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Relocating to Canada from the U.S. presents unique financial planning opportunities and challenges, especially regarding U.S. retirement accounts like IRAs and Roth IRAs. One strategic move often considered is converting a traditional IRA or 401(k)/403(b) to a Roth IRA before establishing Canadian tax residency. Below, we outline the key aspects of this strategy, clarify the Canadian tax filing requirements to maintain Roth IRA tax-free status, and weigh the pros and cons of making such conversions.

Why Consider a Roth Conversion Before Moving to Canada?

• Tax Rate Arbitrage: U.S. federal tax rates may be lower than Canadian rates, especially at higher income levels. By converting to a Roth IRA before moving, you pay U.S. tax on the conversion at your current rate, potentially avoiding higher Canadian taxes on future withdrawals.
• Future Tax-Free Growth: Once in a Roth IRA, investment growth and qualified withdrawals are tax-free in the U.S. and, with proper planning, can remain tax-free in Canada.
• Estate Planning: Roth IRAs can be passed to heirs with favorable tax treatment, making them attractive for legacy planning.

The Canadian First-Year Tax Filing Requirement

To maintain the tax-free status of your Roth IRA in Canada, you must comply with a specific Canada Revenue Agency (CRA) requirement in your first year as a Canadian resident:

The One-Time Treaty Election

• Deadline: You must file a one-time election with the CRA by the due date of your first Canadian tax return (generally April 30 of the year following your arrival).
• What to File: There is no prescribed CRA form. Instead, submit a letter for each Roth IRA account, including:
  • Your name, address, Social Insurance Number, and U.S. Social Security Number
  • The name and address of the Roth IRA trustee/administrator
  • Account number and establishment date
  • Date you became a Canadian resident
  • Roth IRA balance as of your arrival date
  • Statement electing to defer Canadian taxation under Article XVIII(7) of the Canada-U.S. Tax Treaty
• No Canadian Contributions: After becoming a Canadian resident, you must not make new contributions (including conversions or rollovers from traditional IRAs) to your Roth IRA. Doing so invalidates the election and subjects future growth to Canadian tax.

Pros and Cons of Roth Conversions Before Moving

Pros

• Potential Tax Savings: If your current U.S. tax rate is lower than the expected Canadian rate, converting before moving can result in substantial tax savings.
• Tax-Free Growth: With the Treaty election, future growth and qualified withdrawals from the Roth IRA can remain tax-free in both countries.
• Simplified Cross-Border Planning: Roth IRAs are recognized under the Canada-U.S. Tax Treaty as pensions, allowing for coordinated tax treatment.
• No Required Minimum Distributions (RMDs): Roth IRAs are not subject to RMDs during the account holder’s lifetime, providing flexibility.

Cons

• Immediate U.S. Tax Liability: The conversion amount is taxable as ordinary income in the U.S. for the year of conversion, which can result in a significant U.S. tax bill.
• Potential for Higher Tax if Not Timed Well: If your U.S. tax rate is higher than your anticipated Canadian rate, converting before moving could result in paying more tax than necessary.
• Potential for Increased Medicare Part B Premium: A Roth conversion increases your income for the year, which may result in higher, income-tested Medicare Part B premiums for a future year.
• Complex Filing Requirements: Missing the one-time Treaty election deadline can result in annual Canadian taxation of Roth IRA growth.
• No Further Contributions: Once you are a Canadian resident, you cannot contribute to your Roth IRA without losing tax-free status.

Practical Example

Suppose you have a $300,000 401(k) eligible for rollover and plan to move to Canada next year. By converting to a Roth IRA before moving, you pay U.S. tax on the conversion (e.g., 24% federal, $72,000 total if split over two years and living in a state with no income tax). If you wait and take distributions as a Canadian resident, those withdrawals could be taxed at up to 53.5% in Canada (B.C.), resulting in much higher overall taxation.

Key Takeaways

• Plan Ahead: Roth conversions before moving to Canada can offer significant tax advantages, but only if carefully timed and executed.
• File the Treaty Election: To preserve tax-free growth and withdrawals in Canada, file the one-time Treaty election with the CRA by the first-year tax filing deadline and avoid any post-move contributions.
• Seek Professional Advice: Cross-border tax planning is complex; consult a qualified cross-border tax advisor like the advisors at Cardinal Point to tailor the strategy to your situation.

By understanding these requirements and carefully weighing the pros and cons, you can make informed decisions about your retirement assets as you transition to life in Canada.

You’ve spent the majority of your career employed in the U.S. and are ready to return home to Canada with notable retirement assets in hand. For Canadian residents holding U.S. Individual Retirement Accounts (IRAs), Qualified Charitable Distributions (QCDs) offer a rare opportunity to optimize charitable giving while minimizing tax burdens. This strategy leverages unique provisions in the Canada-U.S. tax treaty to create a “double benefit”: avoiding U.S. taxation while potentially claiming Canadian tax credits. Here’s how it works:

Understanding Qualified Charitable Distributions (QCDs)

A QCD allows IRA owners who are taking Required Minimum Distributions (RMDs) from their IRA to transfer funds directly to a qualified charity. The result is that the RMD amount would not be subject to ordinary income tax. Key mechanics of this strategy include:

• Annual limit: Up to $108,000 per person in 2025 (adjusted periodically for inflation).
• RMD satisfaction: A QCD can be used to meet your Required Minimum Distribution (RMD). Even though RMDs now start at age 73, you can make a QCD starting at age 70½. Any QCD you make after turning 70½ will count toward your RMD for that year.
• Direct transfer requirement: Funds must move trustee-to-charity; personal receipt invalidates the tax benefit.
• Eligible charities: U.S. 501(c)(3) organizations and Canadian registered charities.

