Cardinal Point Wealth Management

Your Cross-Border Financial Advisor

Contact Us | Client Login

Canada-U.S. Financial Planning Articles

Moving from Canada to the U.S.: What you need to know

By

The upcoming U.S. presidential election in November has led to much media focus on U.S. citizens looking to move to Canada. So much, in fact, that we prepared an article a few months back entitled, Thinking About Moving to Canada? What You Need to Know.

As one moves from Canada to the United States or vice versa, a multitude of unique lifestyle, immigration, financial, tax and estate planning issues must be considered. Ideally, it is best to plan or be aware of these considerations prior to the move, not afterward. In this article, we will discuss some of the financial and income-tax implications you should be aware of when moving from Canada to the United States.

Residency for Canadian Income-Tax Purposes

Unlike the United States, Canada does not impose its income tax system based on Canadian citizenship. Income tax in Canada is based on residency—and thus it’s important to understand how residency is determined.

Residents of Canada are liable to pay Canadian income tax on their worldwide income. Non- residents of Canada, meanwhile, are liable to pay Canadian tax only on income from employment in Canada, as well as rents, royalties, interest and dividends. They must also pay Canadian tax on income from sources in Canada including a business that carries on in Canada (while the recipient is a non-resident) and income from the disposition of taxable Canadian property.

To further complicate matters, the term “resident” is not directly defined in the Canadian Income Tax Act. Rather, it is based on common-law principles and is related to the kind and types of residential ties that one has or maintains in Canada.

To better understand how the Canada Revenue Agency (CRA) might view residency from a Canadian income tax perspective, you might want to review CRA Income Tax Folio S5-F1-C1: Determining an Individual’s Residence Status.

Whether your residential ties in Canada are sufficient for you to be considered a resident for tax purposes is generally a question of fact. Some of the factors that CRA would likely take into consideration include:

  • Do you have a permanent home available to you in Canada?
  • Does your family live in Canada? In this case, “family” typically refers to a spouse and/or children.
  • Where are your social and personal ties, such as church, social clubs, professional organizations and so on?
  • Where are your economic ties, such as employment or business operations, bank accounts, driver’s license, etc.?
  • Have you established residential ties to another country, and are you resident in that country for tax purposes?
  • Do you intend to return to Canada at a later date?

When we work with clients to properly document their intention to sever their residency from Canada, we recommend that they take the following actions:

  • Consolidate your bank accounts by closing all unnecessary accounts and transferring all or a substantial portion of funds to a bank account in the United States. Once established in the United States and all cheques have cleared against the Canadian accounts, transfer the balances and close all Canadian accounts.
  • Close your Canadian non-registered brokerage accounts and transfer the investments to a U.S. account, or liquidate if necessary. Given that Cardinal Point Wealth Management is licensed and registered in both Canada and the United States for investment management purposes, we can create much value for our clients in this area, including maintaining Canadian-dollar investment accounts in the United States.
  • Advise all Canadian financial institutions with which you will have ongoing dealings of your move to the United States. They will begin to withhold non-resident tax from any investment income earned by you outside of your registered assets. The tax withheld under the Canada-U.S. Tax Treaty (0% for interest, 15% for dividends) represents your final Canadian tax obligation with respect to this income, and a Canadian tax return is not required to be filed to report this income. The same would apply to Canadian-source pensions (excluding Canada Pension Plan and/or Old Age Security).
  • Apply for a driver’s license in the United States as soon as possible, and then cancel your Canadian license.
  • Cancel or change your professional memberships to non-resident status. Cancel your memberships to clubs and other organizations. An individual can retain membership in any professional organization on the basis that he is required to perform duties abroad without significantly impacting non-residency status. However, one should arrange for the membership status to be designated “non-resident” if possible.
  • Sell or dispose of all personal possessions not accompanying you abroad. Where possible, it is preferable to avoid storing items in Canada, as the maintenance of personal property may be an indication that residency was not terminated.
  • Cancel your credit cards with Canadian financial institutions and obtain cards with U.S. institutions.
  • Terminate your Canadian healthcare and medical-insurance coverage.
  • Maintain a personal file outlining your efforts to cease Canadian residency. The determination of residency status is not straightforward, and although one may have a strong fact pattern, CRA can always assert that individual facts and circumstances do not support the contention that you have ceased residency from Canada. A personal file containing this information may be vital in demonstrating to CRA that you have sufficiently severed your ties with Canada.

