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Gifting Strategy for U.S. Citizens with a Non-U.S. Citizen Spouse Planning a Relocation to Canada

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There are notable instances where having a non-U.S. citizen spouse results in complications when it comes to tax and estate planning.  For example, there is no estate tax marital deduction when the donee spouse is not a U.S. citizen unless a QDOT, a form of qualified domestic trust, is used.  This QDOT structure is not an ideal planning structure in many situations.

However, there are certain situations where having a non-citizen allows for tax planning opportunities that are not available to couples where both individuals are U.S. citizens.  In this article, we will discuss one such scenario.  This scenario and the case facts have been simplified to focus on potential benefits of using this gifting strategy.  If this were an actual client situation, there would be additional facts to consider, and each case should be evaluated on its own facts and circumstances.

Summary and Takeaways

Estate and tax planning is always complicated, but can become more complex in situations involving U.S. citizens moving to Canada with spouses who are not U.S. citizens. On the other hand, there are certain kinds of asset-gifting strategies that may offer unique benefits to lower tax exposure. As is the case with all complicated tax matters, it is recommended that you consult a qualified and experienced cross-border tax and financial professional to help you decide what steps to take.

Key Takeaways

  • You will want to avoid having to pay taxes on unrealized gains in both countries.
  • Splitting income between spouses may be beneficial in that regard when it comes to Canadian taxation.
  • Gifting of assets to your spouse may offer the potential to reduce their net worth to avoid expatriation taxes.
  • If splitting income is the goal of the gift, give that gift before establishing Canadian residency.
  • If your spouse is a green card holder, that can require different strategies and solutions that are best formulated with the guidance of a cross-border tax planning expert.
  • Start consulting them as soon as you begin preparing for relocation to Canada, because effective planning may take time to design and execute.

The case facts are as follows, using the fictitious names of “Janet” and “John” for the two spouses.

  • Janet and John are a married couple from Texas who are moving to Alberta, Canada on July 1, 2021. They expect to remain there for the foreseeable future, and feel it is likely that they will retire in Canada.
  • Janet is a U.S. citizen and John is a Canadian citizen who has been living in the U.S. for the last 10 years. He has held a Permanent Resident Card (“Green Card”) for the last five years.
  • Janet has a large brokerage account that contains numerous positions with significant unrealized capital gains. The value of this account is USD$3,000,000, and total unrealized gains are USD$1,000,000.
  • While John has some retirement assets, he does not own a brokerage account.
  • Janet’s net worth is below the current estate and gift tax exemption.
  • John is expected to earn significantly less taxable income on an annual basis compared to Janet in the future.

Before we dive into the gifting strategy, it is necessary to have a brief refresher on certain points related to the Canadian taxation of brokerage accounts.

Canadian Taxation of Brokerage Accounts Upon Becoming a Canadian Tax Resident
In a previous article of ours https://cardinalpointwealth.com/2018/10/08/residents-of-canada-what-are-the-canadian-and-u-s-tax-ramifications-when-being-forced-to-liquidate-a-u-s-brokerage-account/ we outline some of the Canadian income tax implications of becoming a Canadian resident.  Here is a summary of certain facts that are most important for this discussion:

  • There is a deemed disposition of assets immediately prior to becoming a Canadian resident.
  • There is a deemed reacquisition of those same assets at the time you become a Canadian resident. The cost basis of these assets for Canadian tax purposes would equal their fair market value on that date.
  • Each spouse is required to file their own individual tax return in Canada.

For the purposes of our discussion, it is also important to note that Canada has income attribution rules that are applicable in various scenarios, one of which relates to gifts between spouses.  A detailed explanation of these rules is beyond the scope of this article, but here is summary of certain relevant points:

  • If a Canadian resident were to gift assets from their brokerage account to their Canadian resident spouse, future capital gain, interest, and dividend income would attribute back to them.
  • This is designed to curtail shifting income to a lower income spouse.

Taxation of Janet’s Brokerage Account Without Additional Planning

  • As mentioned above, for Canadian tax purposes, Janet will be deemed to sell the assets within her brokerage account immediately prior to becoming a Canadian resident. She is then deemed to reacquire them.  As such, for Canadian tax purposes, she will then have a brokerage account with a value and cost basis of USD$3,000,000.  She has managed to avoid Canadian taxation on the unrealized gains.
  • However, she maintains the USD$2,000,000 cost basis for U.S. tax purposes, and she would still report USD$1,000,000 of capital gains on her U.S. tax return if she were to sell the assets. She has not avoided future U.S. taxation on the unrealized gains.
  • Her net worth for U.S. estate and gift tax purposes remains the same.

Goals of the Gifting Strategy
There are three potential goals related to this strategy.  The first goal is the main driver of the strategy for most individuals, while the two other goals may be applicable in certain situations.  They are as follows:

  • Avoid taxation of unrealized gains in both countries.
  • Do the above in a manner that avoids Canadian income tax attribution and allows for income splitting. This goal is more important for scenarios where the U.S. citizen is expected to be in a much higher Canadian tax bracket compared to the non-citizen spouse.
  • Reduce the net worth of the U.S. citizen spouse. For example, if the U.S. citizen was considering renouncing U.S. citizenship in the future, gifting assets could potentially be a means of reducing their net worth to avoid punitive expatriation tax rules. A full discussion of renouncing U.S. citizenship is outside the scope of this article.

Summary of the Gifting Strategy

  • Prior to July 1, 2021, Janet gifts John the assets contained in her brokerage account. Since she is below the U.S. estate and gift tax exemption amount, although she will be required to file a gift tax return, she will pay not pay gift tax.
  • Janet and John will relocate to Canada on July 1, 2021 and will become Canadian tax residents.
  • John will renounce his Green Card status and as such will expatriate shortly after moving to Canada by one of a couple methods. He will become a non-resident for U.S. tax purposes.
  • John will own his own brokerage account that will contain the assets that were gifted to him. This account will have a fair market value and cost basis of USD$3,000,000 for Canadian tax purposes.
    • Future capital gains realized within this account will not be subject to U.S. income tax, since John will no longer be considered a tax resident of the U.S.
  • The value of Janet’s estate has been reduced by USD$3,000,000.
  • The unrealized gains of USD$1,000,000 will avoid taxation in both countries.
  • Income splitting will be achieved.
    • Since Janet was not a Canadian resident at the time of the gift, the gift will not be subject to the Canadian attribution rules.
    • Income realized within the account in the future will be taxable to John at his lower marginal tax rates.

Additional Comments on the Gifting Strategy

  • If income splitting is an objective, the gift should take place prior to Canadian residency. In Janet and John’s situation, it was beneficial to shift income to John and as such it was important for the gift to take place prior to the move.  For two high income earning spouses, income splitting will be less of a concern.
  • A detailed analysis of the expatriation rules for Green Card holders is beyond the scope of this analysis, but here are a few clarifying details. For more information on the expatriate process please contact Cardinal Point or another qualified service provider.
    • John was able to avoid covered expatriate tax status because he was not considered a long-term resident. He owned his Green Card for less than 8 of the last 15 years.
    • If John had owned his Green Card for at least 8 of the last 15 years, further analysis would be required to determine the appropriateness of this strategy.
    • John could expatriate by filling out the required paperwork and handing in/mailing his Green Card to the proper authorities, or by filing a U.S. non-resident tax return with the proper treaty disclosure.
  • This strategy would be equally effective if the non-citizen spouse had a visa instead of a Green Card.

What if both Spouses hold Green Cards?

  • This strategy would have a different focus if both spouses held Green Cards.
    • The gifting would not be required to avoid taxation of unrealized capital gains if both spouses are able to avoid covered expatriate status when they become non-residents of the U.S.
      • However, it still may be worth gifting assets for income splitting purposes.
    • If one spouse can avoid covered expatriate status, then it might be worth gifting assets to that spouse in order taxation of unrealized gains.
    • It is very possible that neither individual is considered a U.S. resident for estate and gift purposed. A detailed analysis would be required to make this determination.  However, if this was the case, then gift tax considerations could be ignored.  This would allow more flexibility in gifting for very high net worth individuals.

The Cardinal Point Advantage
This article highlights the complexity and intricacy of planning for mixed citizenship marriages, and the importance of tax planning prior to relocating to another country.  When a U.S. citizen and their non-U.S. citizen spouse relocate to Canada, this gifting strategy potentially allows for significant tax savings on unrealized gains, for income splitting, and for an estate planning opportunity.  As mentioned earlier, the example used in in this article was simplified to focus on the strategy and its intended results.  The appropriateness of this strategy depends upon the case facts of each individual situation.  We highly recommend that you consult experts such as those employed by Cardinal Point prior to your relocation to Canada, and when considering whether this strategy is appropriate for you.

Cardinal Point has a unique team of cross-border tax, estate, financial planning, and investment management experts. Not only can we assist with planning for your move, we also have the registrations and ability to manage investment portfolios that include accounts in Canada and the United States.  We have the expertise to ensure that our clients can maintain retirement assets in their country of origin, and to transition other assets from one country to another in a tax-efficient manner. Our clients receive tax planning as a part of their overall financial plan.

Cross-Border Implications of Holding a 529 Plan

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Thousands of Canadians relocate to the U.S. for career opportunities each year. They often envision staying a couple years to garner valuable experience before returning home. However, what was originally meant to be a short sojourn can quickly become a decade or more. Their life may change significantly during that time, perhaps due to a marriage or the birth of children. This article focuses on 529 plans for children and the tax implications of this educational investment vehicle in a move back to Canada.

Plan

Summary and Takeaways

So-called 529 plans are an investment vehicle you can take advantage of in the United States in order to help you save tuition money to fund your child’s future education. A 529 plan may be very beneficial in terms of offering savings growth that can be eligible for some tax deductions or tax-free withdrawals. However, if you move to Canada, that could result in taxation on the earnings in the account. But there are strategies to help avoid tax exposure, if you plan ahead before you move across the border.

Key Takeaways

  • There are two types of 529 plans, those for prepaid tuition plans and those for educational savings plans.
  • The plans are sponsored by states, and while 34 states allow income tax credits or deductions for 529 plans other don’t. Many people don’t legally reside in the same state where their 529 plan is based.
  • 529 plans are deemed taxable brokerage accounts for Canadian income tax purposes.  Investment income earned in the account is taxable annually.
  • To avoid Canadian tax on your 529 you may want to transfer ownership of the 529 account to a trusted U.S. citizen before you move to Canada.

529 Basics
As its name suggests, this plan is derived from Section 529 of the Internal Revenue Code. It states that a qualified tuition plan shall be exempt from taxation. There are two types of 529 plans: prepaid tuition plans and educational savings plans. For more information on the nature of these categories see Cardinal Point’s blog titled: Canada & U.S. Education Savings Options.

529 plans are sponsored by individual states, and it is not uncommon for a resident of one state to utilize another state’s 529 plan. Why? Because not all states allow for an income tax deduction or credit on the 529 contributions (34 states do). As such, the resident of that state may look for a 529 plan in a state where there are better investment options, lower fees, lower minimum contribution amounts, or higher total lifetime account balance thresholds.

529 Mechanics
As of 2022, contributions made to a 529 plan are limited to an annual $16,000 per beneficiary. This amount doubles to $32,000 if the donors are married filing jointly. There is also an option that exists to “front load” the 529 with up to five years’ worth of contributions ($160,000) if married filing jointly. As long as no additional contributions to that beneficiary are made within that five-year window, no gift tax filing obligations are required.

Money contributed does not receive a tax deduction at the federal level. However, if the contributor resides in one of the 34 states that allows for a state income tax deduction or credit, then there is a tax benefit that can potentially be utilized. The earnings on the associated investments within the plan grow tax free as long as future withdrawals are utilized for qualified higher education expenditures.

Expenses that do not qualify for tax-free withdrawal include room and board, transportation, and medical expenses to name a few. If the withdrawal is deemed unqualified, then the earnings on the distribution are subject to income tax and an additional 10% penalty per the “Kiddie Tax” rules (see below).

The Tax Cuts & Jobs Act (TCJA) of 2017 added a feature to qualified 529 withdrawals that allowed $10,000 of annual distributions to be used for K-12 school tuition. The Secure Act of 2020 preserved this condition in the legislation. In addition, the Secure Act revitalized the old “Kiddie Tax” regime.

Kiddie Tax Basics
The tax applies to children under the age of 19 unless they are full-time students. In the latter scenario, these tax rules apply until the young adult turns 24. Under these rules, a portion of a child’s unearned income could be taxed at the parent’s marginal income tax rate. This would include any unqualified distributions from a 529 plan.

When analyzing the federal income tax bill of the child subject to the “Kiddie Tax,” the standard deduction rules apply. For 2020, the child’s standard deduction is the greater of: $1,100 or earned income plus $350, not to exceed $12,950 for 2022. Any annual unearned income between the standard deduction and $2,200 is taxed at the child’s tax rate. Once the annual $2,200 threshold is exceeded, the remaining unearned income is taxed at the parent’s marginal tax rate, which could be as high as 37%.

Cross-Border Implications of 529 Plans
Let’s assume a Canadian family living in Texas had two children during their U.S. tenure.  These children are dual citizens of Canada and the U.S., are currently in high school, and plan to go to a Canadian university for higher education. Now that the entire family has made the decision to return to Canada, how should they deal with the 529 plans they’ve accumulated and what are the tax considerations?

U.S. Taxation – If the Canadian college or university is eligible for Section 529, any qualified distributions are tax free for U.S. tax purposes. Many, but not all, Canadian institutions are eligible, and the list evolves over time. The Federal School Code Lookup Tool gives you an easy way to determine whether your chosen Canadian college or university is eligible for Section 529. The custodian of the 529 reports the distribution on a Form 1099-Q and, assuming the funds were paid to the 529 beneficiary, college/university, or student loan provider, the distribution would be reported on the child’s tax return.

Canadian Taxation – Although 529 plans provide income tax savings for U.S. residents, they are effectively taxable brokerage accounts for Canadian income tax purposes.  As such, any investment income earned in the account would be taxable on an annual basis.  Upon re-establishing Canadian tax residency, there is a step up in the cost basis (converted into CAD) that is applicable to certain assets inclusive of 529 accounts. This is called the “deemed acquisition date” and resets the book value for Canadian tax purposes to the fair market value on the date Canadian residency is established.

There is also an argument that the 529 plan would be a deemed resident trust that would require Canadian trust filings.  In order to avoid Canadian taxation of these accounts in some form or another, you may want to consider transferring ownership of the account to a trusted family member or other individual who resides in the U.S. prior to your move to Canada. That transfer should not trigger any tax.  After transfer of ownership, you could continue to contribute to the fund through gifts, and the account would avoid taxation in Canada. However, some do not feel comfortable transferring ownership of their 529 accounts.

In Conclusion – The future changes constantly, and it’s difficult to know with certainty where you’ll choose to reside or where your child will decide to pursue his or her higher education. If you are confident your child will choose to go to school in the U.S. or enroll in an international institution that is 529 eligible, then a 529 plan is worth exploring. For a more detailed analysis of the options available to meet this goal, it is prudent to have a conversation with a cross border expert. Contact Cardinal Point for more information.

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

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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 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. 

9 Essential Elements of Cross-Border Transition Planning

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united-states-canada-flags“How do I move my financial life to another country?” It’s a question we hear from many clients as they begin making a cross-border transition. Whether you are making the move to the U.S. or Canada, you want to transition your finances smoothly and seamlessly while saving time, headaches, and every dollar you possibly can.

Much like financial planning, transition planning is a process and not a transaction or an end in itself. And like financial planning, the most effective transition planning hinges on a clear understanding of what you want to achieve in terms of lifestyle both now and in the future.

One of our key roles as cross-border financial planners is to learn where you are trying to go (aka, your goals and objectives) and then design a detailed plan to test the viability of your goals/objectives and ultimately get you to your destination. After all, without a flight plan, how can you know which direction to go?

Our firm’s Canada-U.S. transition planning focuses on 9 key areas that should be considered when making a move across the border:

  1. Customs Planning: This element addresses the process of relocating your assets to Canada or the U.S. Transporting belongings such as cars, pets, guns or other valuables across the border brings up specific issues that need to be sorted out ahead of any move.
  2. Immigration Planning: Whether it’s temporary or permanent, moving to and living and working in Canada/U.S. has legal ramifications. Immigration planning covers all the legal means of crossing the border.
  3. Cash Management Planning: This area includes the development and analysis of your net worth statement and an assessment of your cash inflow/outflow during your move. Our team can look at the ownership of your assets (whether between spouses or between the U.S. and Canada) and calculate a variety of financial ratios to see what challenges or opportunities arise. Your net worth statement is a benchmark from which we can analyze the impact of your move over time. We can also focus on the cross-border transition of cash and offer strategies to simplify your financial life before your move. This includes developing a prudent, purposeful and ongoing approach to currency conversion and foreign exchange.
  4. Income Tax Planning: When making a cross-border move, a comprehensive review of your current and prospective tax situation is crucial as it can reveal strategies to reduce your tax liability before and after your move. Effective tax planning reviews various techniques that may apply to your situation—including tax planning strategies that are state and province specific—all with the aim of curbing your tax liability.
  5. Independence Planning: Will you have enough money to sustain your retirement lifestyle through the decades? Independence planning uses current assets, income, and expenses to create detailed projections that help determine the long-term achievability of your financial and lifestyle objectives. Such analysis can provide valuable insights into which actions, if any, may be needed to attain your goals.
  6. Education Planning: This element looks toward the future to determine: how much is required, at what point in time, and what you need to do to fulfill future education goals. This planning can also include a review of your cross-border education savings options and what to do before a move.
  7. Risk Management: Catastrophic events such as fire, theft, illness, disability or death could devastate what has taken a lifetime to build. Risk management looks at your current exposure for risk and determines the most prudent course of action to address such risk. There are numerous differences in the way risk is managed in the U.S. and Canada. When making a cross-border move, it is vital to ensure you will be fully covered.
  8. Estate Planning: Estate planning assists in establishing order to your affairs so that you can: 1. continue to control your property while alive, 2. provide for the needs of loved ones should you become disabled, and 3. leave what you have to whomever you want, in the way that you want, and at the lowest overall cost.
  9. Investment Planning: This area focuses the investment objectives you established in your financial plan and then develops an investment portfolio to achieve your desired rate of return while also managing for tax liability. An essential part of the transition planning process is developing a properly structured and integrated investment strategy that includes your investment accounts on both sides of the border.

Are you ready to begin the transition planning process? Whatever your goals and needs are, the experts at Cardinal Point Wealth Management can help ensure a smooth road to your cross-border destination.

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

Do You Have to Pay U.S. Taxes for Canadian Registered Retirement Savings Plan Withdrawals?

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Have you recently moved to the United States from Canada and left your Registered Retirement Savings Plan (RRSP) open? After becoming a U.S. resident, you might be wondering if you have to pay U.S. taxes on withdrawals from your Canadian retirement plan.

There is a good chance that Canadians, who moved to the U.S., have a keen understanding about the Canadian tax implications regarding cashing out their RRSP. However, often Canadian expats lack proper perspective on the U.S. tax implications in their unique situation.

From the perspective of Canadian tax laws, once someone becomes a non-resident of Canada, further withdrawals from the RRSP are exposed to a 25 percent withholding tax by the Canadian Revenue Agency (CRA). If you are under the age of 71, you have the option to convert the RRSP into a Registered Retirement Income Fund (RRIF) that will allow the withholding tax to be reduced to 15 percent. Under the RRIF provisions, no further contributions can be made once conversion of the RRSP to an RRIF has occurred; however, the conversion enables the plan holder to make periodic withdrawals.

Canadians, who choose to become a resident of the U.S., may still be liable to pay U.S. taxes on their withdrawals from the RRSP or RRIF. However, there are a few workarounds to mitigate the U.S. taxes on Canadian RRSP withdrawals.

Knowing how to properly invoke the Canada-U.S. tax treaty is step one in reducing the likelihood of double taxation. The most common way to reduce your U.S. tax exposure would be to take a foreign tax credit for the tax withheld by the Canada Revenue Agency on the withdrawals from the RRSP. Moreover, you may be allowed to withdraw the cost base of your RRSP tax-free. Nonetheless, the amounts transferred from Canada to the U.S are subjected to some special rules, after considering the foreign exchange adjustments.

Since these RRSP transactions are often complicated and subjected to both countries’ tax regimes, seeking professional help to reduce tax burdens is always a good choice. At Cardinal Point, we are always here to help you navigate the complicated tax laws when it comes to withdrawing funds from your Canadian RRSP. Our experts can guide you in establishing your RRSP’s cost base under the U.S. tax law and help you make good decisions about whether to take a tax credit or deduction for the taxes already paid to the Canadian Revenue Agency. Contact us today.

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