Key Components of U.S. Tax Treatment

• Tax exclusion: QCD amounts are excluded from U.S. taxable income. Report your total IRA distribution on Line 4a of IRS Form 1040, and the taxable portion (total minus QCD) on Line 4b. Write “QCD” next to Line 4b to indicate the exclusion.
• No charitable deduction: You can’t “double-dip” with a U.S. deduction, meaning you can’t take an “above the line” deduction and also claim on Schedule A if you happen to itemize your taxes.
• Reporting: The full distribution appears in Box 1 on IRS Form 1099-R, but only the non-QCD portion is taxable (Box 2a).

Key Components of Canadian Tax Treatment

The Canada-U.S. tax treaty (Article XXI) creates a powerful synergy:

• Non-taxable in Canada: Since QCDs are tax-free in the U.S., they’re generally non-taxable in Canada.
• Charitable tax credit eligibility: You may claim a Canadian tax credit for the donation amount, subject to:
  • Canadian charities: Full credit under Canadian limits up to a maximum of 75% of net income (Quebec is 100%).
  • U.S. charities: Credit limited to 75% of your U.S.-source income.

The “Double Benefit” in Action

Consider a Canadian resident with $50,000 in U.S.-source income who makes a $20,000 QCD to a Canadian hospital:

1. U.S. outcome: $0 tax on the distribution
2. Canadian outcome: Charitable credit worth ~$8,000–$9,000 (varies by province).
   Result: $20,000 to charity + ~$8,500 tax savings

Eligibility and Execution Checklist

1. 1. Age: Must be 70½ or older at the time of the QCD distribution.
   2. IRA type: Traditional or Inherited IRAs (if the beneficiary is over age 70½)
   3. Charity verification:
      • Canada: Confirm Canadian charity registration via the CRA Charities Listing tool.
      • U.S: Confirm U.S. 501(c)3 eligibility via the Tax Exempt Organization Search tool.
   4. Transfer protocol: Instruct your U.S. IRA custodian to:
      • Make the check payable to the charity (not you) – If the distribution is paid to you first, it does not qualify as a QCD and will be fully taxable in both the U.S. and Canada. You may still be able to claim a Canadian charitable tax credit.
      • Include your name and address in the memo field.
   5. Documentation: Obtain written acknowledgment from the charity for your records. Furthermore, maintaining meticulous records is essential. Keep copies of:
      • The IRA custodian’s confirmation of the direct transfer;
      • Your IRS 1099-R showing the distribution; and
      • Any correspondence with the charity regarding the use of funds.

      This documentation will be invaluable if you are ever audited by the CRA or IRS, or if you need to substantiate your claim for the Canadian charitable tax credit.

   6. Tax Return Disclosure Requirements
      • U.S. Taxpayers: If a U.S. taxpayer claims a deduction for a donation to a Canadian charity under Article XXI, they must disclose this treaty position to the IRS. This is done by filing IRS Form 8833 (Treaty-Based Return Position Disclosure) along with their tax return.
      • Canadian Taxpayers: Canadian residents claiming a credit for a donation to a U.S. charity should:
        • Report the donation on the appropriate line of their T1 return (Line 34900); and
        • Ensure the donation does not exceed 75% of their U.S.-source income for the year.

Limitations and Pitfalls

• Non-deductible IRA funds: QCDs can only offset taxable amounts; after-tax contributions don’t qualify.
• Foreign charity limits: Donations to U.S. charities only reduce Canadian tax on U.S.-source income, up to 75% of U.S. sourced income.
• Provincial variations: Quebec may require additional forms for non-Canadian donations.
• Timing: Transactions must clear by December 31st to count for that tax year.
• CRA Review: It is likely that the CRA will review the donation as part of their overall Review Letter process. Therefore, it is important to ensure that you have the necessary documentation to provide to the CRA upon review.

Strategic Considerations

1. RMD optimization: Use QCDs for RMDs to avoid pushing yourself into higher tax brackets. Furthermore, if your IRS Schedule A U.S. itemized deductions are less than the U.S. standard deduction, the QCD still allows the donor to reap a tax benefit.
2. Cross-border philanthropy: Donate to Canadian charities for maximum tax efficiencies.
3. Income sourcing: Pair donations to U.S. charities with U.S.-source income (e.g., rental properties, royalty income, investment income, etc.).
4. Mitigating Currency Risk: Given the fluctuations in the USD/CAD exchange rate, timing your QCDs can also be a strategic decision. If the U.S. dollar is strong relative to the Canadian dollar, your donation will go further when converted to CAD, increasing the impact of your gift to a Canadian charity. Some donors choose to monitor exchange rates and make larger QCDs in years when the currency environment is favorable, maximizing both their charitable impact and the value of their Canadian tax credit.
5. Charitable Giving as a Family Legacy: QCDs can also play a role in your estate and legacy planning. By making charitable distributions directly from your IRA, you not only reduce the size of your taxable estate but also demonstrate philanthropy to your heirs. For families with a tradition of giving, incorporating QCDs into your annual charitable strategy can be a meaningful way to involve children and grandchildren in philanthropy, teaching them about both cross-border finance and the value of giving back.