CRA uses a questionnaire, Form NR73 Determination of Residency Status (leaving Canada) to establish an individual’s residency status. However, we recommend that clients not voluntarily submit this form to CRA. Once submitted, it can be difficult to change filing positions in Canada.

The Canadian Departure Tax

Upon departure from Canada, Canadian residents are generally considered to have disposed of most property, with exceptions as noted below, for deemed proceeds equal to the fair-market value of the property at that time. If the fair-market value of the property exceeds its cost base for income tax purposes, the individual must recognize a capital gain that is taxable in Canada on their final exiting Canadian tax return. You have the option of paying the tax on those gains, from the deemed disposal, when you file your tax return for the year you leave Canada. Or you can provide security (if required) to CRA, to defer payment until the property is sold.

Canadian real estate, stock options, certain employer-sponsored pension plans Registered Assets (RRSPs, RRSPs, LIRAs, etc.) and TFSAs will not be subject to the departure tax, as there are specific exclusions in the rules for these types of assets.

For the most part, non-registered investment assets, including shares within Canadian business interests and certain trusts, would be considered deemed sold as of your departure from Canada.

A requirement to file CRA Information Forms T1161 – List of Properties by an Emigrant of Canada and T1243 – Deemed Disposition of Property by an Emigrant of Canada would need to be included with your final return to CRA for the year of departure. Depending on the fair-market value of assets upon departure and/or the amount of deemed gains, these forms, and the requisite tax (or the posting of adequate security), might not be required.

We assist all of our clients in obtaining the necessary documentation to support the fair-market value of all of their assets on the date they cease residency for reference purposes. It is generally easier to gather this information at the time of their departure as opposed to when we are preparing their Canadian tax returns for the year of departure.

U.S. Income-Tax Considerations

The United States does not have a deemed-acquisition valuation when an individual enters the country for tax purposes. For this reason, an individual who sells appreciated property after entering the United States is subject to tax on the whole gain, not just the portion attributable to the period of residence in the United States. This can result in double taxation, first the Canadian departure tax and then U.S. capital-gains tax upon the sale of the assets while in the United States.

Because of this, we generally recommend that clients physically “trigger” any actual capital gains prior to exiting Canada, or take a specific Tax Treaty election to “step-up” the capital gains for U.S. purposes upon their exit from Canada. However, if a client would have any assets that would be in an unrealized loss position from a U.S. income-tax perspective (after adjusting the U.S. dollar-cost basis), we might recommend that no realization would occur for U.S. purposes so that we can preserve the losses to apply against future realized gains in the United States. Given our Canada/U.S. tax and investment expertise, we can provide great value to our clients upon their departure from Canada and entrance into the United States.

As we alluded to earlier in this article, there are still a number of factors that need to be addressed and reviewed upon a departure from Canada. These include immigration planning, currency exchange, tax preparation, compliance and planning, a comprehensive review of health and risk management programs, the consolidation of investment and retirement accounts and management, estate planning and much more.

At Cardinal Point, we are fortunate in that we provide a Comprehensive Wealth Management Solution that meets our clients’ specific and unique needs. We are not just “book smart.” The majority of our advisors actually live and work in both countries, and are recognized as leading experts in Canada/U.S. financial planning. If you are considering a move to the United States from Canada, we would encourage you to request our White Paper, Manage Your Canada – U.S. Cross Border Lifestyle and/or reach out to us directly at info@cardinalpointwealth.com

 

 

 

Thinking About Moving to Canada? What You Need to Know

By

Irrespective of where you stand politically, the circus currently playing out in the contest for the next President of the United States has a number of Americans—both Democrats and Republicans—looking at options that might include leaving the United States and moving to Canada.

Indeed, by midnight of March 1—Super Tuesday in the United States—searches for “How to move to Canada” had spiked by 1,500%, according to Google Trends.

