RESP subscriber is a U.S. resident and the beneficiary attends college in Canada.

In this scenario, the RESP is susceptible to annual taxation in the U.S., reported on the subscriber’s U.S. tax return and disclosure as an “other” foreign financial asset. This is due to the U.S. view of the RESP, which sees it as a standard taxable brokerage account. The subscriber needs to report any realized capital gains and/or dividends and interest income on their U.S. tax return. For this reason, some families transfer RESP subscribership duties to a close friend or family member who is a Canadian resident and not a U.S. taxpayer. There are pros and cons to this strategy, but it does alleviate the U.S. tax reporting issues for the U.S. subscriber.

Assuming the beneficiary attends a higher education institution in Canada, the same income taxation results detailed in Case Study #1 apply.  But there is one exception. There would be no benefit gained by the student transferring a portion of their education credit to the U.S. parent (unless the U.S. parent had Canadian-sourced income and was required to file a Canadian tax return themselves). All RESP withdrawals are taxable to the beneficiary who then includes the T4A EAP distributions on their T1 as a Canadian resident. Keep in mind that each Canadian resident has access to annual basic personal amounts (BPA). This is a non-refundable tax credit that can be claimed by all individuals to provide a full reduction from federal income tax to all individuals on their taxable income up to the BPA. This is an important detail for Canadian resident students to note when withdrawing EAP while attending colleges and universities in Canada.

Case Study Scenario #3: Both the subscriber and beneficiary are U.S. residents, and the beneficiary plans to get their post-secondary education at a U.S. institution.

In both the second and third scenarios, it would have been necessary to open the RESP while both the subscriber and beneficiary were Canadian residents. Now let’s assume that the subscriber has not shifted their RESP duties to a Canadian resident and continues to report the annual RESP income on their U.S. tax return. All income, inclusive of capital gains within the RESP, needs to be converted to USD and reported and taxed in the U.S., which can lead to increased tax liability and tax preparation costs. Furthermore, if the aggregate total of the maximum market value of all foreign (non-U.S.) financial accounts is greater than $10K USD (a very low bar), an FBAR/FinCEN 114 disclosure report needs to be electronically filed. The taxpayer may also need to include a Form 8938 (higher thresholds) with their U.S. tax return. It’s debatable whether the RESP is considered a foreign trust, but recent IRS Revenue Procedure 2020-17 suggests that Forms 3520/3520-A are no longer required for RESPs.

From the beneficiary’s perspective, any income withdrawn from the RESP needs to be allocated to a specific bucket (PSE vs EAP). In the case of PSE, this is seen as a non-taxable return of capital to the subscriber. These payments represent after-tax contributions to the RESP. If withdrawals include EAP, then as a non-resident of Canada grants need to be repaid to the Canadian government and any earnings necessitate a 25% non-resident withholding tax payable to CRA on behalf of the beneficiary. But the beneficiary does not need to report the EAP on a U.S. tax return, since the account is only taxable to the subscriber.

Conclusion

Tax-related information is a powerful and essential tool to help you strategically plan optimal methods of navigating Canadian assets such as the RESP, RRSP, LIRA, and TFSA. As cross-border financial planners we are in a unique position to examine the intricacies of complex cross-border wealth management scenarios, including those regarding your RESP within Canada or the U.S. Although we only explored three commonly experienced scenarios, there are many other possibilities. To unpack your specific circumstances and learn applicable solutions and strategies, please contact Cardinal Point.

Filed Under: Articles

EBook: The Health Savings Account in a Canada-U.S. Context

August 4, 2022 By Cardinal Point Wealth

There are many possible options for Americans and Canadians looking for savings and investment accounts, and ideally, such an account will allow you to avoid tax on contributions, investment income, and distribution. For Americans living in the U.S., the Health Savings Account (HSA) best achieves these goals but only if distributions are used for eligible healthcare expenses. You must be enrolled in a qualified High Deductible Health Plan (HDHP). There are no income limits on HSA deductibility.