Case Study: The Practical Impact

Sarah, 72, a Canadian resident with a $1.2M IRA:

• Annual RMD: $45,000
• QCD strategy: Directs $20,000 to an eligible Canadian university
• Tax results:
  • U.S.: $25,000 taxable income (vs. $45,000 without QCD)
  • Canada: $20,000 charitable credit + $0 tax on distribution
• Net benefit: ~$7,000 Canadian tax savings + $5,000 U.S. tax savings

The Importance of Cross-Border Financial Advice

For Canadian-resident IRA owners over 70½ or in the RMD distribution phase, QCDs represent one of the most tax-efficient charitable strategies available. By combining U.S. tax exclusion with Canadian credits, you amplify the impact of your philanthropy while minimizing your tax burden.

You should coordinate your reporting to ensure the QCD maximizes tax savings and impact in both Canada and the U.S. Working with a cross-border tax and financial planning professional such as Cardinal Point is strongly recommended. Cardinal Point can help you:

• Confirm the eligibility of your chosen charity;
• Structure your QCDs for optimal tax efficiency;
• Navigate reporting requirements in both countries; and
• Address any estate or succession planning considerations.

By taking a proactive, well-documented approach, you can ensure that your charitable giving is both impactful and tax-efficient, turning your IRA into a powerful tool for cross border philanthropy and financial planning.

With the enactment of the “Big Beautiful Bill” on July 4, 2025, cross-border taxpayers—particularly those navigating Canadian and U.S. tax and estate planning systems—face major legislative changes. These changes are reshaping the individual, estate, business, and international tax landscape, with far-reaching implications for planning, compliance, and long-term strategy.

At Cardinal Point Wealth Management, we specialize in helping Canadian and U.S. families navigate complex cross-border tax, estate, and financial planning needs. Below, we explore the most important updates under the Big Beautiful Bill and how they impact individuals, estates, corporations, and international structures.

Overview: The Big Beautiful Bill at a Glance

The Big Beautiful Bill is one of the most consequential U.S. tax reform efforts in recent history. Its provisions touch on nearly every area of tax law, from personal income and capital gains to corporate tax rates, international taxation, and estate tax thresholds.

The bill introduces:

• Lower personal tax rates and expanded standard deductions
• A higher estate and gift tax exemption
• Significant corporate tax changes, including immediate expensing, promoting investment in the U.S.

While the bill is designed to stimulate investment and simplify parts of the tax code, it also introduces complexity for cross-border taxpayers who must navigate both Canadian and U.S. tax rules.

Individual Tax Changes

Extension of TCJA Rates and Brackets
The Bill makes permanent the individual tax rates introduced under the 2017 Tax Cuts and Jobs Act (TCJA), which were previously scheduled to sunset after 2025. These include:

• Seven federal tax brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%)
• Larger bracket thresholds indexed using Chained CPI

There is also a larger inflation increase for the 12% and 22% federal tax brackets.

Impact:
For U.S. citizens in Canada, this extension prevents a reversion to higher pre-TCJA rates and preserves current U.S. tax obligations, which continue to be offset in Canada via foreign tax credits.

Standard Deduction and Elimination of Personal Exemption

The standard deduction is increased to $15,750 (single), $31,500 (married filing jointly), and $23,625 (head of household) for 2025 (indexed annually afterwards). The personal exemption remains at $0 permanently. Itemized deduction rules stay the same:

• Pease limit (3% reduction in itemized deductions) permanently repealed
• Misc itemized deductions permanently repealed
• Deduction for interest on mortgages permanently capped at $750k principal

Pass-through entity taxes (PTETs), where business owners effectively pay their State and Local Tax (SALT) taxes through their business instead of personally as a way to get around the SALT deduction cap, remain the same.

Impact:
U.S. citizens residing in Canada must plan for reduced deductions if previously relying on exemptions. The enhanced standard deduction may help mitigate the loss.

State and Local Tax (SALT) Deduction Cap

For the 2025 to 2029 tax years, the SALT cap increases to $40,000 Married Filing Joint (MFJ) but phases back down to $10,000 for high-income taxpayers above $500,000 (MFJ) at a reduction of 30% of income. Thus, the extra SALT deduction is fully phased out at $600k Adjusted Gross Income (AGI) (MFJ), making the $500k-$600k income range extremely important from a planning perspective for those with high SALT. Absent any other factors, increasing AGI from $500k to $600k means taxable income could rise by $130k, or a federal marginal tax rate of ~46%. The $40k SALT cap and $500k income threshold are to be indexed at a rate of 1% per year.

Foreign real property taxes remain non-deductible.

Impact:
Canadian residents with U.S. income or properties may still face a deduction cap. This change is more impactful for U.S. citizens in high-tax U.S. states, and planning for those with income between $500k-$600k is very important from 2025 to 2029. U.S. residents in high-tax states will need to consider the SALT deduction cap if they are considering roth conversions above $500k AGI.

Additional Standard Deduction for Seniors (>65)

The Big Beautiful Bill provides an additional standard deduction of $6,000 per individual over age 65, but phases out by 6% of Modified Adjusted Gross Income (MAGI) above $150k MFJ ($75k others). This is effective from 2025 to 2028.

Impact:
Older cross-border taxpayers may benefit from this age-based increase, improving after-tax income in retirement years.

Limit on Itemized Deductions

The bill establishes a new permanent limit on itemized deductions, effective in tax year 2026. This limitation applies to filers with taxable income that exceeds the 37 percent ordinary rate threshold ($751,600 MFJ for 2025) for their filing status and reduces allowable itemized deductions by 2/37 of the amount by which taxable income exceeds this threshold (or the total amount of itemized deductions, whichever is smaller.

Impact:
High-income U.S. citizens in Canada who itemize (e.g., for SALT, mortgage interest, and/or charitable contributions) may see reduced deductions. Planning is needed to optimize timing, and annual tax projections should be completed.

Charitable Deduction for Non-Itemizers

The legislation introduces a permanent above-the-line charitable deduction of up to $2,000 (MFJ) or $1,000 (all other filers), even for those taking the standard deduction.

Impact:
This encourages continued charitable giving by U.S. persons abroad and offers modest tax relief without itemizing.

Child Tax Credit

For 2025, the Child Tax Credit is increased to $2,200 (from $2,000) per qualifying child and is permanently indexed for inflation. The refundable portion remains $1,400. The credit requires a valid Social Security Number (SSN) for the child and the taxpayer.

Impact:
Dual-status families or U.S. citizens married to Canadian spouses may find eligibility more difficult, particularly if SSNs are not obtained.

Alternative Minimum Tax (AMT)

AMT exemption amounts are made permanent, while phase-out thresholds are modified. For example, the phase-out for joint filers will revert to $1,000,000, and the rate at which exemptions phase out increases to 50% (from 25%).

Impact:
High-income U.S. citizens in Canada may face new exposure to U.S. AMT. Therefore, annual tax modeling is essential.

Other personal tax changes include:

• The repeal of several Inflation Reduction Act green energy tax credits primarily aimed at individuals, such as electric vehicle and residential energy efficiency credits, after 2025.
• Allow a temporary above-the-line deduction of up to $25,000 in tip income for individuals working in traditionally tipped industries, available for tax years 2025 through 2028. The deduction phases out at 10% of income exceeding $150,000 ($300,000 for joint filers).
• Temporarily allow a deduction—available to both itemizers and non-itemizers—for interest on auto loans used to purchase new vehicles with final assembly in the United States, for tax years 2025 through 2028. The deduction is capped at $10,000 and phases out at a rate of 20% for incomes above $100,000 (single) or $200,000 (joint).

Estate and Gift Tax Changes

Increased Lifetime Exemption
The lifetime estate, gift, and Generation Skipping Tax (GST) exemption increases to $15 million (from $13.99 million in 2025), indexed for inflation from 2026 onwards. This eliminates the scheduled reversion to ~$7 million in 2026.

The lifetime exemption is still portable, so effectively $30 million per couple starting in 2026.

Impact:
U.S. citizens in Canada and Canadians with U.S.-situs assets (e.g., U.S. real estate) can take advantage of a higher threshold. However, Canadian residents still face the $60,000 threshold for non-resident U.S. estate tax filings, though they may claim a pro-rata unified credit under the Canada–U.S. Tax Treaty to eliminate any U.S. estate tax actually payable.

Permanency and Planning Window

The increased lifetime exemption increase is labeled “permanent,” but future Congresses can reverse this. Early lifetime gifts can remove appreciation from taxable estates.

Impact:
For cross-border families, using the exemption sooner can lock in benefits and reduce uncertainty.

Business Tax Changes

100% Bonus Depreciation Reinstated
The Bill makes 100% bonus depreciation permanent for qualified property, including real property used in production, placed into service after January 20, 2025.

Impact:
Cross-border businesses should time capital investments to maximize deductions and match depreciation schedules between jurisdictions.

Qualified Business Income Deduction (QBID)

The 20% Qualified Business Income Deduction (QBID) under Section 199A is made permanent. It applies to income from pass-through entities like partnerships, S corporations, and sole proprietorships.
There is an increase phase-in range of limitation by $50,000 for non-joint returns and $100,000 for joint returns; create a minimum deduction of $400 for taxpayers with $1,000 or more of Qualified Business Income (QBI).

Impact:
U.S. citizens in Canada with U.S. business income through eligible entities can continue to benefit, subject to wage and property limitations. Careful coordination with Canadian business income reporting is essential.