For some, leaving the country might seem rather extreme. However, we get it!

At Cardinal Point, many of us have a stake in the direction of our political system in both Canada and the United States. And we are intimately aware of the unique immigration, financial, tax, investment and estate-planning implications of becoming an American in Canada. We understand the immigration options and the challenges those decamping for the north might face.

Before Americans hop into their cars, fill their gas tanks (in gallons) and make their way to Canada, they first need to be aware that one can’t simply show up at the Canadian border and expect to live and work in Canada. Like the United States, Canada has a formal immigration process that must be adhered to.

In order to live and work in Canada, you might be able to secure your immigration via one of a number of business and family categories.

Canada’s family immigration laws differ from those of the United States. Notably, you cannot just marry a Canadian citizen and expect to automatically become a Canadian citizen. A formal process must be adhered to before a spouse of a Canadian citizen can live permanently in Canada and ultimately seek Canadian citizenship.

http://www.cic.gc.ca/english/helpcentre/answer.asp?qnum=357&top=5

If you are already employed in the United States, your occupation might qualify you for one of Canada’s Skilled Worker Entry programs. This would entitle you to a visa to live and work in Canada. And depending on your work or trade, you might be entitled to the new Express Entry application process.

http://www.cic.gc.ca/english/immigrate/skilled/index.asp

If you are self-employed in the United States, you might be able to qualify for business immigration to Canada under the Self–Employed Person program. If you have a specific occupation that fits into the Government of Canada’s Arts and Culture or Technical and Skilled Occupations in Art, Culture, Recreation and Sport, you might be able to immigrate to Canada under that program.

http://www.cic.gc.ca/english/immigrate/business/self-employed/index.asp

Under the Provincial Nominee Program (PNP), Canadian provinces and territories are allowed to nominate persons who wish to immigrate to Canada and who are interested in settling in a particular province. Each Canadian province – except Quebec – have agreements with Citizenship and Immigration Canada (CIC) that have developed programs to welcome certain nominees to settle and work in the province and contribute to the community.

http://www.cic.gc.ca/english/immigrate/provincial/index.asp

If you would like to start a business in Canada, you might be entitled to apply for the Start-up VISA. You would have to have a Letter of Support from a designated angel investor group, venture capital fund or business incubator. You must also meet specific ownership requirements in the business. Get scores of at least 5 in the Canadian Language Benchmark test in either English or French and finally meet sufficient settlement funds based on the size of your family.   You also must be able to secure a minimum investment of $200,000 from a designated Canadian venture capital fund or $75,000 from a designated Canadian angel investor group. No investment is required if you are accepted into a Canadian business incubator program.

http://www.cic.gc.ca/english/immigrate/business/start-up/eligibility.asp

The immigration process is definitely the first hurdle that you would have to overcome before entering Canada. It is a process and for some could be a rather costly one as well.

Working with appropriate Canadian immigration counsel, the advisors at Cardinal Point are well-positioned to assist you in partnering with the right attorney through this process.

But beyond the immigration hurdle, if you remain a U.S. citizen, you would still be considered a resident of the United States for income, gift and estate-tax purposes. So if you were hoping to avoid the tax policies of the previous and next administration, I’m afraid you’re out of luck.

As a U.S. citizen, you would be required to continue to file U.S. income-tax returns on your worldwide income (even if that income is only now in and from Canada). And you would have to comply with a number of other foreign reporting and compliance requirements.

Furthermore, as a resident of Canada, you would also be subject to tax in Canada on your worldwide income, including any income that might continue to trickle in from the United States.

Although both countries would have the right to tax you on your worldwide income, you would be entitled to apply foreign tax credits against the same source of income to help to reduce the perceived exposure to double taxation. However, without proper tax planning upon entering Canada, and without continued ongoing planning, you could find yourself exposed to double taxation and a number of nasty tax surprises.

Fortunately, we have the unique expertise to assist you so that you can enjoy the Canada-U.S. lifestyle.

To that end, we would encourage you to request our Cardinal Point White Paper: Manage your Canadian and U.S. cross-border lifestyle.

