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Investment Basics for Americans in Canada

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It’s a good idea for Americans living in Canada to understand which kinds of registered investment accounts they can have without having to confront onerous taxes and paperwork.

Two kinds of plans are friendliest for Americans: The Registered Retirement Savings Plan (RRSP) and the Registered Retirement Income Fund (RRIF).

Effectively, U.S. citizens are simply taxed on the distributions from these accounts as they would be in Canada.

On the other hand, Americans should generally avoid Tax Free Savings Accounts (TFSA) and Registered Education Savings Plans (RESP). The IRS considers both to be offshore trusts, and as such, they involve burdensome filing requirements, with significant penalties for non-compliance. What’s more, their accrued earnings are taxable in the United States.

Check out Terry Ritchie’s recent Globe and Mail video segment for more details about U.S. citizens investing in Canada.

Financial Impact of Renouncing Citizenship

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Americans living in Canada face tax-reporting obligations that can be burdensome—even to the point where one might consider renouncing their citizenship.

Our advice is to take a step back and think it through. As Terry Ritchie explained recently in this Globe and Mail video segment, renouncing one’s citizenship not only involves administrative hurdles, but can be quite expensive in terms of fees and taxes.

Americans must pay a $2,350 fee to the U.S. consulate. In addition, they must certify that they have been compliant through the filing of their IRS tax returns for the past five years. In addition, those who renounce their citizenship may be subject to two levels of income tax.

Those who have a net-worth over $2 million, or who have not filed returns in the previous five years, may face a capital gains “mark-to-market” tax as high as 23.8%. There is a fairly generous exemption that may eliminate some people from the mark-to-market tax. But those with qualified plans such as RRSPs or IRAs will face an immediate 30% tax on those assets.

Finally, bear in mind that you may not be able to change your mind: Provisions in U.S. law may bar those who renounce their citizenship from ever regaining it or being able to physically return to the U.S.

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

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

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

Tax Implications for Americans Living in Canada

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In this video clip, Terry Ritchie updates Rob Carrick on the IRS crackdown on Americans who live and work in Canada but haven’t been filing their annual tax returns. There is serious documentation required by U.S. tax authorities regarding financial holdings. Last September, a new program was introduced for Americans living and working abroad: the Offshore Volunteer Disclosure program. Of the 5 to 7 million Americans who live/work abroad, only 740,000 actually filed a Financial Bank Account Report (FBAR) in 2011.

While only 18 parties have been criminally prosecuted for hiding assets, clearly there is a large percentage that doesn’t know what to do or where to go for advice. Every situation is different, but it’s important to talk to a specialist who understands these issues. Next year, when the IRS imposes the Foreign Account Tax Compliance Act (FATCA), traditional banks in Canada must comply and provide information. Following this, it will be harder to fight reasonable cause. For most Americans working in Canada, there is a Foreigner Income Exclusion imposed on employment income. This, plus the use of foreign tax credits, generally means there are no taxes owed, but the proper documentation must be filed with the IRS to be in compliance.