Few financial advisors are licensed or equipped to provide investment advice for American and Canadian cross-border clients, and there is a lot of bad counsel circulating at present. The best advice usually leads to a choice from three main options, but which one? Cardinal Point is an advisor firm that specializes in this area as it meets the highest industry standards and is licensed to manage investments in both countries. Download the E-Book to learn more.

2020 was a crazy year in many regards, and it was an unusually volatile year in the foreign exchange markets as well. The Canadian dollar (CAD) hit a low in relation to the U.S. dollar (USD) of 0.6898 on March 18. The Canadian dollar rallied over the next nine months to reach a 2020 high of 0.7863, an increase of almost 14%. The closing exchange rate on June 1, 2021, was 0.8306, an increase of over 20% from the bottom. The exchange rate has normalized since and has ranged from $0.78 to $0.83.

The weakening Canadian dollar in early 2020 presented an excellent opportunity for many of our clients to convert their USD to CAD at historically high rates. Currency exchange rates are always moving, and our clients look to us for currency exchange guidance. There are several factors to consider when considering currency conversion.

First, which currency are you going to need to fund your future lifestyle and financial goals? We do not recommend speculating on currency exchange rates which means we generally only recommend currency exchange if you will need the converted currency in the future. If we are discussing converting CAD to USD, when will you need the USD? If you need USD in the short-term, then it does not matter what the exchange rate is because you are converting out of necessity. If you will need USD many years in the future, here are some things to consider:

• How does the current exchange rate compare to the long-term historical average? If you do not need the converted currency in the short-term, you have time to wait for a better rate.
• What are the tax implications for liquidating securities to create cash to convert? The more unrealized gains you have, the larger the gain on currency exchange needed to justify liquidating. The time value of money is important, so any conversion gains need to outweigh any tax losses. At the same time, capital gains will likely continue to build in the account over time. If you know you will need the money at some time in the future, you must balance paying some capital gains tax now with the possibility of paying more tax on gains later. Additionally, we do not know what capital gains tax rates will be in the future.
• What are my investment options once I convert? The U.S. stock market has outperformed the Canadian and international stock markets for several years. That is not always the case, but the long-term average return in the U.S. market is slightly higher than international markets. This makes it slightly more attractive to convert to USD if you will be investing for a long period of time. If you need the currency of a country with less developed investment markets, then it might be better to leave the currency in USD or CAD until it is needed because of the limited investment opportunities in emerging and developing markets.
• How much would I like to convert? We do not know what will happen with currency exchange rates in the short-term, but we are confident they will revert to the mean over the long-term. If you are converting a substantial sum, is it better to convert in a lump-sum or in stages over a few months or years? You can always start with a smaller conversion amount and then convert more in a lump sum later if the economic environment changes. Keep in mind that it is unlikely that you will time the market perfectly.
• What are the fees associated with the conversion? There may be transaction fees and wire fees.
• What is the spread on the conversion? The foreign exchange provider makes money primarily from the spread. You should shop providers to get the best deal.

So, what is the long-term historical CAD/USD exchange rate? Like all statistical measures, the average depends on the timeframe you are examining. Below is a complete list of average annual exchange rates between Canada and the US since 1947. As you can see, the long-term average over the entire data set is 0.876. Data that is too old may not be relevant any longer as market conditions change over time. Over the past 50 years, the average exchange rate has varied between $0.80 – $0.83 U.S. dollars per Canadian dollar. We are slightly below that average now at about $0.78 – $0.79, so it is not the best time to convert to USD, but it is slightly better than average when converting to CAD. The exchange rate is currently close to the long-term average, so it is likely that we will see much better opportunities to convert in the future. How long are you willing to wait for better rates?