HSA Canada and US

But for Americans living in Canada, none of these benefits apply. For them, contributions can no longer be made to an HSA, and income from it is taxable in Canada with complex reporting requirements. As well, moving from the U.S. may cause an HSA to be frozen by the provider. For Americans with existing HSAs, it is best to use it up for any healthcare expenses. For Canadians living in the U.S., similar issues arise regarding Tax-Free Savings Accounts (TFSAs) and Registered Education Savings Plans (RESPs). It is hoped that HSAs, TFSAs, etc. may be included in future Canada/U.S. tax treaty protocols.

If you have moved across the Canada/U.S. border, there is real benefit in the advice of a qualified cross-border specialist to optimize your finances and avoid the landmines that exist. Check out this e-book for more on this topic from Cardinal Point’s cross-border professionals, including direct comparison of the tax treatment of all the popular savings and investment accounts available in Canada and the U.S.

View the Ebook

Filed Under: Articles

Cross Border Financial Planning – Non-Arm’s Length Cross-Border Gifting

September 17, 2023 By Cardinal Point Wealth

The desire to gift assets between parties where a personal relationship exists constitutes a non-arm’s length transaction. Gifting is often born from an innate wish to see those who are closest to you enjoy the fruits of your successful financial life. That’s true whether it’s to celebrate or commemorate a birthday, wedding, graduation, job promotion, anniversary, or other milestone – or just to share your generosity.  There are also other reasons why gifts may be made, such as:

  1. Grandparents may want to help their grandchildren pay for higher education as college tuitions skyrocket.
  2. Spouses may decide to retitle assets held in individual accounts into a joint account, for estate or tax planning purposes.
  3. Parents often make a gift of down payment funds to help a child purchase their first home.
  4. Sentimental art or jewelry can be passed from parent to child as a gift.
  5. Aunts or uncles may want to gift an automobile to a niece or nephew.

But when viewing such scenarios through a cross-border lens, it’s vital to know how gifts may be affected by financial and taxation rules and regulations based on such things as the immigration, residency, and relationship status of the donor and recipient. The type of asset being gifted as well as where the asset is domiciled (for example, Canada vs. the U.S) should also be considered. The following article explains some of the nuances of non-arm’s length gifting including non-charitable gifts, and examines common scenarios to help you strategically plan your gifts for the greater benefit of both you and the designated recipient.

gifting, college funds

Grandparents Gifting Money to Grandchildren for College Education


Scenario A Assumptions

  • Dual citizen grandparents and grandchildren residing in the U.S. 
  • Cash domiciled in the U.S. represents the gift

In this specific case, one common gifting option suggests that the grandparents contribute funds to their grandchild’s 529 education plan. Details about 529 plans can be found in Cardinal Point’s Ebook: Cross-Border Implications of Holding a 529 Plan. For the tax year 2023, the annual gift tax exclusion to a non-spouse beneficiary is $17,000 USD. If both grandma and grandpa were to perform gift splitting, the annual gift tax exclusion is doubled. In the latter case, a gift tax Form 709 would need to be prepared and filed with the same due date as the grandparents’ U.S. income tax return. No gift tax would be owed given the current lifetime gift and estate tax exemption amount of $12.92M USD per person (2023). 

From time to time, grandparents choose to “front load” the 529 plan by contributing up to five years’ worth ($170K USD for 2023) of annual gift tax exclusion funds to a grandchild’s 529 account. In this case, no additional excludible contributions can be made for another five years. Even if front loading of the 529 plan via cash gifts beyond the annual gift tax exclusion took place, it is unlikely that gift tax would be owed − unless the current lifetime gift and estate tax exemptions dramatically fell or if grandma and grandpa had already used up their lifetime exemption. There will be an additional tax preparation cost, but that is normally not very significant.  Keep in mind that although the IRS does not allow a tax deduction for contributions to a 529 plan, some states do. Furthermore, some states also set contribution limits for 529 plans. 

