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Navigating Cross-Border Pension Portability: A Guide for Canadians and Americans on the Move

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Moving between Canada and the United States is an exciting adventure—whether for work, family, or retirement. But when it comes to your retirement savings, things can get tricky. Defined benefit (DB) pensions, like the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), and U.S. qualified plans such as 401(k)s, aren’t as portable as your suitcase. The good news? The U.S.-Canada Tax Treaty helps smooth the way, preventing double taxation and allowing some tax-deferred growth. This guide will walk you through the process with a thorough yet digestible breakdown, covering portability, lump-sum options, foreign withholding taxes, tax credits, and the all-important timing of your move. This article is designed to help you work with a cross-border financial planner to secure your financial future across borders.

canada US retirement

This guide is divided into easy-to-follow sections, using real-world examples to make it relatable. Whether you’re a Canadian planning on retiring in a warmer climate or an American heading north to enjoy a Canadian lifestyle, understanding these rules can save you thousands in taxes and headaches. Let’s dive in with the help of cross-border wealth management expertise.

Understanding the Basics: What Are These Plans?

Before we cross borders, let’s clarify the plans in question with insights from a cross-border tax planning perspective.

  • CPP, OAS & Social Security: These are all considered benefits under the social security legislation of Canada and the U.S. They are only taxable in the country of residence. If you are receiving U.S. social security while a Canadian resident, it is only 85% taxable. In receiving any of these while in the U.S. they are taxable up to 85% depending on your income from other sources. Contributions are a fixed percentage of your eligible earned income and benefits are determined at the time of retirement.
  • Defined Benefit (DB) Pensions: These are “promised payout” plans that provide a predictable monthly benefit based on factors such as earnings and years of service, typically starting around age 60. In both Canada and the U.S., DB plans are mostly offered by employers, though they have become increasingly rare as organizations shift toward Defined Contribution (DC) plans, where investment risk is borne by the individual rather than the employer. While the structure and purpose are similar in both countries, U.S. DB plans often integrate with Social Security benefits, whereas Canadian DB plans may coordinate with CPP/QPP.
  • Defined Contribution Plans like RRSPs or 401(k)s: These are more like savings accounts where you (and often your employer) contribute. In the U.S., 401(k)s grow tax-deferred, with options for traditional (pre-tax) or Roth (after-tax) versions.  In Canada, RRSPs grow tax-deferred.
  • FTQ (Fonds de solidarité FTQ): This Quebec-specific fund is a labor-sponsored investment vehicle, often held within an RRSP (Registered Retirement Savings Plan) for the RRSP contribution deduction and the additional FTQ tax credits. It’s not a pure pension but offers retirement savings with tax benefits and can be redeemed under certain conditions.

Government plans like CPP/QPP can’t be “transferred” like private ones, but treaties coordinate benefits. Each system was designed with its own tax advantages and withdrawal rules, creating a puzzle with you trying to fit pieces from one country into another’s framework. This is where cross-border wealth management strategies and the knowledge of a cross-border financial planner really pay off.

Let’s examine two different scenarios.

Scenario 1: Canadians Moving to the U.S. with CPP, QPP, or FTQ

Picture this: You’re a Canadian engineer from Quebec with years of contributions to QPP and FTQ shares in your RRSP. A job offer in Seattle pulls you south. What happens to your retirement savings?

Portability: Can You Take It with You?

For public plans like CPP and QPP, direct transfers to a U.S. IRA aren’t possible. Instead, the U.S.-Canada Totalization Agreement kicks in. This pact combines your work credits from both countries to qualify for benefits. For example, if you’ve worked 8 years in Canada and 2 in the U.S., those Canadian years count toward U.S. Social Security eligibility (which requires 10 years). You can receive your CPP/QPP payments anywhere in the world, including the U.S., without losing eligibility. Unlike other benefits tied to residency, these pensions are based purely on your contributions towards them during your working years.

Side note: Service Canada can even direct deposit your monthly payments directly into a U.S. bank account in USD. 

For FTQ held in an RRSP, you can’t directly roll it into a U.S. IRA. However, you can keep the RRSP intact as a Canadian non-resident. Under the Canada-U.S. treaty and IRS Revenue Procedure 2014-55, U.S. taxation of undistributed income in RRSPs/RRIFs can generally be deferred until distribution. To use treaty benefits, use Form 8833 attached to your tax return, and consult with a cross-border tax professional. Not all U.S. states honor the Canada – U.S. Tax Treaty. In states like California and Kansas, the income earned in your RRSP is currently taxable for state purposes.  Upon leaving Canada, FTQ lets you redeem shares held for over two years without penalties, treating it as a permanent emigration withdrawal.  If the FTQ is held in an RRSP, the withdrawal will stay there and be reinvested until you take an RRSP distribution.

Lump-Sum Options: Cash Out or Annuity?

CPP and QPP don’t offer lump sums for standard retirement—benefits come as monthly payments. You can start reduced payments at age 60 or full payments at age 65. For special cases like disability, limited lump sums exist, but relocation doesn’t trigger them.

FTQ is more flexible: You can take a lump-sum withdrawal upon emigration, but it’s fully taxable in Canada if from an RRSP. This might make sense if you need cash for your U.S. move, but it’s important to plan for the tax implications with a cross-border wealth advisor.

Foreign Withholding Taxes: Who Takes a Cut?

Under Article XVIII of the Canada – U.S. Tax Treaty, CPP/QPP, OAS and U.S. Social Security income are taxable only in the taxpayer’s country of residence.  Source-country non-resident withholding taxes are not required.

For FTQ or RRSP lump sum distributions, Canada applies 25% withholding to non-residents. The treaty doesn’t reduce this for one-time payouts—only periodic payments get a 15% withholding rate. So, a $100,000 lump sum distribution could see $25,000 withheld upfront.

Tax Credits: Reducing Double Taxation

As a U.S. resident, you’ll report Canadian pension income on your U.S. tax return. If Canada withheld tax, claim a Foreign Tax Credit (FTC) on IRS Form 1116 to offset U.S. liability on the same income. For example, if Canada takes $5,000 in tax on a $20,000 distribution, you credit that against your U.S. tax bill on that amount of foreign-sourced income. Cross-border tax planning is key here.

Timing Your Move: When to Act

  • Pre-Move: Boost contributions to maximize Totalization credits. Defer any withdrawals to avoid Canadian tax while still a resident.
  • During the Move Year: File as a dual-status taxpayer—U.S. non-resident up to the date of move and U.S. resident post-move. Indicate treaty deferral on form 8833 for RRSP/FTQ on the first U.S. return to keep growth tax-free in the U.S, at least for federal purposes.
  • Post-Move: Start benefits in the U.S. when it makes sense for your situation. Are you full retirement age? Are you still working and contributing to Social Security? Note the 2025 Windfall Elimination Provision (WEP) was recently repealed, which means your U.S. Social Security won’t be reduced by CPP receipts. For FTQ, withdraw after settling to claim emigration status.

Example: Sarah, a Quebec resident with QPP and FTQ, moves to Texas. She keeps her RRSP, indicates treaty deferral on her first U.S. tax return, and receives QPP, taxable as if it was U.S. Social Security, in the U.S.

Scenario 2: Americans Moving to Canada with 401(k)s or DB Pensions

Now flip the script: You’re a U.S. citizen with a 401(k) from your tech job, heading to Toronto for a new role. As a U.S. citizen or Green Card holder, you’ll file taxes in both countries, but Canada becomes your primary tax home. Having a cross-border wealth management strategy is essential to navigate this transition effectively.

Portability: Transferring South to North

For 401(k) and 403(b) Plans you have three options:

  1. Leave it where it is. This allows your assets to grow tax-deferred thanks to the Canada-U.S. Tax Treaty, however managing it while out of the country is not possible. This is the simplest solution but not ideal if you plan on moving out of the U.S.A. for the long-term.
  2. Roll it over into an IRA. Prior to leaving the U.S. you can elect to rollover your 401(k) plan into an IRA. Doing this allows for greater flexibility and can be managed by a cross-border wealth advisor who is licensed in both countries.
  3. Transfer it to an RRSP. This is an option, however due to high U.S. withholding and Canadian tax on withdrawals it tends to be sub-optimal. This can be done without having or losing RRSP contribution room thanks to the treaty. This keeps growth deferred in Canada.

DB pensions can’t directly transfer to an RRSP, but you can leave them in the U.S. plan with treaty-protected deferral. If your employer allows, commute the value to a lump sum and roll to RRSP with guidance from a cross-border financial planner.

Lump-Sum Options: Flexibility North of the Border

Distributions from 401(k)s and IRAs are taxable in the U.S. at 15% under the Treaty. Those distributions will be taxable in Canada as well but sourced to the U.S., and the 15% U.S. tax can be used as a foreign tax credit on your Canadian return.   If your 401(k) or IRA has already been transferred to an RRSP, then it will be reportable to the U.S., but foreign tax credits should shield it completely from U.S. taxation. DB plans often offer lump-sum buyouts, taxable in the U.S., but potentially transferable to RRSP at commuted value.

Foreign Withholding Taxes: U.S. Takes First Bite

The U.S. withholds 10% on pension plan distributions to U.S. citizens or Green Card holders living abroad. Roth versions are tax-free in the U.S., but there is still a nominal refundable withholding on withdrawals. Presuming that the correct Competent Authority elections have been made for the Roth and the distribution is ‘qualifying’, the income escapes taxation in both countries, once the tax returns are filed. Cross-border tax planning can ensure this favorable result.

Tax Credits: Double Duty Relief

Claim Canadian FTC on your T1 return for U.S. taxes paid, avoiding double taxation. As a U.S. citizen, use Form 1116 on U.S. returns for Canadian taxes.

Timing Your Move: Strategic Planning

  • Pre-Move: Consider rolling over your 401(k) into an IRA, then either convert or transfer it to an RRSP. Alternatively, work with a cross-border, dual-licensed financial advisor while you are still a U.S. resident. Either option allows you to minimize having to pay higher Canadian tax rates on conversions. Whenever possible, it’s also wise to defer distributions.
  • During the Move Year: Dual-status filing; time lump sum distributions before move for U.S.-only taxation with a cross-border wealth advisor.
  • Post-Move: Use Form W-9 to indicate U.S. citizenship and avoid the higher U.S. withholdings on non-resident aliens.

Example: John, a U.S. citizen with a 401(k), moves to Vancouver. He rolls it to an IRA pre-move, transfers to RRSP largely tax-free, and claims FTC for U.S. withholdings on later withdrawals with cross-border wealth management support.

Key Comparisons and Practical Tips

To make sense of it all, here’s a quick comparison table:

Aspect Canadian to U.S. U.S. to Canada
Portability CPP/QPP: Benefits abroad; no transfer. FTQ: Redeem or keep. 401(k)/DB: Roll to IRA/RRSP tax-deferred.
Lump-Sum Limited for public plans; yes for FTQ. Yes, but taxable unless transferred.
Withholding 25% Canada (0-15% treaty). 15% treaty for periodic, 25% treaty for lump-sum. 30% U.S. without Treaty
Tax Credits U.S. FTC. Canadian FTC.
Timing Defer post-move. Convert pre-move.

Practical Tips:

  • Hire Experts: Always work with a cross-border wealth advisor and tax professional. Navigating forms, like the CRA’s T1 and IRS’s 1040, can be overwhelming when doing it alone.
  • Avoid Double Taxation Pitfalls: Time conversions to lower-tax years; use treaty elections early with cross-border tax planning.
  • Inflation and Currency: Factor in exchange rates—CAD-USD fluctuations can erode value.
  • Recent Changes: The 2025 WEP repeal benefits dual earners. Watch for treaty updates with a cross-border financial planner.

Final Thoughts: Plan Ahead to Minimize Retirement Surprises

Cross-border moves don’t have to derail your retirement plans. By leveraging treaties, timing your actions, and using tax credits, you can protect your savings. Whether it’s preserving CPP benefits in the U.S. or rolling a 401(k) to an RRSP, knowledge is power. A cross-border tax planning expert can create a strategy tailored to your unique situation.

If you’re planning a move, start now: Review your contributions, elect treaty benefits, and model scenarios with a cross-border financial planner. Your future self will thank you.

To speak with one of our Cross-border Wealth Advisors click on the “contact us” link at the top of the page.

Moving from Canada to the U.S.: What to do with your Canadian dollar investments

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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 more smoothly navigate the financial transition.

Here’s the background. The Canadian dollar has been valued within the same limited range for nearly a decade, and is currently valued between 0.70 and 0.80 against the U.S. dollar. That is big departure from the summer of 2014, when the ratio was 0.90 to 0.95. 

moving to US from Canada

In the past, when the currencies were so closely valued, many individuals planning a move to the U.S. elected to convert their bank and non-registered (taxable) investment-account funds to U.S. dollars. After all, it makes sense to hold most of your liquid net worth in your local currency. Also, converting Canadian dollars to U.S. dollars and moving Canadian taxable investment accounts to the United States simplifies tax and foreign-account reporting requirements. It also provides you with better investment opportunities, including those that are more tax efficient – while simplifying your financial and estate planning.

But a Canadian dollar below 0.80 complicates things, as most people are reluctant to convert funds at such a sizeable discount. So, let’s look at options available to individuals or families who do not want to convert their CAD taxable investment accounts to U.S. dollars.

OPTION 1 (which is never ideal): Leave your Canadian investment accounts in Canada.

If you work with a Canadian financial advisor, chances are that adviser is 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 status 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 to learn why), one of three things will likely happen:

  • Your advisor will inform you that they are no longer able to provide investment advisory services to you and that you must work with someone in the U.S.
  • Your advisor will explain that you can keep your accounts on the Canadian platform but that they will be frozen and no further trading or rebalancing can take place.

Your advisor will explain that they are, indeed, 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, your most likely scenarios are Options 1 and 2. In the event that your advisor fits the third scenario, you want to ensure that their services and expertise extend beyond merely 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 to the management of your investment assets. It is critically important to align yourself with a firm that boasts a team of seasoned professionals who have earned both Canadian and U.S. credentials and designations. Those include (but aren’t limited to) Canadian CFP, U.S. CFP, Canadian CPA, U.S. CPA, and Chartered Financial Securities Analysts licensed in both Canada and the U.S.

Now, if you do decide to leave your Canadian non-registered accounts in Canada, there are number of important points to consider, such as:

  • Drawbacks of Canadian Funds
    Canadian-traded mutual funds are considered “not registered for sale” to U.S. residents. Even more importantly, Canadian-traded mutual funds and ETFs are likely categorized as Passive Foreign Investment Companies (PFIC). The earnings and dividends distributed by such investment vehicles are subject to the highest marginal tax rates on your U.S. income tax returns. Holding these securities could also invite additional and more costly U.S. tax filing requirements.  (Download our whitepaper on PFICs  for further information.)
  • Accounting Hurdles
    Canadian custodians have a reputation for doing a poor job of complying with U.S. tax reporting requirements. For example, many do not prepare and submit annual U.S. 1099 tax reports showing dividends, interest, and long-term versus short-term capital gains. But these reports are required by law if you are a U.S. resident. Furthermore, many of the tax reporting forms Canadian custodians provide to U.S. resident clients are denominated in Canadian dollars. That means that you or your accountant must convert all taxable and reportable transactions to U.S. dollars before filing your U.S. tax returns. This additional work by can increase the likelihood of errors and lead to significantly more time-consuming and expensive accounting and tax-preparation.
  • The Conversion Window
    If converting your funds to U.S. dollars once the exchange rate improves is still your goal, make sure your investment strategy is flexible enough to accommodate a future currency conversion. For example, you do not want to be locked into investment products that must be held for a certain period of time. If they are locked when exchange rates improve, you may miss your chance to take advantage and convert because your funds aren’t accessible. 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 the exchange rates became attractive but the value of your Canadian-dollar investment holdings had deteriorated due to poor market performance or downside volatility.
  • Tax-Aware Investing
    Make sure your advisor is managing your account under an investment mandate that reflects your U.S. tax residency. As previously mentioned, U.S. residents are subject to long-term and short-term capital gains tax 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 40.8%). 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 considerably lower rate (15% or 20%). But in Canada, there is no such thing as long-term or short-term capital gains. Canada has just one capital gains rate, and Canadian portfolio managers are trained to oversee client accounts while applying that rate. 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. Tax residents of the U.S. should also seek to invest in securities that distribute qualified dividends that are taxed at a more favorable rate than ordinary dividends. For these reasons and others, it is always in your best interest to confirm that the Canadian money manager or advisor has a depth of experience working with U.S. tax residents. Be sure they know how to strategically and effectively customize the management of your portfolio to ensure total compliance with 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, highest market value in the tax year, etc.) on a form called the FinCEN Report 114. Additionally, you may have to file an IRS Form 8938 – Statement of Specified Foreign Financial Assets as part of your Form 1040 filing. These increased reporting requirements are time-consuming and will likely lead to substantially higher tax preparation costs.

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

Option 2 (better, but still challenging): Move your Canadian Investment Account to the U.S.

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 will still 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 obviously contradicts your goal of maintaining your holdings in Canadian dollars. The main reason why U.S.-based advisors make this recommendation is that their firm, or its custodian, does not offer multi-currency accounts. The U.S. dollar is the only currency option they are able to provide for your investments. It is rare for U.S. investment firms to offer Canadian dollar-denominated accounts because there is little demand for them in the United States.

Another critical consideration is that investment advisors who 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 (which as mentioned above, is rare). But it is quite a different matter for a financial advisor or portfolio manager to have the knowledge base, experienced acumen, and extensive training needed to build and oversee Canadian-based investment portfolios that include Canadian-traded securities.

All too often, clients are left holding their Canadian-dollar investment accounts in cash, simply because they cannot find a qualified financial professional based in the United States to expertly invest those assets.

OPTION 3 (the best option): Manage your cross-border investments with Cardinal Point.

The Cardinal Point difference is simple yet profound. We are legally 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, IRAs, 401ks, Trusts, Non-Registered accounts, etc.), we construct integrated cross-border portfolios customized to each investor’s personal risk tolerance, needs, and goals.

Whether you are an individual living in the U.S. or are moving there with Canadian dollar investment accounts − or you have recently received a large sum of Canadian dollars from the sale of a home, business, or through inheritance, our fully certified Canada-U.S. portfolio management team can provide experienced and insightful help. We have the ability to invest your Canadian dollar accounts on a U.S. custodial platform and then tax-manage them based on your U.S. tax jurisdiction residency. As a U.S. resident partnering with Cardinal Point to oversee the management of your Canadian-dollar investment accounts, you gain significant benefits including:

  • Fully compliant and customized U.S. tax reporting on Canadian-dollar investment assets
  • Multi-currency investment accounts supported by a savvy investment team providing a variety of Canadian-dollar and U.S. dollar asset management services
  • Flexible and convenient foreign exchange services
  • Cardinal Point’s in-depth understanding of effective U.S. tax management strategies for Canadian-dollar investment accounts
  • Additional cross-border financial, tax, and estate planning expertise for the sustained preservation and growth of your wealth

Please contact Cardinal Point to discuss your cross-border investment management, tax, retirement, and other financial planning needs.

Navigating RRSPs/RRIFs/LIRAs/LIFs: Tax Planning for Canadians Moving to the U.S.

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When a Canadian resident decides to move to the United States, there are numerous cross border tax and financial planning considerations that need to be addressed. One area of concern for many is how their Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Locked-In Retirement Accounts (LIRAs), and Life Income Funds (LIFs) will be impacted by this move. In this blog, we’ll explore what happens to RRSPs/RRIFs/LIRAs/LIFs when an owner moves to the U.S. and we’ll reveal various available options for effective cross border tax and wealth management planning.

Summary and Takeaways

Any Canadian who migrates to the United States should do careful cross-border financial and tax planning, to minimize tax exposure and ensure effective wealth management. One important consideration that is covered in detail in this article is that even if you leave Canada you can still hold on to your RRSPs, RRIFs, LIRAs, and LIFs. Just make sure you fully understand and strictly follow U.S. and Canada compliance rules and regulations.

Key Takeaways

  • Thanks to treaties between the two nations, you may be able to defer U.S. taxes on income accumulated within those Canadian retirement plans, until the funds are distributed to you.
  • However, not all U.S. states adhere to those international tax treaties. So depending on where you live, you may still be liable for state mandated taxes.
  • Also pay close attention to any applicable requirements for filing certain tax forms in both countries in a timely manner.
  • Cross-border tax laws and financial planning can be very complicated, and it is strongly advised that you seek help from qualified professionals experienced in this kind of specialized and intricate planning.
Considerations for cross-border financial planning

Understanding the Transition

Leaving Canada doesn’t necessarily mean leaving behind your Canadian investment accounts. RRSPs/RRIFs/LIRAs/LIFs can still be maintained, as long as you follow crucial steps to ensure full compliance with Canadian and U.S. tax regulations.

Reporting Requirements

One important note for Canadian emigrants moving to the U.S. is that they do not need to report on Form T1161 (List of Properties by an Emigrant of Canada) or Form T1243 (Deemed Disposition of Property by an Emigrant of Canada). However, it is essential that they file a Form 8833 with their U.S. tax return to disclose any tax treaty elections or positions under the Canada-U.S. Tax Treaty. If the maximum value thresholds are met on your Canadian registered accounts, it is also critically important that you report that on an FBAR/FinCEN 114 and on Form 8938 of your U.S. tax return.

Tax Planning Strategies

For Canadians relocating to the U.S., several tax planning strategies can help optimize the treatment of RRSPs and RRIFs.

Article XVIII(7) Election

Under Article XVIII(7) of the Canada-U.S. Tax Treaty, emigrants can elect to defer U.S. taxation on income accruing within their RRSPs/RRIFs/LIRAs/LIFs until distributions are received from the accounts. This election offers a unique advantage, particularly if the individual plans to take periodic distributions over time. 

Withholding Tax Considerations

The tax treatment of distributions from RRSPs/RRIFs/LIRAs/LIFs depends on the individual’s tax residency status. Canadian withholding tax rates for Canadian residents range from 10% to 30%, but if someone becomes a U.S. tax resident or non-resident of Canada, the Canadian withholding tax rate is automatically 25%. However, the Canada-U.S. Tax Treaty allows for reduced withholding rates of 15% for periodic distributions from RRIFs under specific guidelines. The Canadian non-resident withholding tax (Part XIII) on lump sum distributions from RRSPs/RRIFs/LIRAs/LIFs remains at 25%. Canadian Part XIII taxes are a final tax liability to Canada. Taking a distribution from RRSPs/RRIFs/LIRAs/LIFs with Part XIII tax withheld does not necessitate a Canadian tax return filing. The taxes paid to Canada will be available as foreign tax credits to reduce taxes payable to the U.S.

Non-Resident Canadian Income Tax Return

In certain cases, former Canadian residents might benefit from filing a Canadian income tax return as a non-resident under Section 217 of the Canadian Income Tax Act. Doing so enables non-residents of Canada to claim deductions and credits similar to those available to Canadian residents, thereby optimizing tax efficiency.

State Tax Implications

It’s essential to consider that some U.S. states, such as California, may tax annual income and realized capital gains within RRSPs/RRIFs/LIRAs/LIFs, irrespective of distributions. This is because some states do not adhere to the Canada-U.S. Tax Treaty, so the Article XVIII(7) Election does not apply at the state level. These potential implications should factor into your overall tax planning strategy.

Conclusion

Navigating the complexities of cross-border financial and tax matters requires a deep understanding of both Canadian and U.S. tax laws. If you’re a Canadian moving to the U.S. and wish to maintain your RRSPs/RRIFs/LIRAs/LIFs, it’s crucial that you work with experienced professionals who can help you develop a comprehensive tax plan tailored to your individual circumstances. Keep in mind that tax laws can change, so it is vital that you stay informed and seek consistent professional advice to ensure your financial health in both countries. Please see our blog titled Income Tax Implications of RRSP Withdrawals as a Non-Resident of Canada for more information, and contact Cardinal Point should you have any questions. 

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Understanding Dual Tax Residency in Canada

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Dual tax residency, or having more than one country in which one is considered a resident for tax purposes, is not uncommon. In Canada, individuals such as high-net-worth individuals with a second home in a warmer location, landed immigrants who have maintained ties to their country of origin, employees on extended foreign assignments, and those who qualify as dual residents for tax purposes may all find themselves in this situation. The COVID-19 pandemic has also led to a new group of dual residents, due to decisions they made to extend their stay in Canada or abroad based on travel restrictions or health and safety considerations. Similarly, the trend for employees to work remotely (even across borders) has also increased the number of dual residents.

Dual Canada U.S. citizenship

Summary and Takeaways

If you reside or work in one country but are deemed a tax resident in another country, you are considered to have dual tax residency, or in more precise terms; you’re a “dual resident for tax purposes.” This situation can arise in various scenarios. For example, you may be Canadian but work remotely for a U.S. employer. Alternatively, you may own a second home in a warmer climate in another country. Regardless of the specifics, being a dual resident for tax purposes carries significant tax obligations for Canadian taxpayers. These obligations are based on the rules and policies established and enforced by the Canada Revenue Agency (CRA). A lack of awareness regarding these guidelines and regulations can lead to adverse financial consequences. However, understanding your unique tax situation and employing strategic tax planning can assist you in minimizing or even eliminating your tax liability.

Key Takeaways

  • You can file an NR73 or NR74 form to request a determination of your residency status, but there is a risk that this could trigger an unwanted audit.
  • If you are a non-resident of Canada, you are likely only taxed on certain income sourced in Canada.
  • If you earn significant income sourced from another nation, existing tax treaties between nations may help reduce your tax liability.
  • Dual taxation is complicated and every taxpayer’s situation is unique. It is strongly recommended that dual residents consult a cross-border taxation expert to ensure compliance and avoid unnecessary tax liability.

The Canada Revenue Agency (CRA) has traditionally engaged in increased audit activity on high-net-worth individuals and certain landed immigrants with multiple residences. Due to the pandemic, it can be expected that the CRA will have even more focus on residence issues. That’s because many individuals unexpectedly spent more time in Canada during the 2020 to 2022 taxation years, and now may have significant Canadian tax issues.

Dual residents should be aware of their Canadian tax compliance requirements before filing their Canadian tax returns. They should also carefully respond to any CRA inquiries, requests, and demands for tax returns. Proactively consulting a tax advisor may be beneficial.

The Canadian tax system is based on residence, and Canadian residents are taxable on their worldwide income. In the year of immigration or emigration, they are subject to tax on their worldwide income earned during the part of the year when they were Canadian residents. The concept of “residence” is not defined in Canada’s Income Tax Act, but the courts have defined it as the degree to which a person has settled into or maintains a central location for their ordinary mode of living.

The CRA provides guidance in the form of Income Tax Folio S5-F1-C1, which lists the most important factors (known as primary residential ties) as well as secondary factors used in determining whether or not an individual is a Canadian resident for tax purposes. Individuals can file an NR73 or NR74 form to request a determination of their residency status, but there is a risk that this could trigger a review or audit and that the determination may not be in their best interest. There is no legal obligation to file these forms unless they are requested by the CRA.

Dual residency, or having more than one country in which one is considered a tax resident, can happen when an individual is a tax resident of Canada as well as a tax resident of another jurisdiction that has a tax treaty with Canada. In these cases, the individual’s residence status for Canadian tax purposes may be determined through the application of subsection 250(5) of the Income Tax Act (ITA).

When subsection 250(5) applies, it can deem an individual who is otherwise a factual resident of Canada to be a non-resident of Canada if the tie-breaker rules of the applicable tax treaty identify the individual as a resident of the other country. Being a non-resident of Canada means that the individual is generally only taxable in Canada on certain Canadian-sourced income and would only be required to file a Canadian tax return under specific scenarios. This provision, therefore, is crucial for individuals with residential ties in Canada and another treaty country, who have significant sources of income earned outside Canada, such as through business, employment, or investment income.

The tie-breaker rules in most of Canada’s tax treaties utilize internationally recognized tests such as the permanent home test, center of vital interest test, place of habitual abode test, and the citizenship test. But before these tie-breaker rules can be applied, the individual must be considered a resident of both contracting nations for the purposes of the treaty. To be considered a resident of a contracting nation for treaty purposes, a person must be “liable to tax” in that nation, per the terms of the treaty. The CRA has provided guidance on the meaning of “liable to tax” in its publication, Income Tax Folio S5-F1-C1, paragraphs 1.41 to 1.45.

Individuals relying on subsection 250(5) of the ITA should expect to provide support to the CRA regarding their tax status in the other jurisdiction, such as copies of foreign tax returns and assessments. The first tie-breaker test is always the country in which the individual has a permanent home, either owned or rented, available to them. This is why proper tax planning can often ensure that the tie-breaker rules will apply in the desired way. However, in cases where the individual has a permanent home available to them in both countries during the dual resident period, the first test will not resolve the tie. Consequently, the second and third tie-breaker tests, center of vital interest and place of habitual abode, are often the tie-breaker rules that determine the individual’s residence status for purposes of the treaty. As these tests are highly subjective, it’s recommended that the individual consult a tax advisor for an opinion on the matter. In cases where the individual relies on the CRA to make the determination, the CRA may err on the side of caution and determine the individual to be a resident of Canada, when in fact they may have a valid and defendable tax filing position as a non-resident of Canada due to subsection 250(5) of the ITA and the treaty tie-breaker rules.

Taxpayers may not be bound by their initial classification as a resident of Canada if they have mistakenly filed their tax returns as such. If an individual is a dual resident and ITA subsection 250(5) applies to deem them a non-resident, they may be able to amend their prior tax returns − as long as the taxation years are not statute barred and the CRA agrees with the analysis of the tie-breaker rules. There is Canadian legal precedent supporting the idea that taxpayers are not bound by their initial mistaken tax classification as residents of Canada. This can be beneficial for taxpayers, particularly those who have significant non-Canadian sources of income and lower tax rates in their other country of residence. However, amending tax returns to identify oneself as a non-resident can also trigger negative tax implications, such as departure taxes. It’s advisable to consult with a tax advisor to understand all possible ramifications that may arise in both jurisdictions before considering amendment of tax returns.

It’s important to note that every dual resident case is unique and can trigger numerous tax issues in both countries. If an individual is a resident of Canada with significant ties to a country that has a tax treaty with Canada, they should not be subject to double taxation. If a double taxation arises, there will be a tax dispute process (Mutual Agreement Procedure) available to resolve the issue. The objective of this article is to raise awareness of Canada’s tax system and specifically, subsection 250(5) of the ITA. With an increase in dual residency cases as a result of the pandemic and the trend of remote work it’s important for taxpayers to be aware of the rules that may impact their tax situation. For more information, please consult Cardinal Point’s Canadian tax residency blog post, or if you would like to discuss your tax situation, please reach out to Cardinal Point.

Moving to Canada? Know the Tax Residency Rules

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If you are contemplating a move to Canada, note that you should consider tax implications well ahead of your actual move date. Your tax liability in Canada is dependent on your tax residency status:

  • Canadian resident taxpayers are taxed on their worldwide income
  • Canadian non-resident taxpayers are taxed on their Canadian source income

This presents opportunities to structure your financial affairs before being subject to the full Canadian tax system.

Move to Canada

Summary and Takeaways

As part of your preparation for a move to Canada, it’s prudent to factor in the tax residency rules, to understand your potential tax liability. Resident taxpayers are subject to taxes on their worldwide income, while non-resident taxpayers are only taxed on income sourced within Canada. But there is no strict legal definition of what the term “resident” means under the Income Tax Act of Canada. That complicates tax planning, but there are four different main things to consider, explained in this article, that can help you determine your tax residency status. Then you may be able to structure your finances in a way that minimizes tax liability.

Key Takeaways

  • Statutory provisions in the Income Tax Act of Canada and principles established by Canada’s courts may determine tax residency.
  • So can administrative decisions handed down by the Canada Revenue Agency
  • But there are more than 90 international income tax treaties in place that can override a deemed or factual residency.
  • Interpreting the rather subjective residency definitions and the complex rules can be challenge, so give yourself as much time as possible to make tax plans.
  • Is it recommended that you take advantage of the services of an expert cross-border tax planner.

How Canadian Tax Residency is Determined

The term “resident” is not defined in the Income Tax Act of Canada. Instead, Canadian tax residence is a question of fact and somewhat subjective. It depends largely on the nature and quality of the ties you establish in Canada compared to those retained in your previous jurisdiction. In determining whether you are a Canadian tax resident or not, there are four different sources to consider:

  • Statutory provisions as stated in the Income Tax Act of Canada
  • Common law principles established by the Canadian courts
  • The Canada Revenue Agency’s (CRA’s) administrative pronouncements
  • The use of an income tax treaty to override Canadian factual or deemed residency

Each of these is discussed in detail below in addition to Canadian provincial/territorial tax residency and the deemed acquisition of property when you become a Canadian tax resident.

Statutory Provisions (Income Tax Act of Canada)

Generally, you are considered a factual tax resident of Canada if you are living in Canada, and the nature and quality of the ties you establish in Canada are greater than those retained in your previous jurisdiction. Factual tax residents of Canada are taxed on their worldwide income starting with the date they become factual tax residents of Canada.

You can also be deemed to be a tax resident of Canada if you sojourn in Canada for a period of, or periods the total of which are, 183 days or more in a calendar year. This rule is outlined in the Income Tax Act of Canada. A sojourn implies a temporary stay in Canada, and you cannot already be a factual tax resident of Canada – you must be a tax resident of another country. You are said to sojourn in Canada if you are physically present in Canada for any part of a day.

Deemed tax residents of Canada are taxed in Canada on their worldwide income (the same as factual tax residents of Canada) as of January 1, even if their first day in Canada is any other day of the year. In comparison, factual tax residents of Canada are taxed on their worldwide income as of their first day of factual residency (eg. June 1, not January 1). If you are deemed to be a tax resident of Canada, but also reside in a country that has a tax treaty with Canada, it is likely that the tax treaty will remove you from the provisions of being a deemed tax resident of Canada.

Most individuals do not move and become Canadian tax residents on January 1. If your unique facts determine that you have become a factual Canadian tax resident during the year, you will be considered a “part-year” resident of Canada. For the part of the year in which you are a tax resident of Canada, you are taxed on your worldwide income in Canada. For the part of the year in which you are a non-resident of Canada, you are only taxed on your Canadian source income. Tax credits will need to be prorated based on period of tax residency in Canada.

Below is a helpful summary of the various Canadian tax residency classifications, and what each is taxed on:

Deemed Resident Part-Year Resident Non-Resident Deemed Non-Resident
Worldwide income earned from January 1 Worldwide income earned only during the period of Canadian tax residency Canadian sourced income only Canadian sourced income only

Common Law (Canadian Courts)

In the leading case of Thomson v. MNR, [1946] CTC 51 (SCC), the Supreme Court of Canada considered the circumstances of a Canadian who sought to become a non-resident of Canada and established key principles regarding the meaning of “ordinarily resident in Canada,” setting the standard still referred to by courts today. The general principles established by this case are as follows:

  • For income tax purposes, an individual must reside somewhere
  • An individual does not need to have a principal residence in a country to be considered resident of that country
  • Residency is more than the simple fact of being present in one country
  • Residency does not require a constant presence in that country
  • An individual can be resident in more than one country at the same time
  • The intention of the individual is relevant, but not determinative
  • The number of days spent in a country is not a determinant factor in itself, but can become one

As tax residency in Canada is largely a question of facts, here are the criteria established by the courts and largely used to assess the facts:

  • Primary criteria:
    • Maintenance of a home in Canada which is available for occupation
    • The location of the individual’s spouse and children
    • The intention of the individual in regard to return to Canada
    • The frequency and duration of visits to Canada
  • Secondary criteria:
    • Citizenship
    • The location of other family members
    • The relative strength of social and economic ties, if any, to Canada vs. those established in another country
    • History of fiscal compliance (or non-compliance) with the other country (e.g., have you routinely filed resident tax returns in the other country you claim is your tax home?)

CRA’s Administrative Pronouncements

The CRA issued Income Tax Interpretation Bulletin IT-221R3, which does not have the force of law, but outlines their interpretation of the factors considered in determining Canadian tax residency. The CRA’s interpretation places an emphasis on residential ties in Canada as an indicator of residency:

  • Primary residential ties
    • The location of the individual’s dwelling place (or places)
    • Where the individual’s spouse or common-law partner resides
    • Where the individual’s dependants reside
  • Secondary residential ties
    • Personal property
    • Social and economic ties
    • Landed immigrant status or appropriate work permits
    • Medical insurance coverage from a province or territory of Canada
    • Driver’s license
    • Vehicle registered in a province or territory
    • Seasonal dwelling place in Canada or a leased dwelling place
    • Canadian passport
    • Memberships in Canadian unions or professional organizations

Income Tax Treaty

At the time of this writing, Canada has a tax treaty in force with 94 countries.  If you are arriving from one of these countries to Canada, it is likely that the residency article of the respective tax treaty will help determine your Canadian tax residence status. As an example, the Canada-U.S. Tax Treaty Article IV states:

  • Paragraph 1 – A “resident of a Contracting State” is defined to mean a person who, under the laws of that state, is liable to tax by virtue of their domicile, residence, citizenship, or other criterion. This basically outlines that tax residency is first determined under each country’s tax rules.
  • Paragraph 2 – By virtue of paragraph 1, an individual may be a resident of two contracting states at the same time – a “dual resident.” When this occurs, the Canada-U.S. Tax Treaty provides tie-breaker rules for determining the country in which you are a tax resident. The tax residency tie-breaker rules look at the following, in order:
    • The country in which you have a permanent home available to you
    • The country where your centre of vital interests is strongest. Your centre of vital interests is defined as your personal and economic ties, such as the location of your family and social relations; your occupations; your political, cultural, or other activities; your place of business; the place from which you administer your property; etc.
    • The country in which you spend the greatest amount of time (habitual abode)
    • The country of your citizenship (note that a U.S. Green Card holder is not a U.S. citizen)
    • Competent authorities of both countries will settle the question of your tax residency by mutual agreement

Canadian Provincial/Territorial Residency

In general, you are subject to a province’s/territory’s tax rates for the entire tax year if you are a resident of that province on December 31 of that year. Your provincial/territorial tax residency is determined in the same manner as your Canadian tax residency. If you reside in more than one province/territory on December 31, you are considered resident in the province/territory where you have the most significant residential ties.

Deemed Acquisition of Property

When you commence or recommence Canadian tax residency, you are deemed to dispose of and immediately reacquire, at fair market value, most properties (except for certain specified property, such as Canadian real estate and stock options) owned immediately before becoming a tax resident of Canada. If the properties are then subsequently disposed of during the period of Canadian residency, only the gain or loss accrued since the commencement of Canadian tax residency is taxable in Canada.

Conclusion

As you likely gathered from this article, Canadian tax residency is not exactly black-and-white. It is best to review your unique situation with a qualified cross-border tax advisor and financial planner well ahead of your actual move date. There may be opportunities to structure your financial affairs before being subject to the full Canadian tax system and the deemed acquisition of property. For more information, please contact Cardinal Point.