Year	Annual Average	Average since 1947	Average since 1970	Average since 1980	Average since 1990	Average since 2000
1947	0.91862	0.87513	0.83358	0.80231	0.80467	0.82501
1948	0.91687
1949	0.92809
1950	0.91523
1951	0.94946
1952	1.02123
1953	1.01675
1954	1.02734
1955	1.01402
1956	1.01618
1957	1.04299
1958	1.0301
1959	1.04256
1960	1.03108
1961	0.98746
1962	0.93571
1963	0.92693
1964	0.927
1965	0.92751
1966	0.92815
1967	0.92573
1968	0.93059
1969	0.92858
1970	0.95801
1971	0.99022
1972	1.00942
1973	0.99976
1974	1.02257
1975	0.98299
1976	1.01417
1977	0.94113
1978	0.87731
1979	0.85388
1980	0.85533
1981	0.8341
1982	0.81037
1983	0.81135
1984	0.77243
1985	0.73228
1986	0.71967
1987	0.75431
1988	0.81294
1989	0.84453
1990	0.85719
1991	0.87274
1992	0.82833
1993	0.77566
1994	0.73218
1995	0.7289
1996	0.73339
1997	0.72252
1998	0.6752
1999	0.67317
2000	0.67353
2001	0.64601
2002	0.63694
2003	0.71571
2004	0.76972
2005	0.82583
2006	0.88201
2007	0.9348
2008	0.94413
2009	0.87956
2010	0.97126
2011	1.01171
2012	1.00065
2013	0.9694
2014	0.9058
2015	0.7835
2016	0.7556
2017	0.7724
2018	0.7739
2019	0.7537
2020	0.7461
2021	0.798

The Lifetime Capital Gains Exemption (LCGE) is available to all Canadian residents and Americans living in Canada as a tax deduction on the sale of a Qualified Small Business Corporation (QSBC). It is indexed to inflation, and it can be used in part. Three tests must be met to claim an LCGE, and there are complicated regulations governing each of these. There are implications regarding succession planning, and its benefits can be multiplied through use of family trusts. An LCGE can be a significant deduction, and Canadian or dual Canada/US tax residents need professional help devising a tax-efficient strategy. Download the E-Book to learn more.

Given the challenges of the current U.S. administration, President Biden has been unable to effectively achieve the U.S. income, gift, and estate tax changes that he was hoping to impose. With the likely outcome of the U.S. mid-term elections this November, there is little reason to expect any significant tax changes this year for Americans in Canada or snowbirds who own or sell property in the U.S.

However, one area we often see which affects U.S. taxpayers in Canada, or those Canadians that might have a U.S. tax filing obligation through the sale or renting of U.S. real property, or through the receipt of U.S. source pensions or retirement distributions, are the administrative challenges imposed by the IRS and CRA.

If a Canadian taxpayer has a U.S. tax filing obligation and is required to report the same source of income on both countries’ tax returns where U.S. tax is paid or withheld at source, it is not uncommon for the CRA to come back and require documentation to prove the tax was indeed paid. The CRA wants verifiable proof to support the claim by the taxpayer to take a foreign tax credit for any net U.S. tax paid on their Canadian return. This is requested through what is often referred to as a Review Letter. These always come after CRA has issued a Notice of Assessment (NOA).

The Review Letter can come in a variety of forms. It is not unusual for the CRA to want proof of donation receipts, medical receipts, business receipts, etc. In a cross-border context, for those Canadian taxpayers who are entitled to receive U.S. Social Security Benefits (SSA), we often see CRA requesting additional support for the 15% deduction that is available on line 25600 of your Canadian T1 Return for U.S. SSA benefits paid, including U.S. Medicare premiums. This is provided for under Article XVIII (2) of the Canada/U.S. Tax Treaty. However, the CRA Letter which can cause more aggravation than any other letter from CRA, is the dreaded Review Letter to support foreign tax credits on your T1 from net U.S. taxes paid or withheld.

Several years ago, if a CRA Review Letter was sent to a taxpayer, the taxpayer could simply provide a copy of the taxpayer’s filed U.S. return, the related U.S. tax slip(s) showing the tax withholding, and other documentation to support the foreign tax credit. However, that is no longer enough. The CRA currently requires a copy of an IRS Tax Account Transcript as well.

Now, here is where it gets exceedingly difficult. In the cases where U.S. tax returns are paper- or e-filed, the IRS is so behind in the processing of these returns that a Tax Account Transcript is not yet available to submit to the CRA. According to an article in the Wall Street Journal (WSJ), Good News, Tax Evaders! The IRS Can’t Keep Up (Feb. 15, 2022), the IRS had a backlog of 35 million tax returns that had yet to be processed, including e-filed returns. Further, there were 5 million pieces of unprocessed paper correspondence that had yet to be reviewed by the IRS.