This paper will provide you with additional insight into how a Cardinal Point cross-border financial advisor can assist you with your unique cross-border financial planning complexities.

And if it does not make sense to move to Canada, bear in mind that our offices in the United States can provide you with comprehensive, U.S.-only wealth management services.

Moving to a Green Card Calls for Financial Planning

By

At Cardinal Point Wealth, we come across many situations where former Canadian residents have been working in the United States on an L-1 visa. This type of visa allows a U.S. employer to transfer a manager, executive or someone with “specialized knowledge” from an affiliated Canadian office to one of its U.S. offices.

To secure this visa, the U.S. employer must be doing business in the United States and have a current business relationship with the Canadian company or affiliate. Further, the employee must have worked for the Canadian company for at least one of the past three years.

For former Canadians, the initial term of the L-1 visa is two years, and it can be renewed for a total of seven years. Unlike many other types of U.S. work visas, the L-1 provides the opportunity for a spouse and dependents to work in the United States, through an L-2 visa.

Often, after years of employment and the acceptance of their new U.S. lifestyle, individuals consider pursuing a U.S. Green Card (GC). Unlike other issued U.S. work visas, an L-1 visa holder can apply for a GC.

A GC grants “lawful permanent residence status” for the worker and his or her family. The ability to live and work in the United States for as long as you want and for whomever you want—including yourself—can be compelling. After holding your GC for five years (three years if married to a U.S. citizen), you would be entitled to apply for U.S. citizenship.

The United States determines income-tax residency based on one of three factors: U.S. citizenship, holding a Green Card, or meeting what is called the substantial presence test—a calculation of the number of days one is physically present in the country over a three-year period.

Obviously, once you receive your GC you are considered a U.S. income-tax resident, subject to tax on your worldwide income and all the requisite tax compliance requirements.

After their first year of employment in the United States, L-1 holders would generally have been considered U.S. income-tax residents, subject to the filing of U.S. tax returns and related compliance requirements of foreign accounts. So for the vast majority of individuals going from an L-1 visa to a GC, their U.S. tax situation remains virtually the same.

In unique situations, L-1 holders who filed Form 1040NRs with U.S. treaty elections tie-breaking residency back to Canada may only be subject to U.S. tax on U.S.-sourced income—but that is a subject for another time. In this case, obtaining a GC could dramatically change an individual’s U.S. tax-filing situation.

If you are living and working in the United States on an L-1 visa, you should consider U.S. gift and estate tax planning needs. U.S. gift and estate-tax residency is often based on the concept of “domicile.” Domicile in the United States can best be defined as living in the country with no present intent of leaving. Living in the United States even briefly can often satisfy this requirement, so many believe that holding a GC or renewing one’s U.S. work visa is enough to establish domicile.

If domiciled in the United States, you would be subject to U.S. estate tax on your worldwide estate (including any remaining assets in Canada). That’s after the U.S. estate tax exemption–$5.43 million for 2015 and $5.45 million for 2016.

Gift tax would also be levied on lifetime transfers after the application of the annual exclusion of $14,000 for 2015 and 2016. Non-U.S. citizen spouses could be gifted $147,000 ($148,000 for 2016). So if you are considering obtaining a Green Card, you should update your estate plan to include the transfer of wealth at death to a non-citizen spouse (through the use of a qualified domestic trust, or QDOT). Assets that might remain in Canada would need to be addressed. If you ultimately become a U.S. citizen, then the role of a QDOT, and the transfer of assets during life between spouses beyond the annual exclusion, would not create adverse U.S. gift-tax results.

Many of our clients who pursue a GC choose to return to Canada on a part or full-time basis. In such a situation, it is important to be aware of the current U.S. expatriation tax laws that could be imposed when you leave the United States and return to Canada.

The expatriation tax provisions under Internal Revenue Code (IRC) sections 877 and 877A apply to U.S. citizens who have renounced their citizenship, as well as long-term residents (as defined in IRC 877(e)) who have ended their U.S.-resident status for federal tax purposes. Under these rules, a long-term resident would be defined as someone who held a GC in at least eight of the past 15 years. So does that mean eight full calendar years? No! Under specific circumstances, you could be considered a long-term resident for less than the eight-year period. Under the rules, you count the years of long-term residency by the “moment of time” that you had your GC during a calendar year. So in some situations, long-term-resident status could actually be achieved in six years!

