Articles

For high-net-worth Canadians who own private corporations, moving to the U.S. involves a series of complex tax considerations. But effective tax planning can help minimize exposure to both Canadian and U.S. tax obligations. This blog outlines key tax strategies for those looking to make the transition, with examples that illustrate the impact of those decisions.

1. Deemed Disposition and Departure Tax
   • When Canadians leave Canada to become U.S. residents, Canada requires certain assets, including shares in a private corporation, to be sold at fair market value. This creates a “deemed disposition” and may trigger significant departure tax on any unrealized capital gains.
   • Example: Suppose Sarah owns shares in her Canadian private corporation valued at $1 million, with an unrealized gain of $400,000. Upon leaving Canada, she may face departure tax on her $400,000 gain.
   • Strategy: Some Canadians can defer departure tax by posting security with the Canada Revenue Agency (CRA). Alternatively, planning a gradual transition, or selling assets before departure, can help minimize the tax impact.

2. Controlled Foreign Corporation (CFC) Rules
   • Under U.S. tax law, foreign corporations owned by U.S. persons are often classified as Controlled Foreign Corporations (CFCs). Canadian corporations held by Canadians moving to the U.S. may fall under CFC rules, leading to additional tax reporting requirements and potential taxation on corporate earnings.
   • Example: James, a Canadian citizen moving to the U.S., owns 60% of a Canadian corporation. After becoming a U.S. resident, his corporation is classified as a CFC, requiring him to report and potentially pay U.S. tax on the corporation’s income, even if the earnings are not distributed.
   • Strategy: U.S. residents can mitigate CFC-related taxes through Qualified Electing Fund (QEF) or Section 962 elections. These elections can reduce the tax burden by treating the income in specific ways, although they do involve additional reporting.

3. Passive Foreign Investment Company (PFIC) Implications
   • Canadian private corporations often hold passive investments that can classify them as Passive Foreign Investment Companies (PFICs) under U.S. tax law. PFICs are subject to punitive tax rules – and those can result in increased tax rates and interest charges on income.
   • Example: Emily’s Canadian corporation holds a portfolio of Canadian mutual fund investments, classified as PFICs once she moves to the U.S. The classification subjects her to complex reporting on IRS Form 8621, with potentially higher taxes on income and capital gains.
   • Strategy: Electing to treat the PFIC as a Qualified Electing Fund (QEF) allows U.S. taxpayers to report their share of the company’s income and capital gains annually, potentially reducing the tax burden. Alternatively, restructuring investments or transitioning the portfolio before the move may prevent PFIC classification.

4. Double Taxation on Dividends and Earnings
   • Without careful planning, dividends paid from Canadian corporations to U.S. residents can be subject to double taxation − taxed once in Canada and again in the U.S.
   • Example: Mark, who now resides in the U.S., receives $100,000 in dividends from his Canadian private corporation. But Canada imposes a 15% withholding tax, and the U.S. taxes the dividends at his personal income tax rate, leading to potential double taxation.
   • Strategy: To minimize double taxation, claim the Foreign Tax Credit (FTC) on U.S. returns for taxes paid in Canada. Additionally, review corporate structure options like creating a U.S.-based subsidiary, to potentially streamline cross-border tax liabilities.

5. Transitioning Assets to U.S. Holdings
   • Transferring assets from Canadian private corporations to U.S.-based structures requires careful planning to avoid unintended tax consequences. That’s because moving assets across the border may trigger capital gains or other taxes.
   • Example: Sophia, a Canadian who owns real estate through her corporation, wants to move the property under a U.S. holding structure. Without thoughtful planning, this transfer could result in an immediate Canadian capital gains tax on the property’s fair market value.
   • Strategy: Some options to consider include selling assets before the move, using inter-corporate transfers under Canadian rollover rules, or setting up a U.S. LLC or corporation to acquire new assets. Each method has unique tax implications, but carefully selecting the right approach can help reduce tax costs.

6. Estate Planning and Cross-Border Taxation
   • For high-net-worth individuals, U.S. estate taxes can apply to worldwide assets, unlike Canada’s system, which only taxes capital gains upon death. This difference poses a risk of significant estate tax liability for Canadians who become U.S. residents.
   • Example: David owns significant assets in both Canada and the U.S., including shares in his private Canadian corporation. Upon his death, his worldwide estate will be subject to U.S. estate taxes, potentially resulting in a substantial tax bill.
   • Strategy: To reduce estate tax exposure, consider gifting strategies, setting up trusts, or leveraging spousal transfers. Dual Wills, one for Canadian and another for U.S. assets, can also streamline estate planning and effectively address cross-border differences.

