Canadians become permanent residents of the U.S. for many personal and professional reasons. Prior to a move, it’s important to be organized and understand that significant differences exist between Canada and the U.S. when it comes to cross-border financial planning and investment matters. The following actionable items should be considered when cross-border transition planning from Canada to the U.S.

1. Notification – You should send letters containing your updated address and residency information to your financial institutions such as brokerage firms, banks and life insurance companies.
2. Income Tax – A qualified team should review and analyze the tax implications of your pending move.
   • S. Filing Implications – Federal and state tax laws as well as tax rulings should be researched to optimize pre and post relocation tax planning strategies. It’s important to note that cross-border tax planning needs differ for Canadians living in California, Texas, Arizona and other states.
   • Brokerage Accounts – From a Canadian tax perspective, non-registered brokerage accounts will be “deemed disposed of” as of the date your exit from Canada takes place. Your holdings will be considered sold regardless of any transactions being completed. When possible, capital losses can offset capital gains on your Canadian tax return.

     From a U.S. tax perspective, your non-registered brokerage account holdings become taxable when you establish U.S. residency. However, a “deemed disposition” is not observed and your original cost basis carries over as a U.S. taxpayer. Therefore, it might be beneficial to liquidate some or all of your holdings prior to exiting Canada. Once you become a U.S. taxpayer, there is potential to offset realized capital gains with losses. U.S. taxpayers are eligible to claim $3,000 USD annually in capital losses against ordinary income (such as wages) when married filing jointly returns are prepared. Any remaining capital losses can be carried forward to future years without restriction. It’s a good idea to maintain investment account statements for U.S. tax purposes.

   • RRSPs and LIRAs – From a Canadian tax perspective, there is no “deemed disposition” upon exiting Canada. However, any lump-sum withdrawals from these accounts will be subject to a 25% withholding by the Canadian Revenue Agency or a 15% withholding when converted to a RRIF.

For U.S. tax purposes, registered accounts become fully taxable upon entering the U.S. However, they can continue to grow tax free in most circumstances until distributions are taken. A thoughtful strategy is to step-up the value of your Canadian RRSPs prior to departure by liquidating securities. In any event, you should maintain your statements for U.S. tax purposes.

3. RRSP Trading – Some U.S. states permit authorized trading on behalf of an RRSP owner even though the owner is a U.S. resident, however, the following criteria must be met.

   The Canadian broker-dealer must:

   • Be a Canadian resident.
   • Have no office or other physical presence in this state.
   • Only effect or attempt to effect transactions in securities:
     • With or for a person from Canada who is temporarily present in this state and with whom the Canadian broker-dealer had a bona fide business-client relationship before the person entered this state.
     • or
     • With or for a person from Canada who is present in this state and whose transactions are in a self-directed and tax-advantaged retirement plan in Canada with which the person is the holder or contributor.
   • Be a member in good standing of a self-regulatory organization or stock exchange in Canada.
   • Maintain provincial or territorial registrations and membership in a self-regulatory organization or stock exchange in good standing.
   • Not be in violation of the anti-fraud laws of the state in connection with any securities transactions therein.
4. Brokerage Account Trading – Canadian non-registered brokerage accounts should be closed and the proceeds transitioned to the U.S. Most Canadian-based registered advisors and investment firms are not legally licensed to oversee non-registered investment accounts on behalf of U.S. residents. Further, many U.S.-based registered advisors are not well versed in building out investment portfolios denominated in Canadian dollars. Ensure you seek a cross-border advisor with securities licenses in both Canada and the U.S. who are experienced in building integrated investment portfolios denominated in both currencies.
5. Consolidate Accounts – Managing Canadian and U.S. based accounts simultaneously is often complicated for many reasons. Account consolidation is one strategy to help mitigate those complications. Initiating new account paperwork and transfers prior to a move to the U.S. is worth considering. Doing so can ease administration burdens such as foreign account reporting and cross-border tax withholding requirements.
6. Automobile – Disposing of an automobile in Canada prior to a move is advisable for several reasons:
   • The speedometer and odometer are in kilometers. The cost to switch to miles is approximately $1,200 USD.
   • Canadian automobiles are subject to U.S. emission standards shortly after arrival in the U.S.
   • The typical registration requirement of a Canadian automobile is within 30 days of arrival to your new state of residence.
   • Inspections to verify ownership are often cumbersome.

   It’s helpful to register and insure your Canadian automobile within 30 days of transitioning to the U.S. This can be accomplished by forwarding a termination letter to your existing auto insurance company. Your Canadian registration should be returned to the issuer with notification of your U.S. residency.

7. Canada Health Care – It’s important to contact your Canadian health care provider and notify them that you are no longer a Canadian resident once your U.S. health care is available.
8. Driver’s License – Once a U.S. driver’s license is obtained, you can cancel your Canadian driver’s license and inform the issuer that you are no longer a resident of Canada. Another option is to allow the Canadian driver’s license to lapse when an expiration date is a short time away.
9. Memberships – It’s a good idea to cancel memberships with churches, clubs, professional associations, etc. All should be informed of your permanent relocation to the U.S. When possible, you can request a refund for unused membership dues.
10. Subscriptions – You should cancel all magazine and newspaper subscriptions as well as terminate safety deposit boxes.
11. Personal Items – It’s important to transition personal property, collectibles and or other valuables to the U.S. during your move or shortly after. It’s best not to permanently store items in Canada.
12. Estate Plan – A comprehensive estate plan including wills and POAs should be updated with a local attorney within your new state of residency. Canadian based estate planning documents are often not valid or useful for U.S. residents. There are certain Canadian documents such as health care directives and POAs that can be added to an overall Canada U.S. cross-border estate plan.
13. Canadian Exit Tax and US Tax Filings – Specific Canadian tax filings must to be completed by April 30^th following the year of exit. Any tax owed to Canada must be paid at this time. In addition, a U.S. return is due on April 15^th of the year following your entry to the U.S. It’s common to postpone the U.S. filing past April 15th by filing an extension. Please note that strict foreign account reporting requirements exist when filing U.S. returns.

As the preceding list shows, making a permanent move from Canada to the U.S. is a complicated undertaking and careful planning and preparation will be crucial to your success.  When it comes to moving your finances, mistakes in timing or missed deadlines can result in expensive tax or penalty .  Finding a good cross-border financial planner can help with the more complicated aspects of such a move and can go a long way towards making your transition to the U.S. a successful one.

As we approach the end of the year, it’s natural to take stock of how everything in our life is going: family, health, wealth and more. But when we reflect back, we may find that our wealth, at least that part which is tied to the stocks markets, probably hasn’t performed all that well in 2018.  The major Canadian and U.S. indexes are sharply negative for the year, a far cry from the strong 2017 returns. And a quick look at the rest of the world shows that most International Developed and Emerging stock markets have fallen, down 10% or more. Bonds have also had a below average year. With Central Banks hiking rates in both countries, bond prices have been under pressure from rising yields.

Yet these results don’t jive with the expectations coming into the year. In December 2017, Barron’s published their expert forecasts for 2018 returns in an article which ended: “So long as earnings are rising, rates are low, volatility is subdued, and every stock selloff is met with more buying, as happened again this past week, the bull will still rule over Wall Street.” While estimates varied, all 10 experts questioned for the article forecasted higher returns, with an average  gain of 7% on the S&P 500. And these forecasts came out before the U.S. corporate and personal tax cuts were passed at the end of the year.

Coming off a calm 2017 with solid returns around the globe, strong economies in North America, and tax cuts fueling companies’ bottom lines, what wasn’t to be excited about? In fact, 2017 was so tranquil, it was easy to get lulled to sleep thinking markets were a smooth escalator going up.

Yet at both the beginning and end of 2018, markets were impacted by worries of higher interest rates, increasing trade tensions, and doubts about the sustainability of phenomenal growth in the tech sector. Even as economies remain strong in North America, markets are forward looking and fears about a recession in the next 18 months have grown.

Those worries were reflected in day to day market performance over the course of the year.  As we can see in the chart , in 2017, investors in Canada and the U.S. saw 5 or fewer days with losses in excess of 1%, which is extremely low compared to historical norms. In 2018, though, with a couple of weeks of trading left in the year, we’ve already seen 26 days with a loss greater than 1%  in the U.S. and 16 such days in Canada.

Count of days in which Stock Market declined by more than 1%
Jan 1 ,2017 – Dec 7, 2018

Returns on most asset classes in 2017 were above historical averages, but in 2018 almost all will be below. By the time the year ends, most investors will look at 2018 and could see negative returns and think the year was a disappointment. While below average market returns are indeed disappointing, it’s rare that we ever do hit that exact average. But that’s what makes up those long-term averages. We witnessed positive returns of just 2.1% for the S&P 500 in 2011 and 1.4% in 2015, yet the average return over the 10 calendar years starting with a very poor 2008 was still 8.5%.

We can’t control what the market returns will be, but we can do several things to ensure we’re capturing as much of those returns as possible:

• Determine the right overall asset allocation for your long-term objectives and risk tolerance
• Create custom portfolios for you which blend stocks and bonds from a variety of distinct asset classes
• Utilize the most efficient implementation options possible
• Reduce company, sector and country risk by diversifying globally across thousands of companies
• Avoid overconfidence when markets are rising, and panicked selling when markets are falling
• Ensure that our financial planning projections are using prudent long-term estimates which account for up and down years along the way

In January we’ll have our quarterly recap out and will touch on the final numbers for 2018, and we’ll continue with ongoing communications throughout the year. If you have any questions, or topics you’d like to see us cover, don’t hesitate to ask.

An RCA is perhaps the most effective and misunderstood tax deferment opportunity that exists in Canada today. It may be used for a wide range of situations, including small business owners, athletes, incorporated professionals, highly paid executives receiving yearly bonuses, and those approaching retirement. In 1986 it was recognized by the CRA that individuals not participating in a defined benefits plan suffered from pension discrimination. In other words, because of RRSP and IPP contribution caps, there was no effective way to use existing Canadian pensions provisions to duplicate the ability to save for one’s retirement under the defined benefits formula of: (average of best five earning years) * (number of years worked) * 2%. Without this, those not participating in a defined benefits plan may not be able to reach a full pension of 70% of pre-retirement income (known in pension circles as an 85 or 90 factor, depending upon the specific defined benefits plan). In response to this inequity, CRA created the Retirement Compensation Arrangement as defined by section 248(1) of the Income Tax Act (ITA). It allows incorporated entities to make tax deductible contributions to key employees to reach the maximum level of retirement income. At the time of the contribution, there is not a taxable event to the employee, but the contribution is a deductible expense for the corporation. It should be noted that this is not considered to be a pension plan but rather a taxable account structure subject to the rules laid out in ITA section 248(1).

Who should consider an RCA?

The use of an RCA should be considered for anyone making more than $150,000 per year under the following circumstances, including:

• Small business owners
• Athletes, both resident and those playing outside of Canada
• Top executives
• Members of Parliament
• Executives receiving a yearly bonus
• Owners of Professional Corporations (physicians, dentists, lawyers)
• Executives receiving a package associated with a change of employment status (severance packages).
• American citizens currently living and working in Canada but who are preparing to return to the U.S. in the future

What are the advantages of an RCA?

• Extremely flexible and based on actuary calculations
• Contributions are 100 percent deductible for the employer. Taxes do not apply to the beneficiary until the money is withdrawn at retirement or change of employment status
• They are exempt from provincial pension regulators
• Assets in the investment account compound on a tax-deferred basis
• An RCA allows buyback of past RRSP room
• Assets are credit proof
• Assets may be used for transgenerational transfer
• Exempt from payroll taxes

This is by no means an exhaustive list of potential benefits of an RCA. Circumstances that are unique to the individual must be considered when reviewing the effectiveness of employing this structure. Its benefits to American citizens living in Canada and planning on returning to the U.S. can be very attractive.

When is an RCA most often used?

• Sale of a small business
• Small business owners saving for retirement
• Individuals receiving a severance package
• Senior executive’s supplemental pension plans
• Athletes playing for Canadian based sports organizations

How these work

The potential candidate for this structure must go through a number of steps to validate the amounts to be contributed to the RCA. A contribution calculation based on the age of the applicant, the average of their last 3 years’ income, past service shortfalls, and their projected date of retirement is generated by an actuarial firm specializing in these structures. Two contribution room figures are generated. One is for the years associated with past employment and the second is for the top up amount needed for a full pension between the original date of funding and the number of years until retirement. Analysis for future service contributions are made every 3 years so that the contribution amounts reflect the reality of the recipient’s current status.

An application is then made with CRA to open two accounts. One is held in trust with CRA, called the Refundable Tax Account (RTA). The other is an Investible Account (IA) held at a custodian. Each account is funded with equal amounts of the total principal and must be rebalanced once per year with any realized income associated with the investments inside the IA . When the account owner begins to withdraw funds from the IA, for every two dollars withdrawn, one dollar flows back from the RTA. In essence the recipient decides on the amount to be withdrawn and timing of withdrawal. The amounts, along with the addition of other income, determine the tax rate under which the funds are withdrawn.

Examples

Scenario One

In our first example we have a candidate born in 1967 who has averaged total yearly compensation of approximately $290,000 per year and is a principal in a privately held business that would be considered a Canadian Controlled Private Corporation (CCPC). His anticipated date of retirement (age 65) is 15 years away. In his case the past service amount – calculated by an actuarial firm – that can be contributed is $3,361,000. His yearly contributions for the next three years would be $54,000, $166,200 and $170,400 for years 2018 through 2020 inclusive. The entire structure would be reexamined in 2021 and adjustments would be made based on the new projections and the returns generated by the IA.

Scenario Two

This candidate’s circumstances differ considerably from the first. In this instance the candidate is an American citizen living in Canada, born in 1958 and retiring in 5 years (age 65). The plan is to relocate back to the U.S. and to become non-residents of Canada sometime after their retirement. Their average income for the last three years is $642,233 per annum. In this case their past service calculation is $1,199,000. Their yearly contributions for the next three years would be $141,300, $347,500 and $356,200.

Other than the time differential between their respective retirement dates, it important to note both the citizenship of candidate two and the fact that they plan to retire to the U.S.  The American citizenship issue complicates the yearly contribution amounts that we would realistically make in any given tax year. The actuarial calculations that originally generated the potential funding limits in our example are based on a scenario of Canadian T4 income, assumes that the candidate resides in Canada, works for an incorporated entity and is a non- U.S. person for tax filing purposes.

The specific complications are that U.S. citizens are taxable on worldwide income and file annual U.S. federal tax returns regardless of where they reside in the world.  As well, the IRS does not view the contributions to an RCA as a deduction for U.S. purposes in the year of the contribution and instead views the RCA as a taxable account.  Because of this, the income reported on the Canadian and U.S. tax returns related to the RCA will not match, which impacts the utilization of foreign tax credits.  Foreign tax credits generated in the contribution year, as well as credits that have been carried forward or carried back, can be used to eliminate some or all of the U.S. tax liability related to the RCA in any given year.  On the other hand, since the contributions and annual investment income have already been taxed in the U.S., no U.S. federal tax would be payable upon withdrawal from the RCA.  Because of these complications, it should be stressed that a yearly U.S. tax assessment should be completed prior to any funding decision. For the purposes of our illustration, we will assume that all U.S. federal tax considerations have been dealt with during the funding phase and that sufficient annual foreign tax credits exist to offset the U.S. tax liability related to the RCA.

The second candidate has two primary options based on their stated desire to retire in the U.S. as a non-resident of Canada.

As part of their exit strategy, they may elect to redeem the total amount of their RCA while a non-resident of Canada and pay the Canadian nonresident withholding tax of 25%. Since the total funding of this account, as well as the accrued investment income since the time of funding, have already been taxed in the U.S. at the federal level, the distribution would not be subject to U.S. federal tax. As such, it is possible that their total combined tax rate for both U.S. and Canadian tax purposes is only 25%.  The caveat being the state chosen as a retirement destination. If there is no state tax, such as is the case in Florida, then no additional state tax would be payable.

Or they may elect to take periodic distributions from the RCA in the form of pension payments. In this scenario, they would incur a 15% Canadian non-resident withholding tax on the distributions.  As mentioned above, it is possible that this income would not be taxable in the U.S. at either the federal or state levels.

If you decide that an RCA might work in your circumstances, it is critical that you contact a team that has experience with these structures. At Cardinal Point Capital Management, we’d be happy to explore how a Retirement Compensation Arrangement might become an important part of your unique financial and tax plans.

Cardinal Point was founded with the idea of delivering an exceptional client experience and world class expertise to clients with Canada-U.S. cross-border financial planning considerations. Cardinal Point is dedicated to meeting the needs of our clients in the areas of capital preservation, tax planning, risk management, and delivery of long-term investment returns through varying economic and market cycles.

Recently we were honored to describe our process and the rationale for our phenomenal growth by sitting as a panelist on a Chartered Financial Analyst (CFA) San Francisco Society event on Cross Border Planning & Investing Implications on November 8^th. A CFA is a professional designation given by the CFA Institute that measures the competence and integrity of financial analysts. Candidates are required to pass three levels of exams covering areas such as accounting, economics, ethics, money management, and security analysis. Find out more about the CFA designation here.

At this event, Matt Carvalho, Chief Investment Officer for Cardinal Point, laid out what he thought has been crucial to our firm’s growth: delivering significant value to a specific group of clients in areas such as customized financial planning, tax services, risk management, immigration status planning, and investment management.

The event was well attended, with a standing room only crowd of over 40 professionals related to the CFA SF Society, an indication that the interest and need for cross border planning is growing.

Audience questions ran a wide gamut, but tended to focus around issues of currency conversion, licensing requirements, and financial planning / estate planning considerations for clients with assets and interests in multiple countries.

With a specialization in working with Canadian and US residents, Canadian and American expatriates, and those immigrating to Canada or the U.S. from abroad, we have  the unique ability to oversee and advance the goals of our clients wherever they call home.

Cardinal Point clients enjoy the assurance that comes with having a team of experienced, multidisciplinary professionals working  to build a comprehensive wealth plan tailored to their unique needs while focusing on creating long-term value for them.

Cross-border relocation can come with tough challenges, yet these are the issues that excite all employees at Cardinal Point. Solving these more complex financial planning questions is not only extremely helpful to our clients , but very satisfying to us. With unparalleled experience in the Canada/US space, we go to work everyday ready to work through all of the problems that impact our client’s lives.

https://cfa-sf.org/events/EventDetails.aspx?id=1049170&group=

While many people are drawn to Florida for its endless sunshine and warm nights, when examining the tax environment between Canada and Florida, the argument in favor of moving south becomes even more compelling.

In this blog, we will examine the tax rates for a Canadian province (Ontario) and a sunshine state (Florida) from the perspective of someone resident for tax purposes in those places.  We will compare the tax rates and the income levels at which they kick in.  Note that Ontarians who snowbird in Florida but maintain a closer connection to Canada would not get the lower U.S. rates and would continue to be subject to Ontario’s higher rates.

Also, as Florida has no state income tax, the numbers below for Florida are for Federal tax rates only while the numbers for Ontario combines Federal and Provincial tax rates and brackets.

Interest Income (Ordinary Income)
Canada and the United States both tax interest income at ordinary income rates.  Canadian rates are generally much higher and kick in at lower income levels than do U.S. rates.  The United States also has different income thresholds dependant upon on Filing Status, whereas Canada does not.

In addition, in the United States, it is possible to purchase municipal bonds that pay tax-free interest, however Canada does not have a comparable opportunity.

Canadian and Ontario integrated tax rates for 2018 are as follows:

As there is no state income tax in Florida, the tax rates are the same as U.S. Federal tax rates as follows:

With the passing of the American Taxpayer Relief Act in 2013, an additional 3.8 % surtax has been imposed on most forms of investment income, including interest, dividends, and most capital gains.  This additional surtax is added when adjusted gross income exceeds a certain threshold.  The threshold is $250,000 for married filing jointly, $125,000 for married filing separate, $200,000 for single, and $200,000 for head of household.

As shown above, in Ontario, the maximum rate of 53.53% kicks in at an income of $220,000 Canadian dollars.  In Florida, the top rate is only 40.8% (including the surtax) and does not kick in until income exceeds between $300,000 and $600,000 USD, depending on filing status.

Capital Gains
Canada includes 50% of the realized capital gain in taxable income.  A resident of Ontario would therefore pay a maximum rate of 26.765%, equal to half of the maximum rate for Ordinary Income.

The U.S. capital gains rate depends on the type of asset being sold, the length of time that the asset has been held, and how much income you have earned. For investments held one year or less, capital gains are taxed as ordinary income, just like interest.  For the sale of most types of investments held greater than one year, refer to the chart below. The 3.8% surtax may also be applicable, as discussed above.  As such, the maximum rate would be 23.8%

Capital Losses 
Canada allows capital losses to be utilized against capital gains in the current year.  To the extent that there are no capital gains in the current year or the gains are not sufficient to offset the amount of capital losses, you can apply capital losses against any capital gains in the three prior years.  Any unutilized losses can be carried forward and applied against future gains.

In the U.S., capital losses can also be used to offset capital gains in the current tax year.  To the extent that capital losses exceed capital gains, up to $3,000 USD (Married Joint), or $1,500 (Single or Married Filing Separate) can be used to reduce other taxable income.  Any excess can be carried forward.

Dividends
Canada provides a gross-up of certain Canadian dividends.  In Ontario, the net tax rate on a Canadian eligible dividend would be as high as 39.34%, and the rate on a Canadian non-eligible dividend would be 46.85% (in 2018).  Foreign dividends are taxed at ordinary rates.

In the United States, non-qualified dividends would be taxed at ordinary marginal income tax rates (as high as 40.8% including the surtax).  Qualified dividends are taxed in a similar manner to long-term capital gains, as per the table above.  As such, the maximum U.S. rate would be 23.8%.  It is possible for foreign dividends to be treated as qualified dividends.

While a move from Ontario to Florida can be beneficial from an income tax standpoint, there are many other items that must be considered ahead of time including immigration, estate planning, health care and Canadian “departure tax.”  If you are considering making the move to the U.S. from Canada, make sure you reach out to a qualified cross-border financial advisor that can assist you in making a smooth financial transition.