For individuals moving from Canada to the U. S. and planning to sell their Canadian home, there are different Canadian and U.S. tax implications. To avoid or minimize tax liability, specific criteria need to be met around the questions of whether tax residency is in Canada or U.S. when the sale occurs and if the home qualifies as a principal residence. If sold while still a Canadian tax resident, a status that can be maintained for a period beyond the moving date, exemptions apply. Additional compliance requirements need to be met when the property is sold by a U.S. tax resident.
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Infographic: U.S. IRAs Can Be a Taxing Issue for Canadian Beneficiaries
A Canadian inheriting a U.S. IRA faces different tax implications than an inheritance in Canada would generate, namely, income tax and income withholding in the U.S. and income tax in Canada. It may be possible though for such a beneficiary to defer taxes in both countries by establishing an Inherited IRA account. Cardinal Point’s cross-border specialists are well positioned to guide you through the rules, procedures, and reporting requirements governing this option.
Deemed Departure Tax Canada
If you are currently a Canadian tax resident who is thinking of leaving Canada to move to another country, you should consider the tax implications of the Deemed Departure Tax Canada. At a high level, the Deemed Departure Tax Canada is a deemed disposition of all of your assets (other than those assets which are eligible to receive an exemption) for their fair market value (FMV) immediately before the end of your Canadian tax residency. The Canadian Deemed Departure Tax was introduced to maintain Canada’s right to tax any gain that was earned during your Canadian residency period. It was originally established after a prominent family left Canada with significant gains that were not taxed upon their departure.
Summary and Takeaways
If you currently live in Canada but are thinking of leaving, your financial plans could be significantly impacted by the Canadian Deemed Departure Tax Canada. This tax may apply to sales of assets before you end your Canadian residency.
The tax is intended to prevent residents from departing without paying taxed on gains they earned while living in Canada. It was originally inspired when a wealthy family left, and − because no such rule was in place − Canada suffered significant tax losses. This blog describes key ways that the tax works.
Key Takeaways
- There are 5 asset categories exempt from the tax – including assets you may have owned long-term or short-term
- To avoid noncompliance, you have to report your date of departure to the Canada Revenue Agency. There are also lots of other forms you will likely have to fill out and submit in timely fashion
- A cross-border tax advisor and financial planner can review your situation with a view toward helping you avoid departure taxes
- Consult them early-on in the process, to ensure you meet the applicable timelines.
Exceptions to the Deemed Departure Tax
There are five general asset exceptions to the Deemed Departure Tax Canada:
- real property and resource property situated in Canada
- capital property used in a business carried on by the taxpayer through a permanent establishment in Canada
- “excluded right or interest” (defined under the Income Tax Act of Canada), including: RRSPs, RRIFs, IRAs, pension plans, and life insurance
- employee security/stock options
- assets subject to the “short-term resident” rule. This entails property owned when you last became a tax resident of Canada or property you inherited after you last became a tax resident of Canada if you were a tax resident for 60 months or less during the 10-year period before you ceased Canadian tax residency.
Departure Tax Filings
In your year of departure from Canada, ensure that you report your Date of Departure on your T1 – Income Tax and Benefit Return. This informs the Canada Revenue Agency (CRA) that you are no longer a Canadian tax resident. You may also need to complete the following information forms along with your T1 Departure Return:
- T1243 – Deemed Disposition of Property by an Emigrant of Canada
- This form reports the deemed disposition of assets as a result of the Canadian Deemed Departure Tax
- This form is completed in addition to listing the deemed dispositions of these assets on Schedule 3 – Capital Gains (or Losses)
- T1161 – List of Properties by an Emigrant of Canada
- This form is to be completed where the FMV of all “reportable properties” at date of departure is > $25,000 CAD
- “Reportable properties” include any property other than:
- cash (including bank deposits)
- property that is an “excluded right or interest” (defined under the Income Tax Act of Canada), including: RRSPs, RRIFs, IRAs, and pension plans. Note that subparagraphs (c), (j), and (l) of the definition of “excluded right or interest” per the Income Tax Act of Canada are excluded for purposes of the T1161.
- property owned at time last became resident of Canada, if resident for 60 months or less during the 120-month period that ends at the time of departure
- personal-use property (clothing, household goods, cars, collectibles) with FMV < $10,000
- This form should include:
- shares and mutual funds
- bonds and debentures
- real estate (Canadian AND foreign – including any U.S. seasonal or personally owned property)
- stock options
- interests in trusts, partnerships, and life insurance policies
Canada-U.S. Tax Treaty – Article XIII (7) Election
If you are departing Canadian tax residency and subject to the Canadian Deemed Departure Tax, you can elect to have sold and repurchased property at FMV for U.S. tax purposes prior to emigration from Canada. For a U.S. resident individual, this election accelerates U.S. tax but allows a foreign tax credit to be claimed on the U.S. tax return for the amount of Deemed Departure Tax Canada paid. For a non-U.S. resident person, this election adjusts the U.S. cost basis of the assets subject to the Canadian Deemed Departure Tax to their FMV on date of departure from Canadian tax residency.
Other Possible Elections
There are various loss elections, payment deferral elections, and former resident elections that can be made to reduce or reverse the Canadian Deemed Departure Tax. These are beyond the scope of this blog, but we are happy to discuss the applicability of these elections to your individual situation.
Conclusion
Quantifying your Canadian Deemed Departure Tax can be a difficult task. This is further complicated by the various exemptions and elections available. It is best to review your unique situation with a qualified cross-border tax advisor and financial planner as soon as you consider a move from Canada and well ahead of the actual move date. There may be opportunities to structure your financial affairs before being subject to the full Deemed Departure Tax Canada or opportunities to better structure yourself after leaving Canadian tax residency. For more information, please contact Cardinal Point.
Moving from Canada to the U.S. – What you need to know Ebook
If you are considering moving from Canada to the US, you should plan well in advance—especially for financial and tax considerations. Residency is a key tax issue, and as it is not specifically defined but more inferred by the Canada Revenue Agency, extreme care must be taken to ensure compliance. Cardinal Point specializes in precisely these issues and can offer you a complete checklist of very specific actions to take as you move through this complicated process as well as expertise in both Canadian and US investment opportunities.
Read our E-book to learn more about what you need to know about moving from Canada to the U.S.
Retirement Planning: Three Simple Questions
This is the third blog in series of posts on the subject of non-financial retirement planning. Written by Renee Bellefeuille, CSA®, AFC®, CPRC®, Private Wealth Manager, Cardinal Point Wealth Management and Cardinal Point Capital Management
In 2021, the average life expectancy for those born in developed countries was 76 years for males and 82 years for females. Personally, I find these numbers a bit low, and this makes sense since according to an online life-expectancy calculator, my life expectancy is age 93. Retirement for me will not be a short period of time—it could be one third of my life! Longevity is an aspect of retirement planning that cannot be ignored.
Summary and Takeaways
Effective, proactive retirement planning is about much more than just finances. That’s especially true since people are living longer and enjoying much more active retirements than in past generations.
To help plan accordingly, this blog takes a unique and fun approach by asking a trio of deceptively simple questions. But the answers are exceedingly profound and meaningful.
Key Takeaways
- Not outliving your wealth is often cited as the greatest challenge retirees face. But experts actually believe that you are at greater risk of failing health, lack of access, and a declining social life.
- Those aspects of financial planning are illuminated by projecting forward while asking 1) “Who will change my light bulbs” 2) “How will I get an ice cream cone?” and 3) “Who will I have lunch with?”
- Home maintenance – such as changing light bulbs in the ceiling – may necessitate outside help, which depends on what kind of community you live in during retirement.
- Buying ice cream likely requires transportation and access to quality-of-life amenities like shopping.
- Lunch dates depend on an active social network of like-minded friends.
- Planning that provides answers to these questions helps ensure a more enjoyable retirement.
As I am quickly approaching this time of my life, I have started working harder at getting my financial house in order. I regularly update my net worth statement and cash flow statement which my husband and I review monthly. However, I have come to realize that effective retirement planning must be about more than financial security. It must include planning and preparation to live longer but also to live well.
A few years ago, I attended a Financial Planning Symposium. While there were many interesting presentations, there was one that really stuck with me over the years and reminds me to continue to plan for the next thirty years. The presentation referenced an article written by Joseph F. Coughlin, PhD, who is the director of the MIT AgeLab. Created in 1999, MIT AgeLab is a multidisciplinary research program that works with business, government, and nongovernment organizations to improve the quality of life of older people and those who care for them. The MIT AgeLab article identified three simple questions you should ask yourself to assess how prepared you are to live well in retirement.
The three questions were:
- who will change my light bulbs?
- how will I get an ice cream cone?
- who will I have lunch with?
You may ask what do these questions have to do with retirement planning? They actually uncover important factors that can determine your future quality of life and can serve as a starting point for planning a satisfying retirement.
In retirement planning, we tend to focus on accumulating assets and making sure we spend our money wisely. We fear outliving our wealth. However there is a greater risk of:
- losing our independence due to ailing health
- being unable to access the big and small things in life that make us happy
- facing a decline in the number of friends in our social network
Let’s look at how each one of the three simple questions relate to these risks.
- Who will change my light bulbs? When younger, most of us take for granted our ability to do house cleaning, maintenance, and basic repairs. Changing light bulbs is more than an issue of long-term home maintenance. It asks the question: do I have a plan to maintain my home? If I can’t do the work myself, what will it cost me to hire trusted service providers? Is staying in my home right for me? Should I downsize? Should I move to a retirement community?
- How will I get an ice cream cone? Imagine it is a hot summer night, and you decide to hop in the car to pick up ice cream. While getting ice cream is not a financial strain, the ability to go out and get it whenever you want raises a few more questions. Do I have adequate transportation to get where I want, when I want? Will I age in a community where there are activities to keep me engaged, active, and having fun?
- Who will I have lunch with? Who you have lunch with may be a good indicator of your social network. These are not the friends you have online but those friends that you see on a regular basis. People who you can count on if needed. Planning where to retire may be as important as how much it will cost. A home in the mountains or in a small town may be appealing, but it may lead to an inadequate network of friends and social engagement.
So, whether you are approaching retirement or already retired, take some time to think about these three simple questions. Your answers will lead to additional questions and retirement research which should guide you to living a satisfying retirement.
Read our articles in this series of non-financial retirement planning:
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