7. Tax Treaty Provisions for Mitigating Double Taxation
   • The U.S.-Canada Tax Treaty provides benefits to reduce double taxation on certain types of income, including dividends, pensions, and social security benefits. Understanding treaty provisions can be crucial for optimizing cross-border tax obligations.
   • Example: Rachel receives income from her Canadian corporation, taxed under both Canadian and U.S. laws. By leveraging treaty provisions, she claims a tax credit on her U.S. tax return for Canadian taxes paid on this income.
   • Strategy: Regularly reviewing the U.S.-Canada Tax Treaty for applicable credits, exemptions, and treaty elections can help taxpayers minimize double taxation. But treaty positions should be carefully documented in tax filings to ensure compliance.

Kris Rossignoli, a cross-border tax and financial planner at Cardinal Point Wealth Management, is advising Canadian snowbirds to prepare for the rising costs of wintering in the U.S. With inflation and a weak Canadian dollar driving up living expenses, Rossignoli stresses the importance of proactive financial planning.

He points out that U.S. homeowners are particularly impacted, with property insurance premiums rising by up to 10% annually due to increasing risks such as flooding. Combined with higher travel and healthcare costs, these financial pressures are leading many snowbirds to reevaluate their budgets and lifestyles.

Rossignoli recommends regular budget reviews that consider inflation, foreign exchange rates, and insurance costs. He underscores the need for diversified, balanced investment portfolios to provide both stability and growth, helping clients sustain their desired lifestyle. His strategies include rebalancing portfolios and addressing currency conversion challenges, such as holding U.S. dividend-paying stocks in U.S. dollars.

Acknowledging the financial and logistical challenges, Rossignoli emphasizes the importance of flexibility, thorough planning, and consulting knowledgeable advisors. This approach enables snowbirds to adapt to changing circumstances, mitigate risks, and make informed decisions about their winter plans.

Read the full article below to learn more about navigating these rising costs and protecting your financial health.

As the 2024 year-end approaches, it’s a great time to review your finances and make adjustments to optimize your tax situation, retirement savings, charitable giving, and more. Here are essential financial and tax planning considerations to help you make the most of 2024 and set yourself up for a stronger financial future.

1. Tax Planning and Income Management

• Bracket Management: Review your income to understand where you stand in the tax brackets. For example:
  • If your taxable income is below USD$191,950 (USD$383,900 for married filing jointly), you’re in the 24% tax bracket or lower. But be aware that any increase could push you into the 32% bracket.
  • If your income is over USD$518,900 (USD$583,750 for married filing jointly), your long-term capital gains rate rises to 20%.
• Net Investment Income Tax (NIIT): If your Modified Adjusted Gross Income (MAGI) exceeds USD$200,000 (USD$250,000 for married couples), you may be subject to the 3.8% NIIT. Managing income to stay below this threshold can help reduce your tax liability.
• Medicare IRMAA Surcharges: Higher-income taxpayers may face increased premiums for Medicare Parts B and D. Avoiding or reducing surcharges involves strategically managing your MAGI by deferring income or maximizing deductions.

2. Retirement Account Contributions and Required Minimum Distributions (RMDs)

• Maximize Contributions: Contribute the maximum to retirement accounts before the year ends:
  • The 401(k) limit is USD$23,000, with a USD$7,500 catch-up for those 50 or older.
  • For IRAs, the maximum is USD$7,500 if you’re 50 or older.
• Roth vs. Traditional: If you expect your income to increase in the future, consider Roth contributions or Roth conversions that allow for tax-free withdrawals in retirement. If income is expected to decrease in the future, traditional contributions may be more tax-effective.
• Required Minimum Distributions (RMDs): Ensure all RMDs are taken before December 31st to avoid penalties. Aggregation rules differ depending on account type:
  • RMDs from multiple IRAs can be combined, but inherited IRAs require separate RMDs.
  • RMDs from employer plans must be calculated separately.

3. Charitable Giving Strategies

• Tax-Efficient Contributions: Consider gifting appreciated securities rather than cash, as this avoids capital gains tax and provides a full charitable deduction.
• Qualified Charitable Distributions (QCDs): If you’re over age 70½, QCDs allow direct transfers from your IRA to a qualified charity, counting toward your RMD without increasing taxable income.
• Bunching Donations: If you usually take the standard deduction, you might benefit from “bunching” contributions to exceed the itemization threshold. Donor-advised funds can also help group donations into a single year, allowing for itemization when it’s most beneficial.

4. Investment and Capital Gains Planning

• Tax-Loss Harvesting: If you have unrealized losses in taxable accounts, consider realizing these losses to offset gains. You can offset up to USD$3,000 against ordinary income if losses exceed gains.
• Capital Gain Distributions: Many mutual funds make capital gain distributions toward the end of the year. Review holdings to understand potential tax impacts and consider selling high-gain investments to offset distributions. Include any anticipated distributions in your 2024 tax estimate to ensure there are no tax surprises. 

5. Business Owners: Qualified Business Income Deduction and Retirement Planning

• Qualified Business Income (QBI) Deduction: Pass-through business owners should ensure they’re eligible for the QBI deduction. Income limits and business structure affect eligibility, so review the “Am I Eligible for a QBI Deduction?” flowchart.
• Retirement Plans for Small Businesses: Setting up a Solo 401(k) or SEP IRA may allow for significant contributions and tax deductions. Remember, many retirement plans must be established by year-end, although some can be funded up to the tax-filing deadline.

6. Maximize Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs)

• HSA Contributions: For those with high-deductible health plans, HSA contributions are tax-deductible, and growth is tax-free if used for medical expenses. Contribution limits are USD$4,150 for individuals and USD$8,300 for families, with an additional USD$1,000 catch-up for those over 55.
• Use FSA Balances: Check to see if you have remaining FSA funds and is so, plan to use them before the end of the year. Some employers offer a grace period or limited rollover, but unspent funds may have to be forfeited.

7. Estate and Gift Planning

• Annual Gifting: You can gift up to USD$18,000 per recipient per year without incurring gift tax. Consider using this exemption for family members, especially if you’re building a tax-efficient wealth transfer strategy.
• 529 Plans: Contributions to 529 education savings accounts are an effective way to help with education costs and reduce estate tax exposure. In 2024, you can contribute up to USD$90,000 per beneficiary (five-year lump-sum gifting) without being subject to gift tax.

8. Year-End Cash Flow Planning

• Flexible Spending Account (FSA): Check your FSA balance and deadlines. You may have to forfeit unused FSA funds unless your employer offers a grace period or rollover.
• Health Insurance Deductibles: If you’ve met your health insurance deductible, consider scheduling additional medical procedures or appointments before the end of the year to maximize your insurance benefits before the deductible resets.

9. Other Key Considerations

• Life Changes: Review your finances if you’ve experienced major life changes, such as marriage, divorce, a new child, or the death of a loved one. These changes may impact your tax filing status, retirement beneficiaries, and estate plan.
• College Financial Aid Planning: For families with children nearing college, reducing income during specific years can increase eligibility for financial aid.
• New Tax Laws: Be aware of upcoming tax law changes that might affect your financial plan, as well as any adjustments in 2025 that could impact your investment and tax strategies.

By proactively addressing these year-end financial considerations, you can optimize your tax situation, enhance your financial strategy, and establish a strong foundation for the year ahead. Meeting with a financial advisor or tax professional can provide personalized insights to make the most of these opportunities. To discuss your unique situation with a qualified cross-border financial planner, please contact Cardinal Point.

Canadians owning U.S.-based assets, such as real estate or shares in U.S. corporations exceeding $60,000 USD, face the requirement to file U.S. estate tax returns—even under potential tax reforms by former President Donald Trump. While the U.S. estate tax exemption stands at $13.61 million USD for 2024 and will increase slightly in 2025, it is set to revert to roughly $7 million USD in 2026 without further legislative action.

Although estate tax applies mainly to the very wealthy, executors must still file a U.S. estate tax return to secure the release of U.S.-situs property. This includes properties like U.S. homes, shares of U.S. corporations, or U.S.-based pension plans. Failing to file can delay asset transfers by years and leave executors personally liable for taxes owed.

Terry Ritchie
Vice President and Private Wealth Manager
Cardinal Point Wealth Management

Terry Ritchie, Vice President and Private Wealth Manager at Cardinal Point Capital Management, highlights the importance of compliance, noting that delays in obtaining IRS transfer certificates can extend to two years or more. Strategies to mitigate this burden include investing in Canadian mutual funds with U.S. exposure, transferring U.S. shares to Canadian holding companies, or other tax-efficient structures.

Canadians with U.S. investments should plan proactively to minimize tax filing complexities for their heirs, ensuring compliance and preserving their financial legacy. For more detailed guidance on navigating these obligations, explore the full article for practical strategies and expert advice on managing cross-border assets.

In the wake of the U.S. presidential election, cross-border tax, and financial planner Kris Rossignoli shares critical insights into the evolving financial landscape for individuals navigating U.S.-Canada tax complexities. With potential extensions to the 2017 U.S. tax cuts under President-elect Donald Trump, Rossignoli notes significant considerations for cross-border clients, particularly around lifetime gift tax exemptions and income deferral strategies.

For U.S. citizens considering a move to Canada, Rossignoli highlights rising interest following the election results. Dual citizens face fewer immigration hurdles but must carefully evaluate the tax implications of filing returns in both countries. Conversely, Canadian clients frustrated by rising capital gains taxes are eyeing a return to the U.S., spurred by the allure of lower tax rates. However, they face challenges like Canada’s departure tax, which imposes capital gains taxes on most assets deemed sold upon leaving the country.

Rossignoli and other experts emphasize the importance of comprehensive planning when making international moves, addressing issues such as legal residency, health care, and retirement portfolios. From managing RRSP withdrawals as non-residents to navigating complex tax treaties, Rossignoli underscores the intricate interplay between tax laws on both sides of the border, urging clients to plan strategically amid political and economic shifts.

View a copy of the article below: