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Americans in Canada: Investment Basics

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It’s a good idea for Americans living in Canada to understand which kinds of registered investment accounts they can have without having to confront onerous taxes and paperwork.

Two kinds of plans are friendliest for Americans: The Registered Retirement Savings Plan (RRSP) and the Registered Retirement Income Fund (RRIF).

Effectively, U.S. citizens are simply taxed on the distributions from these accounts as they would be in Canada.

On the other hand, Americans should generally avoid Tax Free Savings Accounts (TFSA) and Registered Education Savings Plans (RESP). The IRS considers both to be offshore trusts, and as such, they involve burdensome filing requirements, with significant penalties for non-compliance. What’s more, their accrued earnings are taxable in the United States.

Check out Terry Ritchie’s recent Globe and Mail video segment for more details about U.S. citizens investing in Canada.

Tax Implications for Americans Living in Canada

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In this video clip, Terry Ritchie updates Rob Carrick on the IRS crackdown on Americans who live and work in Canada but haven’t been filing their annual tax returns. There is serious documentation required by U.S. tax authorities regarding financial holdings. Last September, a new program was introduced for Americans living and working abroad: the Offshore Volunteer Disclosure program. Of the 5 to 7 million Americans who live/work abroad, only 740,000 actually filed a Financial Bank Account Report (FBAR) in 2011.

While only 18 parties have been criminally prosecuted for hiding assets, clearly there is a large percentage that doesn’t know what to do or where to go for advice. Every situation is different, but it’s important to talk to a specialist who understands these issues. Next year, when the IRS imposes the Foreign Account Tax Compliance Act (FATCA), traditional banks in Canada must comply and provide information. Following this, it will be harder to fight reasonable cause. For most Americans working in Canada, there is a Foreigner Income Exclusion imposed on employment income. This, plus the use of foreign tax credits, generally means there are no taxes owed, but the proper documentation must be filed with the IRS to be in compliance.

Americans in Canada Facing Obamacare Surtax

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In this video segment, Terry Ritchie, cross-border tax and estate planning expert, discusses how a new measure in the Patient Protection and Affordable Care Act, also known as “Obamacare,” could result in a surprise for U.S. citizens living in Canada. Effective for 2013, a 3.8% surtax will be imposed on passive income such as interest, dividends, rental property, and capital gains.

As Ritchie points out, the challenge is that foreign tax credits will likely not offset the 3.8% Obamacare tax on net investment income. This means that individuals earning more than $125K and couples earning more than $250K may be taxed on passive income for the first time in 2013. Ritchie asserts that there are no clear options to avoid or minimize the surtax at the moment, so advisors are wise to make their clients aware of this measure.