Scenario B Assumptions

  • Canadian citizen / U.S. Green card holder grandparents residing in the U.S.
  • Grandparents properly exited Canada and filed their Canadian departure / exit tax return when they moved to the U.S.
  • Canadian-only parents and grandchildren residing in Canada
  • Cash located in the U.S. is the gift consideration

Unlike Scenario A, Canada has a separate college funding account mechanism called a Registered Education Savings Plan (RESP). For more information on RESPs visit Cardinal Point’s blog on Canada & U.S. Education Savings Options. The U.S. tax resident grandparents can help fund the RESP and allow those contributions to attract Canadian Education Savings Grants (CESG) from the Canadian government. 

From a Canadian tax perspective, neither the grandparents, parents, nor grandchildren need to report the gift. In instances other than a contribution to a registered plan, income attribution rules would need to be considered – but those complex laws are beyond the scope of this article. 

From a U.S. tax perspective, it is unlikely there would be a need to report the gift on a U.S. gift tax Form 709, since contribution limits on RESPs are much less than in the U.S. Although the amount of contributions are significantly less in RESPs than in 529 plans, the cost of tuition in Canada is typically substantially lower.

It’s important to note that there are U.S. income tax issues for U.S. tax residents when they are the subscriber on a Canadian RESP. Therefore, in this case, if the U.S. grandparents wanted to partake in subscriber duties, the income within the RESP would become taxable to them in the U.S., which is something to avoid. If a non-U.S. person were the subscriber the tax liability would be much lower.

Scenario C Assumptions

  • Canadian citizen / resident, non-U.S. citizen grandparents
  • Dual citizen grandchildren residing in the U.S. who plan to attend college in the U.S.
  • Cash located in Canada in Canadian dollars for gift consideration

This scenario is not as common as the first two. The tax benefits of an RESP for a child planning to attend a U.S. college are not consistent with Scenario B. That said, grandparents can gift funds to their grandchild’s 529 plan − but have the additional hurdle of FX rates to overcome. If this scenario were to occur, Cardinal Point has business relationships with online FX providers to optimize FX rates between CAD and USD. 

From a Canadian tax perspective, any income (not including realized capital gains) generated by the gift to the minor grandchild would technically need to be attributed back to the grandparent since 529 accounts are not recognized in Canada for their tax-sheltered status. 

If the Canadian resident grandparents subscribe to an RESP instead of a 529 plan for their U.S. resident grandchildren, be aware that the grandchildren will not be able to access the CESG (government grant) portion of the RESP unless they become Canadian residents while attending their university.

From a U.S. tax perspective, if the gift exceeded $100K USD equivalent, a “Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” would need to be filed by the owner of the 529 account for the year of gift.

For these reasons, this scenario is uncommon.

Gifting in Estate Planning – Retitling Assets from Individual to Joint Tenancy with Rights of Survivorship

In many good estate plans, “will substitutes” are maximized in order to avoid probate. This is done by retitling assets owned individually into joint tenancy, so the surviving tenant can maintain full control of the asset after the death of the other. The transfer to the survivor happens outside of probate. This alleviates potential tax owed on the decedent’s ownership of the asset (if certain elections are made on the decedent’s tax return) and allows the survivor to avoid lengthy court proceedings to distribute their late spouse’s estate at a time when they are grieving the loss. Furthermore, probate costs are minimized. It should be noted that tax-advantaged plans such as an RRSP, TFSA, Roth IRA, and Traditional IRA, can only be owned individually. But retirement plans such as these can have beneficiary designations allowing the inherited funds to also avoid the probate process.

Assuming both spouses are comfortable with amalgamating applicable assets into joint titling, there is an unconscious “gift” that takes place. This is true whether the asset and/or person resides in Canada or the U.S. Multiple scenarios can quickly develop, and we will outline a few of those below.