If you did return to Canada and voluntarily abandoned your GC by filing USCIS Form I-407 (Record of Abandonment of Lawful Permanent Resident Status) or had it taken from by an immigration officer who believed you no longer intended to reside in the Unites States, you could find yourself subject to the expatriation tax laws. In such a case you would be required to file IRS Form 8854 (Initial and Annual Expatriation Statement), where you would be required to complete a worldwide balance sheet and income statement.

Further, two types of income tax, often referred to together as the “exit tax,” would be imposed on your worldwide assets. The first is a mark-to-market tax that would be imposed on the majority of your worldwide assets. You would be deemed to have disposed of these assets at fair market value on the date prior to your date of expatriation—or, in the case of a long-term resident, on the date prior to the abandonment of your Green Card.

After an exemption of $690,000 ($693,000 for 2016), you would be subject to capital gains tax on any gains subject to the mark-to-market calculation from Form 8854. Further, there would be an additional ordinary income tax imposed on any deferred compensation, pension plans, stock options, IRAs and other tax deferred vehicles, including registered assets in Canada.

From a financial-, income- and estate-planning perspective, the implications of the U.S. expatriation tax need to be strongly considered when one is considering returning to Canada after having held a GC for a period of time and being defined as a long-term resident.

The advisors at Cardinal Point Wealth understand the unique cross-border planning need of individuals who are considering living in the United States and returning to the Canada on a full- or part-time basis. Our clients’ financial plans are customized to meet each client’s specific goals and to help them make important decisions with confidence.

 

 

Canada & U.S. Education Savings Options

By

“The Simpsons” is a funny show, and that’s despite—or maybe because of—the fact that it often tackles the issues that make us most anxious.

Take the episode in which Bart terrifies Homer with a campfire story about college costs for Maggie. The scene ends with Homer shrieking, “No! No! Noooo!”

I suspect that Homer speaks for many of us parents. We may not howl like the Simpsons patriarch, but the price tag for higher education definitely does nothing for the quality of our sleep.

  • The average undergraduate tuition for a full time Canadian student in 2015 is $5,959. That more than doubles—to $12,959 per year—for medical studies. And it more than triples, to $18,187 annually, for dentistry school. Between 2011 and 2015, tuition increased an average of 4% annually.
  • In the United States, a public two-year college tuition now costs $3,347 per year, a public four-year college tuiton costs $9,139 per year and a private, four-year college program costs $31,231 annually.
  • In addition to those figures you can add $800 to $1,000 per year for books and $10,000 or more for possible room and board.

college-savings-planStill, there’s wide agreement that college is worth it. Nine in 10 American parents believe a college education is an important investment in their child’s future, according to a recent national study conducted by Sallie Mae and the research firm Ipsos. Interestingly, just 48% of respondents are actively saving for that education.

Assuming that you’re part of the 90% who value college education, and that you’re committed to saving to fund at least part of your child’s education, what are the options?

Canada

Registered Education Savings Plans (RESPS)
By far, the Registered Education Savings Plan (RESP) and associated grants available for contributions make this savings plan the best option for Canadians. That explains why a 2009 survey found that 66% of Canadians saving for a child’s education contributed to a RESP. (The second most-common approach, used by 28% of respondents, was to contribute to a dedicated savings plan or account).

RESPs’ benefits include:

  • A minimum of 20% Canada Education Savings Grant on annual deposits of $2,500 from the year the child is born until December 31 of the year the child turns 17. Account holders can earn up to $7,200 in these grants per child.
  • Additional Grant and deposits for low-income families.
  • Saskatchewan and Quebec residents receive additional Grants.
  • Deposit up to $5,000 annually per child and receive Grants if you have not deposited in the past.
  • Set up a family plan, and if one child does not attend post-secondary schooling, the Grant can be used by the other children named on the account.
  • Choose your own investments.
  • Tax advantaged investing. You can invest in a variety of vehicles and your deposits and Grants grow tax deferred until withdrawn. Contributions are withdrawn tax free. And Grant and investment income is taxable to the child on withdrawal; factor in credits and personal exemptions, and the withdrawal could be tax-free.

