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Canadian Snowbirds

An Alternative Cross-Border Lifestyle

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Scott and Marie McFarland1 lived and worked in Canada for many years as well as in the U.S. for a time. They eventually retired to the United States, choosing the Sun Belt as their home. The McFarlands are not wealthy. However, they will gladly tell you that they feel rich. Below is a closer look at the particulars of their situation.

Summary and Takeaways

Cross-border lifestyles are increasingly common, as more people who are legal residents of Canada or the U.S. work remotely or own a second home in the other country over the border. Cross-border lifestyles can be very attractive, and offer numerous versatile benefits. But there are special considerations to factor in if you’re in that situation, regarding financial and tax planning – to help reduce paperwork and more importantly, reduce your tax liability.

Key Takeaways

  • Some years, choosing between the U.S. and Canada as your declared legal residence may offer significant tax advantages, if you plan ahead for those.
  • The same goes for healthcare. As a U.S. resident, you may qualify for subsidies to help cover the cost of health insurance while enjoying an American lifestyle.
  • In the event of a major health problem, reestablishing Canadian residency in Ontario could make you eligible for the province’s free healthcare services without a waiting period.
  • If you invest in a business based in the U.S. you may qualify for an E-2 visa, which allows you to live and work there but go back and forth to Canada with ease – without having to apply for a green card.
  • Guidance from experts in cross-border law and financial and tax planning when contemplating a cross-border lifestyle is strongly recommended.
  • They come and go from the U.S. as they please. Typically, they spend about seven months in the U.S. and about five in Canada. However, they do not have to watch the calendar to stay on-side with the border patrol.
  • On the other hand, they may go through multi-year periods where they spend most of the year in Canada and never have to file a jot of paperwork with the U.S. government as a result. This is especially helpful when it comes their grandchildren. Scott and Marie can spend as much time as they wish in Canada and then return to life in the Sun Belt without waiting for permission from anyone.
  • Some years, it may be more advantageous to be a U.S. or a Canadian resident for tax reasons. If they can plan ahead, they make sure they reside in the country that gives them the better tax benefit that year.
  • They love the fact that they only file U.S. resident tax returns when they actually live there. No longer do they have to file two tax returns and struggle to manage foreign tax credits.
  • If they ever decide to pull the plug on their relationship with the U.S., they will not be subject to the U.S. expatriation tax on their accumulated wealth.
  • And they are not necessarily considered U.S. residents for estate tax purposes (domiciliaries) either. Insulating themselves from the brunt of U.S. estate tax required a little planning, but it wasn’t hard or expensive.
  • As far as healthcare is concerned, the McFarlands carry U.S. health insurance for the years they reside there. The U.S. subsidizes some of the cost. If they encounter a major health problem, they reestablish Ontario residency and qualify for OHIP without a waiting period (under current rules).

The McFarlands think that the cost of U.S. health insurance (with a partial subsidy) is a reasonable price to pay for all of the other benefits their lifestyle offers. The funny thing is that the McFarlands are not dual citizens. And they are not green card holders either. The McFarlands found a different way—and for them, a better way—to live a cross-border lifestyle.

What the McFarlands did is obtain E-2 Treaty Investor visas, which are renewable every five years. As E-2 visa holders, the McFarlands are nonimmigrants (as opposed to immigrants aka green card holders) under U.S. immigration rules. They come and go from the country as they please and can qualify for U.S. tax residency if they are physically present in the U.S. for a sufficient amount of time. If they spend more time in Canada, they qualify for Canadian tax residency instead.

The E-2 visa is granted to an individual (and immediate family members) to direct their own investment in the United States. The key words here are direct and investment:

  • Direct is interpreted loosely. The visa holder does not have to work in the business. Checking in on the business now and then should suffice.
  • Investment means starting a business, purchasing a business, or becoming a partner with a controlling interest in a business. This is NOT the Immigrant Investor (green card) program which requires a commitment of USD $900,000 or $1.8 million. The E-2 sometimes requires less than USD $100,000.