Therefore, if the taxpayer’s U.S. tax return is not processed, an IRS Tax Account Transcript is not available to provide to the CRA as documentation for the Review Letter response. Consequently, in many cases, it is quite difficult to get a copy of the IRS Transcript.

There are generally three ways to get a copy of your transcript:

1. Provide authorization to your Tax Professional to obtain
2. Request a copy of it online
3. Contact the IRS and request a copy by phone

Under Option 1, if you are having your returns prepared by a professional cross-border tax preparer or firm, if authorized, they might be able to obtain this information for you directly from the IRS. This might be the easiest option for you. Of course, this also assumes, the Transcript for the U.S. tax return which the CRA is requesting, has already been processed.

Under Option 2, taxpayers can go to an IRS site – Ways to Get Transcripts Transcript Types and Ways to Order Them | Internal Revenue Service (irs.gov) and then select Get Transcript Online Get Transcript | Internal Revenue Service (irs.gov). However, a major challenge exists with this option. The taxpayer must create an Online Account, provide information to the IRS, and answer specific and unique security questions. Unfortunately, we found many taxpayers who are Americans in Canada, have had little success going this route. In fact, the system the IRS is using to create your online account – ID.me – is apparently going to be shut down in the future, as it is fraught with challenges. So, if you have had no success under Options 1 and 2, then let’s see how you can fare under Option 3.

Under Option 3 you can contact the IRS by phone and request they mail you a copy of the Transcript. The phone number is 800-908-9946. And guess what? The number does not work from Canada. So that will not be much help.

Lastly, some taxpayers might try to contact IRS’ non-toll-free International Services number at 267-941-1000. However, if you attempt to contact the IRS by phone, your luck might be better playing Lotto 649 in Canada or the Pick in the U.S. According to the WSJ article referred to earlier, last tax season, the IRS was getting 1500 calls a second. Over 150 million calls were made last season to the IRS with only 7% answered. Specific U.S. tax professionals that are registered with the IRS (Enrolled Agents, CPAs) have access to a special phone number referred to as the Practitioner Priority Service line. However, it is extremely difficult to get through to the IRS even on that separate phone line. According to an article in Kiplinger’s Tax Letter in November of 2021 “Delays on IRS’s Practitioner Priority Service are frustrating tax pros … Practitioners calling this number have long wait times, if they can even get through.”  The article further mentioned, preparers are using a private company line-cutting service to try to minimize IRS hold times. The IRS is claiming this has made it much harder for anyone to get through to them.

If the taxpayer has difficulty obtaining their IRS Tax Transcript, we find the CRA timelines are not very reasonable for the taxpayer. If you are able to contact the CRA, it is suggested you request an extension of time to respond to their Review Letter given the IRS delays. However, we have seen instances, where even with the extension or the review not yet completed, the taxpayer’s file ends up with CRA Collections. If you cannot provide the necessary documentation the CRA is looking for, the return will be reassessed, and additional tax will be owed. The CRA Review and CRA Collections are on separate systems. If the file goes to Collections, they may not be aware the file is also still in Review. We have had success with providing documentation to CRA Collections to show a concerted effort is being, or has been made, to request the documentation the CRA Review needs, and an extension may be provided. However, this assumes the Collections Agent is reasonable as well. This situation has become quite the challenge for U.S. taxpayers in Canada, who are trying to satisfy the CRA’s review requirements.

Finally, even though taxpayers may believe this is a “one-off” issue and will not occur again, do not be surprised if this continues to be an annual or consistent part of your future cross-border tax filing requirements.

Many Canadians move for career opportunities to the U.S., work and raise families, and then plan to relocate back to Canada. A qualified tuition and educational savings plan for children (a 529 plan) is exempt from taxation in the U.S., in most cases even when a child attends a Canadian university. If you are a Canadian who is considering such a plan, and especially for anyone with an investment in a 529 plan who is moving back to Canada, clear expert advice from a cross-border financial specialist is a very prudent step.