Bear in mind that withdrawals can only be made while the child is attending post-secondary education.
Unfortunately, the IRS does not yet recognize the tax-deferred status of RESP accounts for Americans. For this reason it is not advisable for American citizens or green card holders living in Canada to be a subscriber of an RESP account. In this case, or if you have maximized your Grant room, an In Trust For Account may be a second option for saving.

In Trust for Accounts
“Informal trusts” are created at financial institutions and used to invest funds on behalf a minor.
This type of account is particularly useful if you deposit Canada Child Tax Benefits, Universal Child Care Benefits or a child’s inheritance, as the growth and income on these deposits will be attributed to the child rather than the account owner. If contributions are made from other income sources, secondary income (income earned on income that has already been taxed to the account holder) can be moved to a separate account that will be taxed in the hands of the child.

The child may take control of the account once he or she reaches the age of majority. ( This does not occur automatically). At that point, the account can be moved into the child’s name for education funding, or it can be left intact, with the accountholder responsible for additional deposits or disbursements for schooling or other expenses.

With either option, be aware of fund management and commission costs, which can erode your college savings. Your investment advisor can help you choose quality investments that will meet your savings objectives.

United States

College and State 529 “Qualified Tuition” Plans
Unlike RESP accounts in Canada, the U.S.-based 529 plan varies on both the state and college level. These plans number in the thousands, making research essential.
There are two types of 529: the pre-paid tuition plan and the college savings plan. Here are a few facts about each:

Pre-paid tuition plans

  • Enable us to purchase credits for future education (and at times room and board) at a specific college or university.
  • Lock in prices, covering tuition and mandatory fees. Some plans allow a room and board option.
  • Invest in a lump sum or by installments based on the child’s age and years of tuition purchased.
  • Most offer a state guarantee.
  • Most require state residency.

College Savings Plans

  • Do not lock in college costs.
  • Cover all expenses related to education (tuition, room and board, books and computers).
  • Feature high contribution limits.
  • Deposits are subject to investment market fluctuations.
  • Have no age limit; open to adults and children.
  • Do not have a residency requirement.

In both cases, the earnings in the 529 are free from federal tax and in most cases, as long as withdrawals are for eligible college expenses, state tax as well.

Unlike the Canadian RESP, where withdrawals can be used for any expense, 529 withdrawals must be used for eligible college expenses. If they are not, you will generally be subject to income tax on the withdrawal and an additional 10% federal tax penalty on the earnings.

Nearly every state offers a 529 plan (or plans), and it is up to each state to set the tax break or grant offered. Morningstar has surveyed 529 plans each year since 2004 and provides rankings based on costs, tax benefit and investment options. Whether to invest in a plan run thorough your home state or look elsewhere depends on a number of factors, including deposit limits and residency, as well as how highly your state’s plans are rated. Morningstar advises that, for those contributing around $1,000 annually, with savings of $25,000 or less, it usually best to stay in state. At present, residents of Arizona, Kansas, Maine, Missouri and Pennsylvania can invest out of state and still receive a tax deduction on their contributions (they may forgo other benefits if going out of state, though). However, the more you plan to invest, the less consideration should be given to state tax benefits and the more you should consider the quality and type of investments offered.

You can purchase 529 plans through a financial advisor or directly from the providers. Some direct-purchase plans, such as CollegeAdvantage 529 Savings Plan of Ohio, use passive and active investment options run by a variety of firms at a reasonable price, and are thus rated highly among direct investment options. Virginia’s CollegeAmerica Plan is the nation’s largest 529 plan, and is typically available through your investment advisor. With its high state tax deductions, it is consistently ranked by Morningstar as one of the best plans. A wealth of additional information can be found at www.529.morningstar.com .

Given the complexities of the 529 arena, it is understandable that many families choose the general savings account option for college savings. A general savings account, managed through your investment professional, can include a wide variety of investments and can be used for expenses other than college. For perspective, nearly half of college-saving families rely on general savings accounts, while 27% use tax-advantaged accounts such as 529 plans.