Of course, no visa opportunity is perfect. In the E-2 context, the challenges are clear:

  • You need to find the investment. The government does not have a catalogue of suitable investments. If you don’t have the experience or the contacts to identify an investment, often times an immigration lawyer can tap his/her own network of contacts. Certainly, business brokers can offer extensive assistance (and some have experience with investing in the E-2 context). In any case, an E visa lawyer should be involved in choosing the investment, if only to ensure that it likely meets the E-2 criteria.
  • If the investment ends, so does your E-2 status. Always have a Plan B: a Canadian home to return to, another investment opportunity on which to base a new E-2, or pursue a different visa or green card.
  • Your long-term financial plans should not depend on this money. Your E-2 investment is not a loan. Funds are “placed at risk” like every other true investment. But getting your money out is not like selling a stock. How you get your money out depends on the terms of your investment agreement and the good faith of the parties.
  • The E-2 is conditioned on your health. An E-2 visa renewal may require a personal interview. (Who knows what the procedure will be five years from now?) Advanced age or poor health could raise doubts about your ability to “direct.” For this reason, do not plan to die of old age in the U.S. on an E-2 visa. Plan to spend your twilight years in Canada—or pursue a green card strategy to establish a different basis for life in the United States.
  • Like an accountant, an E visa lawyer should become a fixture in your cross-border lifestyle. People do prepare their own E applications, but it is not recommended. There can be more to the preparation and planning than you will ever find online. Fortunately, there are lawyers who focus on E visa work, and they are easy to find.

After your visa is approved, an E visa lawyer should review your situation every year or two to confirm that you continue to meet the requirements and to set the stage for your five-year renewal application. While many E visa holders file their own renewal applications, some get peace of mind from having the E visa lawyer who knows the business prepare the renewal requests.

An E-2 visa is a unique foundation for a cross-border lifestyle. Certainly, it is useful for those who can’t qualify for a green card. But it also may be a near-perfect solution for Canadian globetrotters who just don’t want to be saddled with U.S. tax residency when they are living elsewhere. The E-2 offers a unique balance of flexibility (versus the green card) and certainty (versus a work visa) for a long-term cross-border lifestyle.

1 The McFarlands are a fictional composite.

What can Snowbirds do with their U.S. Vacation Property During the Pandemic?

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Are you a snowbird, spending lush summers in your home country and avoiding Canada’s cold, harsh winters in a U.S. vacation property? If so, you’ve probably wondered about the tax implications of retaining or selling your U.S. home now that a global pandemic has made that southern migration too dangerous to be prudent.

Terry Ritchie, Cardinal Point Wealth Management Vice President, recently contributed his expertise on this topic in an article for The Globe and Mail. In the piece, Terry and other cross boarder financial experts suggest a number of actions you can take to come out on top despite these uncertain times including:

  • Renting the property to cover the costs of holding onto it
  • Selling the property to eliminate associated costs

Each option has its own set of tax implications, which should be considered before you act. Read the full article and learn more on The Globe and Mail website here.

Terry Ritchie
Terry Ritchie

Terry Ritchie in “Weak loonie, competition from U.S. home buyers work against Canadian snowbirds”

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In past years, with a strong Canadian dollar, Canadian Snowbirds were able to pick up investment properties or vacation homes in popular locations such as Arizona, California and Florida. With a softer Canadian dollar, snowbirds are finding some competition for these types of homes. Cardinal Point Capital Management’s Terry Ritchie discusses the current state of the U.S. real estate market for snowbirds in this Globe and Mail article.

Terry Ritchie featured in the Globe and Mail: Foreign Exchange

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Terry Ritchie gives his insights and tips when dealing with foreign exchange options.

From the Globe and Mail article:

“I’m not a big fan of the banks,” said Terry Ritchie, a financial adviser who works both sides of the Canada-U.S. border. “They’re great for convenience. But if you can take the time and wait a day or two, there are better bets.”

Read the article here

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

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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