Scenario A – Canadian citizen and resident spouses

Forms are required for non-real estate assets in order to reregister the individual bank and non-registered accounts into joint tenancy. There is a deemed disposition for the original owner at cost, resulting in a continuation of that spouse’s original book value for their 50% share of the joint account. Canadian income tax rules dictate that all income and capital gains within the joint accounts attribute back to the original owner prior to the reregistration. The original owner still reports all the income, but upon their death probate may be avoided.

With respect to changes in real estate titling, there are a couple of additional items to consider. The method of title transfer is a more formal process, typically via an attorney deeding the property title transfer. Secondly, there can be a land transfer tax, and in some jurisdictions (i.e., Toronto), there is both a provincial and municipal land transfer tax. This can easily result in tens of thousands of dollars of taxes when retitling, given the “deemed disposition” for these types of assets. Fortunately, in Ontario, retitling the property between spouses exempts the property from land transfer tax.  

Scenario B – Dual citizen spouses residing in the U.S. who plan on returning to Canada in a few years

As U.S. citizens, spouses are entitled to the unlimited marital gift tax exemption. This allows spouses to transfer an unlimited amount of assets or gifts between one another. Therefore, if all assets are domiciled in the U.S., any shift from individual to joint tenancy avoids income and gift tax altogether. There is no “deemed disposition” as there would be in the case of Canadian residency.  However, it is a good idea to file a gift tax return to report and document that the transfer is eligible for the unlimited marital exemption.

Scenario C – Dual citizen husband residing in the U.S. with Canadian citizen / U.S. Green Card wife residing in the U.S. There are U.S. “situs” assets only.

Without U.S. citizenship, special rules apply if the recipient spouse is a U.S. Green Card holder. For non-U.S. citizen spouses, the marital deduction is limited to $175,000 USD for tax year 2023. Therefore, attempting to create a smooth estate plan by retitling applicable assets into joint names could potentially trigger negative U.S. gift tax consequences. Let’s look at an example.

John is a U.S. citizen and Jane is a Canadian citizen with a U.S. Green Card. John has a taxable brokerage account worth $2M USD. John would like to minimize gaps in his estate plan and maximize future income tax splitting in preparation for his move to Canada, by adding Jane on the account title. If John were to follow through with that plan, he would be gifting 50% of the account, or $1M USD, into Jane’s name. However, this gift exceeds the maximum marital deduction to a non-U.S. citizen spouse by $825K USD. Essentially, John would have to file a U.S. Form 709 Gift Tax Return and decrease his lifetime gift and estate tax exemption amount from $12.92M USD to $12.09M USD or less. This may seem insignificant, but tax laws are in flux and in 2025 the current lifetime gift and estate tax exemption amounts are scheduled to revert to what they were prior to the 2017 Tax Cuts and Jobs Act. Future exemption levels could be substantially lower, resulting in John having a smaller unused Lifetime Gift and Estate Tax Exemption available at his death.

In Summary

Domestic or cross-border gifting strategies involving non-arms-length transactions can take many different forms, each requiring its own unique strategies and considerations. We’ve outlined just a few in this article, and with any type of gift the Canadian and U.S. tax issues and corresponding opportunities are important to understand and dissect. The immigration, residency, and relationship status of the donor and recipient have significant implications when it comes to cross-border financial planning. That’s why it is critical that you integrate and coordinate your gift giving plans in full alignment with your overall cross-border investment, tax, and estate planning. The educational insights provided in this article are general in nature, but to review your specific circumstances and objectives, please contact Cardinal Point. 

Filed Under: Articles

The Health Savings Account in a Canada-U.S. Context

June 23, 2021 By Cardinal Point Wealth

You work hard to earn your money. You live below your means and have extra funds to save for retirement or a rainy day. But with all the different types of savings and investment accounts available, which should you prioritize? Once you’ve stashed away three to six months of living expenses in a basic savings account to cover unexpected emergencies like insurance deductibles, out-of-pocket medical expenses, and auto repairs, it’s time to turn your attention to other savings or investment accounts that have tax advantages that provide a benefit from the investment, allowing more of your money to be invested and ultimately returned back to you. Below are the factors to consider:

HSA Canada

Summary and Takeaways

The Health Savings Account (HSA) is the only type of account that allows you to deduct contributions, create tax-free investment income, and enjoy tax-free distributions as long as those are used to pay for eligible healthcare expenses. That can be a user-friendly tax-saving tool if an HSA is appropriate for your circumstances. But in a cross-border context, an HSA may complicate tax filing and expose you to Canadian taxes in ways that essentially offset the benefits. That’s why it is advised that cross-border taxpayers seek the guidance of a qualified cross-border tax planner before opening or closing an HSA account.

Key Takeaways

  • There is no required minimum distribution, and HSA funds can be withdrawn for any reason with no penalty after the age of 65.
  • Generally, those living in Canada are not eligible to make U.S. tax deductible HSA contributions. Those contributions are also not deductible for Canadian tax purposes.
  • It is generally advisable that if you already have an HSA account but you’re moving to Canada you should keep the account open to avoid a distribution penalty.
  • But after moving to Canada, you should spend the funds for eligible healthcare expenses to avoid the risk of potential penalties and to simplify your tax filing.
  • Are contributions to the account deductible?
  • Does the account provide tax deferral of investment income?
  • How are distributions taxed?

The best scenario for an investment account is one that allows deductible contributions, tax-free investment income, and tax-free distributions. This means you never pay tax on the contribution, the income, or the distributions. The following chart summarizes the tax treatment of the most popular types of accounts in the US and Canada. With the exception of differing contribution and income limits, IRAs, 401(k)s, 403(b), SIMPLE IRAs, SEP IRAs, and individual Defined Benefit plans are all very similar, and those accounts are usually rolled into an IRA upon retirement.

Taxable Investment 401(k) IRA Roth IRA HSA 529 RRSP TFSA RESP
Deductible Yes Yes Yes Yes
Income Deferral Yes Yes Yes Yes
Tax-free Investment Income Yes Yes Yes Yes
Tax-free Distribution Capital gains are taxed Yes Yes Yes Yes Taxed to student
Annual Contribution Limit Unlimited $19,500 $6,000 $6,000 $3,600
($7,200 for family coverage)
$27,830 $6,000 20% CESG up to $2,500
Catch-up contributions $6,500 for 50+ $1,000 for 50+ $1,000 for 50+ cumulative limit cumulative limit cumulative limit
Lifetime Contribution Limit $235,000+ determined by state $75,500 $50,000
Age Restriction 59.5 59.5 65 31 years after inception
Early Withdrawal Penalty 10% 10% 20% 10% 20%
Penalty Portion Full Full Full Earnings Earnings
RMD Yes Yes Yes 36-year limit

The HSA is the only type of account that has the benefit of a deduction for the contributions, tax-free investment income, and tax-free distributions. HSAs combine the tax attributes of an IRA and a Roth IRA in that you get a deduction on the way in, and it is tax-free on the way out but only if distributions are used to pay eligible healthcare expenses. HSAs  are also similar to Roth IRAs in that there is no required minimum distribution. Distributions from taxable investment accounts are not fully taxable like distributions from an IRA, but capital gains are taxed. HSAs (healthcare) and 529s (education) must be spent on qualified expenses or else they are taxable with a penalty rather than tax free. The exception to this rule is that HSA funds can be withdrawn for any reason with no penalty after the age of 65. In this case, the distribution is taxable like an IRA, but no penalty applies.

Another benefit of HSAs is they are the only account that provides for an “above-the-line” deduction, which means they are deducted before totaling Adjusted Gross Income (AGI) so there are no income limits on HSA deductibility. IRA contributions are also above the line but are potentially subject to income limits. Many employed taxpayers are eligible for executive compensation packages through their employer, have a spouse who has an employer-sponsored retirement plan, or their high income disqualifies them from contributing to a traditional IRA. There is no income limit for IRA and Roth IRA contributions if neither spouse has access to a qualified employer sponsored retirement plan. The only qualification for receiving a deduction for a contribution to an HSA is the participant must be enrolled in a qualified High Deductible Health Plan (HDHP). Retired clients generally are on Medicare, do not need the tax deduction, or have retirement health benefits provided by their former employer which are not considered a HDHP.

For the most part, the HDHP requirement means that those living in Canada are not eligible to make U.S. tax deductible HSA contributions. Canadians are covered by provincial healthcare, which is not considered a HDHP. Besides, there is no deduction in Canada for HSA contributions. There would be no advantage to contribute because people generally pay more tax in Canada and need Canadian deductions. Even as a dual resident, the deduction in the U.S. will not benefit you because the foreign tax credits created in Canada will usually offset your U.S. tax payable.

HSAs were not included in the Canada-U.S. Tax Treaty, so investment income is taxable in Canada even though it is not taxable in the U.S. Our advice to those moving to Canada with existing HSA accounts is to keep the account open because you would not want to take a taxable distribution with the penalty before you leave. However, you should make sure to use the HSA account for all your healthcare needs in the U.S. and Canada. Expenses incurred for healthcare in Canada are considered qualified healthcare expenses and will not trigger a penalty. The reason you want to make sure to spend your HSA down as quickly as possible once entering Canada is because:

  • Having an account that is tax-free from a U.S. perspective, but viewed as a taxable investment account in Canada, will create accounting complexities for tax reporting purposes. HSAs do not issue tax slips to detail investment income. You will have to review the account transaction history to determine the taxable investment income from a Canadian perspective. You will then have to convert the income to Canadian dollars on the date of the transaction, then sum all the Canadian income by type to report on your Canadian return. As you can see, this could get complex.
  • HSA providers have become more uncommon in the U.S. over the past 10 years. Many large banks used to offer HSA accounts, but many providers have exited the market.
  • Investment options may be limited and may require a minimum account balance.
    • Many HSA providers do not offer the option of investing in equities. Often the only option is a high-yield savings account. If your provider does offer equity investments, the account may be frozen once you change your address to a foreign address. Once that happens, you will only be able to sell securities, not purchase new ones. This may not be an issue if your investments are appropriate before you move. The equities in your account may also be frozen once your account balance drops below the minimum.
  • If you are not able to invest in equities, the small amount of interest income you are receiving is only complicating your life.
  • Once you move to Canada, your HSA essentially becomes a taxable account with the downside of potential penalties and tax reporting complications. You are no longer receiving tax-deferred or tax-free investment income, so you should use the HSA for Canadian medical expenses rather than your taxable investment account.
  • Many providers will not mail a new debit card to a foreign address if you lose your debit card. You may also have checks to use, or you could transfer balances from your HSA to your checking account online or via the phone. Make sure to save your health expense receipts if you do this.

While HSA accounts are not appropriate for everyone, they are the tax-friendly accounts in the U.S.. They may be included in the sixth protocol to the Canada-U.S. tax treaty when it is updated in the future.

There are similar issues with Tax-Free Savings Accounts (TFSA) and Registered Education Savings Plan accounts (RESP) for Canadians living in the U.S. in that they are not recognized by the treaty, create taxable investment income in the U.S., and complicate your tax filings. The problem is worse with TFSAs and RESPs than with HSAs because they can be considered foreign trusts.

If you have moved across the Canada-U.S. border or are living a cross-border lifestyle, it is important you work with a qualified cross-border specialist to optimize your financial situation and avoid the landmines inherent in cross-border financial planning, tax planning, and investment management.

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