Whether those you are saving for are American or Canadian, the key is to get advice before deciding which savings vehicle to use. A professional can assist you in navigating government grants and available credits with an eye on reducing the overall cost of education and helping your savings last through to graduation day.

Source: Morningstar.com, Statistics Canada, Canada Revenue Agency

Options for your CAD Non-registered assets when moving to and/or living in the U.S

By

The strong U.S. dollar has created new challenges for those moving to the United States from Canada—but understanding these challenges, and your options, can help you to navigate the financial transition as smoothly as possible.

canadiandollarHere’s the background. The Canadian dollar is currently valued around 0.80 versus the U.S. dollar, a big departure of 0.90 to 0.95 seen in the summer of 2014. With the currencies so closely valued in the past, many individuals elected to convert their bank and non-registered (taxable) investment-account funds to U.S. dollars, and move them to a U.S. bank or custodian.

After all, if you live in the United States and your living expenses are denominated in U.S. dollars, having much of your liquid net-worth in the local currency makes sense. Furthermore, converting and moving Canadian non-registered accounts to the United States simplifies tax and foreign-account reporting requirements. It also provides for better investment opportunities, including those that are more tax efficient. And it helps to simplify your financial and estate planning.

A Canadian dollar at 0.80 complicates things, however, as most clients naturally do not wish to convert funds at a 20% discount. So let’s look at the options available to individuals or families who do not want to convert their non-registered accounts to U.S. dollars.

OPTION 1: Leaving your Canadian investment accounts in Canada
If you work with a Canadian financial advisor, chances are they are not registered to provide investment or financial planning advice to a U.S. resident.

A financial advisor must always be licensed in the jurisdiction in which a client lives, regardless of the client’s citizenship or the country in which the assets reside. Thus, once you become a resident of the United States and ask your advisor to update your mailing address on file to your new U.S. address (never leave your old Canadian address on file: see this related article), one of three things will likely happen:

  1. Your advisor will inform you that they are no longer able to provide investment advisory services to your non-registered accounts, and that you must work with someone who is able to do so;
  2. Your advisor will explain that you can keep your accounts on the platform, but that they will be frozen and that no further trading or rebalancing can take place;
  3. Your advisor will explain that they are registered in the United States and can continue to oversee all investment-management services in your accounts.

To reiterate, most Canadian advisors are not registered in the United States. So the mostly likely scenarios are numbers one and two. In the event that your advisor fits the third scenario, you will want to make sure that their services and expertise extend beyond just providing investment management.

For example, when moving to, and/or living in the United States, clients face a host of cross-border planning complexities. A true cross-border advisor will help construct an integrated Canada-U.S. cross-border financial plan that addresses tax and estate planning matters in addition the management of your investment assets.

Now, if you decide to leave your Canadian non-registered accounts in Canada under one of the first two scenarios, there are number of important points to consider.

  • Drawbacks of Canadian funds. Canadian-traded mutual funds and exchange-traded funds (ETFs) are considered “not registered for sale” to U.S. residents. Even more importantly, they are likely to be considered Passive Foreign Investment Companies (PFIC). Earnings and dividends distributed by such vehicles are subject to the highest marginal tax rates on your U.S. income tax return. Download our whitepaper on PFICs  for further information.
  • Accounting hurdles. Canadian custodians do a poor job conforming to U.S. tax reporting requirements. For example, many do not prepare year-end tax reports that show long-term versus short-term capital gains. These reports are required if you are a U.S. resident. Further, many of the tax reporting forms Canadian custodians provide are denominated in Canadian dollars, which means your accountant will have to convert all taxable and reportable transactions to U.S. dollars when you file your annual U.S. tax returns. This additional work by your accountant can increase the likelihood of errors and lead to higher accounting and tax-preparation cost.
  • The Conversion Window. If your goal remains to convert your funds to U.S. dollars once the exchange rate improves, make sure the investment strategy put in place will accommodate a future currency conversion. For example, make sure you are not locked into investment products that must be held for a certain period of time. Also, make sure your investment accounts are not invested in volatile or speculative securities that are subject to sharp market swings. It would be unfortunate if, when exchange rates became attractive, your Canadian-dollar investment holdings were sitting at a loss due to poor market performance.
  • Tax-aware investing. Make sure your advisor is managing your account under an investment mandate that reflects your U.S. tax residency. As mentioned earlier, U.S. tax residents are subject to long-term and short-term capital gains rates. If you sell an asset that has been held for one year or less, any profit is considered a short-term capital gain, and is taxed at your ordinary income rate (up to 39.6%). If you sell an asset held longer than one year, any profit you make is considered a long-term capital gain, and is typically taxed at a preferable rate (15% or 20%). In Canada, there is no such thing as long- or short-term capital gain. Canada has just one capital gains rate, and Canadian portfolio managers are trained to oversee client accounts under this standard. Also, there are different types of investment securities, such as Canadian preferred shares, that are attractive investments from a Canadian tax standpoint but not from a U.S. tax standpoint. It is always in your best interest to confirm that the Canadian money manager or advisor can customize the management style of your portfolio to adhere to U.S. tax rules.
  • Reporting requirements. You will be subject to extra foreign account reporting requirements by the Internal Revenue Service. Because these accounts are domiciled outside of the United States, the IRS will require you to report specific information about them (account number, year-end value, highest market value in the tax year, etc.) on a form called the FinCEN Report 114. Additionally, you might likely have to file IRS Form 8938 – Statement of Specified Foreign Financial Assets as part of your Form 1040 filing as well. These increased reporting requirements are time-consuming and will likely lead to increased tax preparation costs.

Leaving your Canadian-dollar taxable or non-registered accounts in Canada once you become a U.S. resident can be done under limited scenarios. But in light of the considerations above, it certainly is not ideal.

Option 2: Moving your Non-Registered Investment Account to the United States
Moving your Canadian-dollar investment accounts to the United States will simplify financial and estate-planning initiatives, and will streamline U.S. tax reporting. But you still will face challenges. For one, most U.S.-based financial advisors will automatically want you to convert your Canadian-dollar accounts to U.S.-dollar accounts—which, of course, contradicts the goal of maintaining your holdings in Canadian dollars. The main reason U.S.-based advisors will recommend this is that their firm or its custodian does not offer multi-currency accounts. The only currency option they provide for investments is U.S. dollars. It is rare for investment firms to offer Canadian dollar-denominated accounts because there is little demand for them in the United States.

Those investment advisors that do offer multi-currency accounts may not know the Canadian investment market well enough to construct a proper investment portfolio. It is one thing to be able to open a Canadian-dollar-denominated account on behalf of a client. It’s another to be a financial advisor or portfolio manager with the knowledge base and training to build Canadian-based investment portfolios using Canadian-traded securities.

All too often, clients are left holding their Canadian-dollar investment account in cash because they cannot find a qualified U.S.-based investment manager to invest the assets.

The Cardinal Point Difference: Cross-border investment management
At Cardinal Point, we are registered to provide investment management and financial planning services in both Canada and the United States, without any restrictions or limitations. For clients who have investment accounts in both countries (RRSPs, Non-registered, IRAs, 401ks, Trusts etc.), we are able to construct integrated cross-border portfolios customized to the investor’s risk tolerance, needs and goals.

If you are an individual living in and/or moving to the United States and do not want to convert Canadian-dollar, non-registered assets to U.S. dollars, our experienced Canada-U.S. portfolio management team can help. We have the ability to invest your Canadian-dollar accounts on a U.S. custodial platform. Partnering with Cardinal Point to oversee the management of your Canadian-dollar non-registered accounts brings the following benefits:

  • Proper and customized U.S. tax reporting on Canadian-dollar investment assets
  • Multi-currency investment accounts supported by an investment team that provides Canadian-dollar and U.S. dollar asset management services
  • Flexible foreign exchange services
  • Understanding of U.S. tax management strategies on Canadian-dollar investment accounts
  • Additional cross-border financial, tax and estate planning expertise
    Please contact Cardinal Point to discuss your cross-border investment management and financial planning needs.

Jeff Sheldon is a co-founder and principal at Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada.