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Terry Ritchie, U.S. Expatriation and Your Dual Citizen Clients

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In this video, Terry Ritchie speaks with InvestmentExecutive.com’s Rudy Mezzetta about what U.S. citizens living abroad need to know when considering renouncing their U.S. citizenship. Though the numbers of expatriations are reaching historical highs, the process is not an easy one. After filing with the Department of Homeland Security, an individual wishing to renounce citizenship must meet with the consulate. Upon approval, the individual will be issued a CLN: Certificate of Loss of Nationality, from The State Department. This is not a quick process.

In terms of taxes, if you meet one of these rules—a worldwide net worth of $2 million or more, average annual net income tax of more than $150,000 (adjusted for inflation), or have not complied with all U.S. tax responsibilities in each of the five preceding years—you can be defined as a “covered expatriate.” CEs are subject to onerous tax considerations, including a “mark-to-market tax” that takes into account what you would net if you sold all of your assets upon expatriation, and then taxes this amount as a capital gain. Further implications include a tax on qualified assets and tax-deferred investment vehicles.
Finally, Terry reveals the #1 reason that Americans chose not to expatriate: the possibility (based on pending U.S. legislation) of not being allowed to return to the U.S. View the video here.

Advising same-sex couples with U.S. ties

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Terry Ritchie, Director of Cross-Border Wealth Services, was recently featured in an article from Advisor.ca looks at how a recent ruling from the U.S. Supreme Court opened the door to new planning options for same-sex partners with ties to the U.S. The June decision struck down a key part of the Defense of Marriage Act and broadened the federal definition of marriage to include legally married same-sex couples. The new definition also applies to American couples who marry outside the U.S.

Following the decision, the IRS released the tax implications: “Same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor.” The article goes on to give examples of how advisors can help their clients benefit from these changes, specifically in the areas of tax filing, wealth transfer, and principal residence exemption. Read the full article here.

Cross-Border Concerns for Athletes

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us-can-hockeyCanadian hockey players in the NHL who play for American teams have specific planning needs and require the specialized advice of a cross-border financial advisor. This article by Cardinal Point’s Terry Ritchie looks at what cross-border issues professional athletes may face, including immigration, estate, tax and investment planning considerations.

Ritchie first examines the potential immigration pitfalls for athletes living and playing across the border. It’s important for these athletes to work closely with their advisors and immigration counsel to secure or extend their U.S. work visas, apply for permanent residence with a U.S. Green Card, or ultimately become a naturalized U.S. citizen. Ritchie illustrates potential immigration issues with a case study of an athlete who faced these hurdles and partnered with his advisors and immigration attorney throughout the long, complicated immigration process.

The article goes on to look at the onerous tax consequences that can come with expatriating back to one’s home country after an athletic career in the U.S. The dreaded U.S. Expatriation Tax holds that a player who has a U.S. Green Card for more than eight years is classified as a long-term resident and could potentially face a significant two-fold tax hit when leaving the U.S.

Ritchie goes on to illustrate some of the woes that can come when advisors lead their athlete clients to bend compliance or CRA rules. He uses a case study to show how compliance violations can also result in a number of adverse Canadian and U.S. income tax problems. Finally, the article looks at the need for estate planning if a player is domiciled in the U.S., marries a U.S. citizen, has children in the states, and/or has non-U.S. beneficiaries.

U.S. IRAs Can Be a Taxing Issue for Canadian Beneficiaries

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irataxAn individual retirement account (IRA) is a personal savings plan offered in the United States. Similar to the Canadian registered retirement savings plan (RRSP), the IRA offers income tax benefits to individuals who are saving money for retirement. But what are the tax implications when a Canadian citizen inherits a U.S. IRA?

Let’s look at an example to see how this works. Let’s say you have an Aunt Betty in Ohio. She dies and then names you as the beneficiary of her traditional IRA, and you inherit the lump sum distribution of $100,000. Because you’re a Canadian resident who only spends a week or two every year in the U.S., you assume you’ll be getting that money free of taxes since it’s an inheritance. Think again. Before you go spending that $100K, it’s important to consider the tax consequences on each side of the border.

On the U.S. Side
As is the case with the Canadian RRSP, IRA contributions are tax deductible and can grow tax deferred inside the plan. Taxes are payable upon the money’s withdrawal from the plan. If Aunt Betty’s IRA beneficiary had been a relative living in the U.S., the amount paid from that IRA to that beneficiary would typically be subject to U.S. taxes.

As a nonresident beneficiary of the IRA, you’d generally need to pay a flat income tax rate of 30% on the distribution. In addition, a beneficiary who is a nonresident alien would be subject to 30% federal U.S. income withholding upon distribution of the IRA. Fortunately, under the Canada/U.S. Tax Treaty, the tax and withholding rates drop to 15%. In order to qualify for this lower rate, it is necessary to complete and submit IRS Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding) to the custodian or trustee for the IRA.

On the Canadian Side
When an IRA is inherited by a beneficiary living in Canada, the amount paid from the IRA to the individual is typically taxable in Canada—in addition to being subject to U.S. tax. When filing a tax return in Canada, you must include the distribution from the IRA with your income. This will allow you to claim a foreign tax credit for the taxes paid to the U.S, including any U.S estate taxes paid on the IRA.

Unique Opportunity
Despite the tax implications described above, a unique opportunity could also be utilized to allow for the continued tax-deferred growth of the IRA in both Canada and the U.S. Under certain rules, beneficiaries of IRAs could establish what is referred to as an “Inherited IRA” account. U.S. resident beneficiaries typically utilize these accounts to minimize current tax. The cross-border specialists at Cardinal Point Wealth Management often assist beneficiaries that live in Canada in the establishment of an Inherited IRA account that can be managed on their behalf. The Canadian beneficiary would be required to obtain a U.S. Individual Taxpayer Identification Number (ITIN) through the Internal Revenue Service (we can assist with this), and an Inherited IRA account would be established with one of our U.S. custodians. Due to the tax implications on both sides of the border, it typically makes more sense to look at setting up an Inherited IRA as opposed to paying current income tax on the distribution.

However, every situation is different and Cardinal Point’s cross-border experts can help ensure that Canadian beneficiaries of IRA accounts fully understand the implications, options and reporting requirements in the U.S. and Canada.

Terry Ritchie is the Director of Cross-Border Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada.  Terry has been providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services to affluent families for over 25 years.  He is active as an author, speaker and educator on international tax and financial planning matters. www.cardinalpointwealth.com

Financial Planning for Canadians Moving to the U.S.

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Did you leave your heart in San Francisco? Is the Big Apple calling your name? Perhaps you are bound for Austin, Texas, the “Silicon Valley of the South.” If the U.S. is your destination—and you plan to stay for a while—there are critical steps to take to ensure your short- and long-term financial wellbeing.

canadians-moving-to-united-statesCanadians moving to the U.S. may view the similarities—language, customs, culture and even cuisine—and imagine a seamless move. What many people don’t realize is that, in terms of investments and taxation, the two countries are very different. As you plan your move, make sure to have a financial plan in place. Many people think of “financial planning” as something to do after having made one’s fortune. In fact, having your financial house in order makes sense no matter where you are in your life, and it’s especially important if you are preparing for a cross-border move.

Start where you are. First things first, take an inventory of your finances in Canada: your bank accounts, credit cards and savings accounts including: Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), and Tax-Free Savings Account (TFSA). The rules governing the use of these accounts are different for non-residents. For example, a non-resident’s contribution to a TFSA would be subject to a monthly penalty. Because these rules are complex, expert help can prevent you from simple, yet expensive mistakes.

Plan the transition. As soon as possible, apply for a Social Security number in the U.S. You will need this to work, open a bank account and even to apply for credit. On the topic of credit, find out whether your Canadian credit cards will charge you a fee on transactions made in the U.S. You may wish to apply—before you move—for a card provided by a company that does business in both Canada and the U.S.

Buying health insurance is another important part of the transition from living in Canada to living in the U.S. If you do not have employer-provided health benefits, you can shop for the coverage that best suits you and your family. Legally, you must have health coverage or face penalties (not to mention costs of care, which can be very high in the U.S.!).

Stay on top of things. There’s an old saying, “Out of sight, out of mind.” It’s up to you to keep your financial picture in focus—even when aspects of it are thousands of miles away. Working with a financial planner is the simplest way to keep track of your accounts and to stay informed of your tax liability. The right advisor will work with you to let you decide how often you want to be contacted. It’s better to hear about changes in policy and tax laws before they affect your finances, back home or in the U.S.

Financial security is a cornerstone of freedom. When you know that you have the best information available about how to handle the money you make, and have taken care to protect yourself from being taxed twice on the same income, you can enjoy the wealth you are working so hard to create. No one expects you to be an expert on one country’s tax laws, let alone two. At Cardinal Point Wealth Management, our cross-border expertise can help keep you in the know about your Canadian and U.S. tax liability and your investments. Our experience on both sides of the border lets us provide you with the information you need, for your big move and every move after that.

John McCord is the Director of Private Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada. John specializes in providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services.
This piece is for informational purposes only.