Expansion of Qualified Small Business Stock (QSBS) Gain Exclusion

The Bill enhances the benefits and expands eligibility for the QSBS gain exclusion by increasing the dollar ($10M to $15M, indexed annually) and asset cap ($50M to $75M, indexed annually).

The Bill introduces a tiered system for QSBS exclusion based on the holding period: 50% exclusion for stock held at least 3 years, 75% for at least 4 years, and 100% for at least 5 years.

Impact:
Owners of U.S. businesses should review their structures to possibly qualify for up to $15M of tax-free gain per shareholder if looking to sell within 5 years.

Business Interest Deduction

Interest expense remains deductible up to 30% of EBITDA, made permanent.

Impact: Favorable for leveraged cross-border entities. Care must be taken with transfer pricing and thin capitalization rules in Canada.

Opportunity Zone Extension

The legislation revives and extends the Opportunity Zone program, including new compliance rules and a refreshed timeline for investment.

Impact:
Canadian investors with U.S. capital gains can continue to defer and potentially reduce gains by reinvesting in designated zones, but only in the U.S. Structuring through U.S. entities may be required.

Other business tax changes that should increase investment in the U.S. include:

• Permanently increases the maximum amount a taxpayer can expense under Section 179 for qualifying depreciable business assets from $1M to $2.5M, with inflation adjustments (reduction for cost of qualifying property > $4M).
• Permanently restore immediate expensing for domestic research and development (R&D) expenses; small businesses with gross receipts of $31 million or less can retroactively expense R&D back to after December 31, 2021; all other domestic R&D between 2022 and 2024 can accelerate remaining deductions over a 1- or 2-year period.
• Temporarily provide 100% expensing of qualifying structures, with the beginning of construction occurring after January 19, 2025, and before January 19, 2029, and placed in service before January 1, 2031.

Planning Implications for Cross-Border Taxpayers

For U.S. Citizens in Canada:

• Update estate plans to leverage the increased $15M exemption.
• Review (Passive Foreign Investment Company (PFIC) holdings and explore compliant U.S. alternatives.
• Consider accelerated income realization under extended lower brackets.
• Coordinate child tax credit claims with Individual Taxpayer Identification Number (ITIN) and SSN rules.

For Canadians with U.S. Assets:

• Reassess ownership of U.S. real estate to minimize estate tax exposure.
• Utilize treaty-based credits to offset U.S. estate tax liability.
• Plan around SALT cap and foreign property tax restrictions.

For Cross-Border Business Owners:

• Leverage full expensing and the lower 21% corporate federal tax rate.
• Structure any pass-through entities carefully to maintain 199A benefits.
• Align interest deduction limits with financing arrangements.

Compliance and Reporting:

• Ensure accurate Form 5471, 8621, and 8865 filings.
• Monitor Controlled Foreign Corporation (CFC) and PFIC tests closely.
• Evaluate trust residency and reporting where U.S. beneficiaries are involved.

Conclusion

The Big Beautiful Bill represents a fundamental recalibration of U.S. tax law. 

For cross-border Canadian and U.S. taxpayers, it offers new opportunities, but also new risks. With the “permanent” extension of TCJA provisions, enhanced exemptions, and international realignments, proactive planning is critical.

At Cardinal Point Wealth Management, we stand ready to help you navigate this evolving environment. From estate structuring to cross-border business operations, we offer integrated financial, tax, and investment strategies tailored to your unique circumstances.

For high-earning professionals, entrepreneurs, and incorporated business owners in Canada, income taxes often represent the single largest household expense. Fortunately, with proactive tax planning, it’s possible to significantly reduce tax drag, accelerate wealth accumulation, and align financial strategy with life priorities.

This blog post outlines a real-world approach to integrated tax and lifestyle planning, using a series of relatable case studies and actionable strategies relevant to Cardinal Point clients across Canada. Whether your goals include saving for a property, funding retirement, or enhancing charitable giving, strategic planning can deliver meaningful outcomes over time.

Tax-Sheltered Accounts: RRSPs and TFSAs

Maximize RRSP Contributions with Salary Planning

When a business owner pays themselves a salary (rather than dividends), they generate RRSP contribution room. By coordinating this with RRSP catch-up opportunities, they can defer personal tax and shift savings into a fully tax-deferred environment.

Example:
A business owner with unused RRSP room pays themselves $80,000 in salary from their corporation. This creates immediate RRSP room, allows for a tax deduction at the corporate level, and permits pre-tax investing in the RRSP. This approach often outperforms corporate passive investing due to the annual tax drag inside the corporation.

Tip: Salary-based RRSP funding is especially attractive when corporate retained earnings are high, and the owner is not maximizing personal savings.

TFSA for Tax-Free Growth

After RRSPs are maximized, the TFSA becomes the next key personal tax-advantaged account. TFSA contributions are made with after-tax dollars, but growth and withdrawals are tax-free.

Practical Use:

• A family contributes to each spouse’s TFSA annually, investing in low-cost index funds.
• Over 10–15 years, the accounts compound significantly.
• When funds are withdrawn to support early retirement or lifestyle purchases, no tax is triggered.

Income Splitting Within the Family

Canada’s progressive tax system means households with uneven income distribution face higher taxes overall. Income splitting—done within CRA rules—can correct that imbalance.

Paying a Spouse for Business Contributions
When a spouse contributes meaningfully to the business through administrative support, bookkeeping, logistics, or other essential work, they can be paid a fair market salary. This reduces the primary earner’s tax burden and builds RRSP room for the spouse.

Example:
A family-run business moves certain tasks from third-party contractors to a spouse. The spouse is paid $45,000 per year for part-time but regular work. This shifts taxable income to a lower bracket, reduces household taxes, and generates pension and RRSP benefits for the spouse.

Dividend Splitting with Adult Family Members

Where a spouse or adult child (over age 24) works at least 20 hours per week in the business on an ongoing basis, dividend income can be split without triggering Tax on Split Income (TOSI).

Steps to Consider:

• Maintain clear timesheets and employment records.
• Ensure that roles and compensation align with CRA’s “excluded business” rules.
• Pay dividends from after-tax corporate earnings when TOSI exemption applies.

Corporate Tax Efficiency and Investment Planning

Many incorporated professionals and business owners accumulate significant savings in their corporations. While corporate investing allows for tax deferral, poorly managed investment income can trigger punitive tax rates and reduce access to the small business deduction, which is a lower corporate tax rate on the first $500k of active business income in a corporation (some provinces may differ).

Managing Passive Investment Income

Passive income over $50,000 annually reduces the small business limit, increasing corporate tax on active income. Below are some strategies to manage this:

• Monitor investment income across all corporate accounts.
• Time capital gains to reduce large one-year spikes.
• Use capital dividends (CDA) to extract tax-free capital gains.
• Pay eligible dividends to trigger RDTOH (Refundable Dividend Tax on Hand) recovery.

Salary vs. Dividend Mix
The optimal mix between salary and dividends varies by age, income needs, and tax planning goals. In early accumulation years, salaries may be better due to RRSP generation and CPP contributions. In later years, dividends allow more flexibility and can help release RDTOH. A high-income taxpayer may be optimized by utilizing a combination of salary and dividends annually.

Key Considerations:

• Salary creates RRSP room and contributes to CPP.
• Dividends do not generate RRSP room but can access refundable taxes and avoid payroll costs.
• Use both strategically to smooth income and reduce lifetime tax liability.

Funding Large Lifestyle Goals Strategically

Large purchases—such as cottages, RVs, renovations, or sabbaticals—require thoughtful planning to avoid unnecessary tax costs.

Case Study: Buying a Vacation Property

Rather than taking a large lump-sum dividend to fund a property, a household uses a three-part strategy:

1. Non-Registered Investments: Sell taxable investments with low accrued gains first, triggering minimal tax.
2. Capital Dividend Account (CDA): Extract tax-free funds from prior corporate capital gains through the CDA.
3. Shareholder Loan: Use a temporary shareholder loan to cover short-term gaps and repay it over multiple years with strategic dividends.

Result:
Taxable income is spread over three calendar years. Instead of triggering a large tax bill in a single year, the family reduces the total tax burden by staggering income and using the CDA efficiently.

Smoothing Income Over Time
Business owners and incorporated professionals have the unique ability to “smooth” income by retaining funds within the corporation and drawing them out in a tax-efficient way.

Strategies for Smoothing Income:

• Pay consistent dividends each year—even in retirement—to avoid bracket creep.
• Use surplus cash to fund TFSAs and non-registered accounts during low-income years.
• Coordinate with planned expenses (e.g., tuition, vehicles, home improvements) to align income needs with tax brackets.

Example:
A retired business owner draws $80,000 annually from the corporation to top up CPP and investment income. This provides stable lifestyle funding without triggering higher tax brackets or OAS clawbacks.

Budgeting and Tax Planning Go Hand in Hand

Tax planning should always start with a realistic understanding of cash flow needs—today, next year, and over the next decade.

Why Budgeting Matters:

• Helps identify when large expenses will hit (tuition, travel, home repairs).
• Enables more accurate compensation planning from a corporation.
• Aligns financial goals (charitable giving, early retirement) with cash flow timing.

Proactive households:

• Build three-year rolling budgets.
• Share cash flow plans with their accountant and advisor.
• Use budget projections to determine when to draw corporate funds and when to retain.

Charitable Giving and Values-Based Planning

For clients with a surplus of wealth, tax-efficient charitable giving can create a lasting impact while reducing tax obligations.

Tax-Efficient Giving Tools:

• Donating securities with accrued gains: Avoid capital gains tax and receive a full donation receipt.
• Use of CDA: Charitable giving can generate capital gains inside the corporation, increasing the CDA for tax-free dividends later.
• Donor Advised Funds (DAFs): Establish a giving legacy over time while retaining control of donation timing and investment strategy.

Example:

• A household donates $100,000 in publicly traded shares to a DAF, avoiding $25,000 in capital gains tax.
• The donation also unlocks future CDA payouts and builds a legacy giving vehicle for their children to participate in.

Summary Planning Framework

Planning Area	Strategy	Outcome
RRSPs	Fund with salary	Full tax deferral, investment growth
TFSAs	Maximize each year	Tax-free growth and withdrawals
Spousal Income Splitting	Fair wage or dividend payments	Lower household taxes
Corporate Investments	Use CDA, RDTOH, dividend timing	Minimize tax leakage
Lifestyle Purchases	Stagger income, use CDA & loans	Smooth tax exposure
Income Smoothing	Withdraw consistently, align with brackets	Reduced OAS clawback, consistent cash flow
Budgeting	Multi-year forecasts	Better advisor coordination and compensation
Charitable Giving	Securities + DAFs	Avoid tax, increase impact, build legacy

 

A Tale of Two Approaches

Approach A: Proactive

• Reviews cash flow and tax strategy each year.
• Uses CDA, TFSAs, RRSPs, and salary/dividends strategically.
• Staggers income around purchases and retirement.
• Engages a financial advisor and accountant in planning decisions.

Result:
Consistent tax exposure, significant tax savings, and financial flexibility to pursue life goals confidently.

Approach B: Reactive

• Files taxes once a year without planning.
• Takes lump-sum dividends to fund big purchases.
• Leaves passive income and RDTOH unreleased.
• Misses opportunities to split income or fund registered accounts.

Result:
Pays 40–50% more in tax over time. Experiences year-to-year tax volatility. Delays retirement due to inefficient cash flow management.

Next Steps with Cardinal Point Wealth Management

If you’re a professional, entrepreneur, or incorporated business owner in Canada, Cardinal Point can help you build and execute a tailored tax plan that integrates your personal, corporate, and family goals.

Your next step:

• Schedule a planning session with a Cardinal Point private wealth manager.
• Share projected expenses over the next 3–5 years.
• Coordinate with your accountant on corporate tax exposure and dividend strategies.
• Start layering in tools like TFSAs, CDA distributions, or charitable giving.

The earlier you begin, the more value you can unlock—financially and personally.

Let’s make your wealth work for your life. Reach out to Cardinal Point today to explore your next phase of tax-smart, purpose-driven planning.

Welcoming a new child is an exciting and life-changing event, but it also comes with major financial considerations. For parents in both Canada and the United States, the early years of a child’s life are a critical window for tax-efficient savings, thoughtful estate planning, and long-term financial security.

In this comprehensive guide, we explore the key education and investment accounts Canadian and U.S. parents should consider opening for their child, such as the Registered Education Savings Plan (RESP), in-trust accounts, 529 plans, and custodial accounts like UTMA/UGMA. We’ll also highlight essential steps in reviewing your estate plan, insurance coverage, and overall cash flow as your family grows.

Key Financial Accounts for New Parents in Canada

Registered Education Savings Plan (RESP)

The RESP is the cornerstone of education savings in Canada.

How It Works:

• Parents, grandparents, or other contributors can open an RESP for a child.
• Contributions are not tax-deductible, but growth inside the plan is tax-deferred. There is a $50,000 lifetime contribution limit per beneficiary.
• When withdrawn for post-secondary education, the income and grants are taxed in the child’s hands, typically at a low or nil rate. The original contributions come out tax-free.

Tax Advantages:

• The federal government provides the Canada Education Savings Grant (CESG), matching 20% of annual contributions up to $500 per year (on a $2,500 contribution), with a lifetime maximum of $7,200 per child.
• Additional grants and provincial incentives may be available for lower-income families.

Strategy Tip:
Start early—even small monthly contributions can grow meaningfully thanks to government grants and tax-deferred compounding. If you are a high-net-worth Canadian, run the math to see if you would be better off superfunding the RESP in the first year rather than making annual contributions.

In-Trust For (ITF) Accounts / Informal Trusts

These taxable investment accounts are often used when families want to gift funds to a child without the complexity of a formal trust structure.

How It Works:

• An adult opens an account “in trust for” a child.
• The account is legally owned by the adult (trustee), but the funds are intended for the child and become theirs when they reach the age of majority (usually 18 or 19, depending on the province).

Tax Implications:

• Attribution rules may apply: income from capital (dividends, interest) may be taxed in the contributor’s hands, while capital gains are typically taxed to the minor child.
• This makes the account more tax-efficient if investments are focused on growth (e.g., equities, ETFs).

Risks and Considerations:

• Lack of control: funds legally belong to the child at the age of majority and can be used however they choose.
• No contribution limits, but no government matching or deferral like an RESP.

Formal Trusts for Minors

While less common due to complexity and cost, formal trusts are an option for high-net-worth families seeking control over how and when funds are accessed.

Advantages:

• Custom terms can restrict access until a certain age or for specific purposes (e.g., education, home purchase).
• Potentially favorable tax treatment if structured to distribute income to a lower-income beneficiary (the child), but one must also be aware of the attribution rules.

When to Consider:

• Large gifts or inheritances.
• Concerns about protecting assets from early misuse.

Key Financial Accounts for New Parents in the U.S.

529 College Savings Plans

The 529 plan is the most widely used education savings vehicle in the United States.

How It Works:

• States sponsor 529 plans, but you can generally invest in any state’s plan regardless of residence.
• Contributions are made with after-tax dollars, grow tax-deferred, and withdrawals for qualified education expenses are tax-free federally and in many states.

Tax Advantages:

• No federal deduction, but many states offer a deduction or credit for contributions.
• High contribution limits—often over $350,000 per beneficiary, depending on the state.

Qualified Expenses Include:

• Tuition, books, room and board, and even up to $10,000 per year for K–12 private school tuition (state-dependent).
• Up to $10,000 in lifetime student loan repayments.

Strategy Tip:
Use “superfunding” to front-load five years of contributions (up to $95,000 per child per parent in 2025) without triggering gift tax. If there are unused 529 amounts after your child is finished with school, these can typically be transferred to another related child, invested for future grandchildren, or up to $35,000 (2025) can potentially be transferred to your child’s roth IRA to grow tax-free.

UTMA/UGMA Custodial Accounts

The Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA) accounts enable gifts to be made to a child while maintaining adult oversight.

How It Works:

• The account is opened and managed by an adult (custodian) until the child reaches the age of majority (18 or 21, depending on the state).
• At that point, control of the account transfers to the child outright.

Tax Implications:

• For 2025, the first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child’s rate, and the amounts above are taxed at the parent’s rate (the “kiddie tax”).
• No tax deferral; income and realized gains are taxed annually.

Advantages:

• Can be used for any purpose benefiting the child (not just education).
• Simpler and more flexible than a trust, but with less control once the child reaches adulthood.

Limitations:

• Assets count against financial aid eligibility.
• No tax-free growth like a 529 plan.

Comparing Canadian and U.S. Accounts

Feature	RESP (Canada)	In-Trust Account (Canada)	529 Plan (U.S.)	UTMA/UGMA (U.S.)
Tax-deferred growth	✅	Partial (gains only)	✅	❌ (annual taxation)
Government incentives	✅ CESG (up to $7,200)	❌	✅ (state-level)	❌
Control at age of majority	✅ if not withdrawn	❌	✅ remains owner-controlled	❌ (child takes control)
Use restriction	Education only	Any purpose	Qualified education only	Any purpose
Annual contribution limit	None (lifetime $50,000)	None	Varies by state ($350k+)	None
Impact on financial aid	Moderate	Moderate	Favorable	Unfavorable

Key Milestones for Financial Review After a Child Is Born

Having a child changes your financial landscape. Here’s a checklist of planning areas that deserve immediate attention:

Estate Planning

Update Wills and Beneficiaries:

• Ensure guardians are named for your child in your will.
• Update beneficiary designations on life insurance, RRSPs, IRAs, or 401(k)s.

Consider a Trust:

• Establishing a testamentary or living trust can help control when and how assets are distributed to your child in the event of your death.

Review Powers of Attorney:

• Ensure you and your partner have valid powers of attorney for property and health care.

Insurance Needs

Life Insurance:

• Essential for income replacement, paying off debts, and funding education.
• Term insurance offers affordable coverage aligned with child-rearing years.

Disability Insurance:

• Often overlooked but critical; your ability to earn income is one of your biggest assets.

Health and Critical Illness Insurance:

• Consider enhanced coverage, especially if relying on employer plans.
• In Canada, some families add private health insurance to cover gaps not included in provincial plans.

Child Life Insurance (Optional):

• Some parents purchase small policies for children that can later be converted to adult coverage regardless of health.

Childcare and New Expenses:

• From diapers to daycare, costs add up quickly. Update your monthly budget and track variable expenses.

Emergency Fund:

• Consider increasing your emergency savings buffer to cover 3–6+ months of expenses in case of job loss or health issues.

Saving for Multiple Goals:

• Prioritize retirement savings before overfunding education. Your child can take out student loans—your retirement can’t be borrowed.

Cross-Border Considerations for Dual Citizens or Moves

If one parent is a U.S. citizen living in Canada—or if a family moves between the two countries—planning gets more complex:

RESP and 529 Plan Compatibility:

• A U.S. person in Canada should be cautious with RESPs, as they may be considered foreign trusts by the IRS and trigger reporting (Forms 3520/3520-A).
• Similarly, 529 plans are not recognized in Canada and may not receive favorable tax treatment for Canadian residents.

Reporting Requirements:

• In-trust and custodial accounts can trigger foreign reporting (e.g., Form 114 FBAR, Form 8938) if held by U.S. citizens abroad.

Professional Advice Needed:

• Work with a cross-border financial advisor to determine the best mix of accounts and structures for your family’s unique situation.

Conclusion

Raising a child brings joy, responsibility, and a pressing need for financial foresight. Whether you live in Canada or the U.S., starting early with the right accounts—RESPs, 529s, in-trusts, or UTMAs—can pave the way for your child’s future.

But financial planning goes beyond just saving: updating your estate plan, insuring your income, and managing cash flow are equally important steps in building a secure future for your growing family.

At Cardinal Point Wealth Management, we specialize in cross-border and high-net-worth financial planning for families on both sides of the border. If you’re welcoming a new child and want to ensure every financial angle is covered, reach out to our team for a personalized consultation.