Many Canadians move for career opportunities to the U.S., work and raise families, and then plan to relocate back to Canada. A qualified tuition and educational savings plan for children (a 529 plan) is exempt from taxation in the U.S., in most cases even when a child attends a Canadian university. If you are a Canadian who is considering such a plan, and especially for anyone with an investment in a 529 plan who is moving back to Canada, clear expert advice from a cross-border financial specialist is a very prudent step.
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Cross-Border Implications of Holding a 529 Plan
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.
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.
Winter 2023/2024 Tax Highlights – USA
As we prepare to put away the 2023 calendar and hang up the 2024 calendar that our favorite charity sent us, it’s worth noting that there was no 2023 income tax legislation that changed everything like the Tax Cuts and Jobs Act (TCJA) did in late 2017. We need to discuss the Inflation Reduction Act, Secure 2.0 and the Corporate Transparency Act, but first let’s go over what is almost the same as the 2022 tax year.
Same old…
The highest marginal tax rate is still 37%, 2.6% lower than the 39.6% in effect before the TCJA. The Net Investment Income Tax (NIIT) is still 3.8% on investment income after the first $200,000 of Adjusted Gross Income ($250,000 for married filing jointly). The 0.9% additional Medicare tax still applies to wage and net self-employment income in excess of $200,000 ($250,000 for married filing jointly). There has been no change to the preferential tax rates from 0% to 25% for qualified dividend and long-term capital gain income. Estate tax is still 40% of the taxable estate in excess of the lifetime estate tax exemption and that exemption is still huge – for now.
Miscellaneous itemized deductions such as interest and carrying charges subject to the 2% of Adjusted Gross Income (AGI) threshold are still suspended. There is still a $10,000 State and Local Tax (SALT) cap in place for itemized deductions. The expanded Standard Deduction still replaces the old combination of Personal Exemptions and smaller Standard Deductions. Take note that some states allow the 2% miscellaneous itemized deductions that are suspended under the TCJA.
Tax brackets and phase-outs have crept up and will creep up again for 2024. Here is a sample.
37% income tax rate applies to taxable income over:
TY 2023 | TY 2024 | ||
Married Filing Jointly | MFJ | $693,750 | $731,200 |
Married Filing Separately | MFS | $346,875 | $356,600 |
Single | S | $578,125 | $609,350 |
Head of Household | HOH | $578,100 | $609,350 |
Estates & Trusts | $14,450 | $15,200 |
40% estate tax rate applies to taxable estate over:
TY 2023 | TY 2024 | ||
Lifetime Gift & Estate | $12,920,000 | $13,610,000 |
The TCJA hugely affected the reporting and taxation of foreign business income. This is still the state of affairs and thousands of pages have been written about it. K1 reporting was expanded to include K2 and K3 reporting last year. This has added many pages to the tax returns of companies and individuals who have foreign-sourced income. No relief from this reporting burden is in sight.
Remember that many of the provisions of the TCJA were temporary and will sunset after December 31, 2025.You may want to accelerate income into 2025 for lower marginal tax rates and push out expenses to 2026 to shelter more income from the higher rates expected to return in 2026. The 20% qualified business income deduction (QBID) is also set to expire in 2026.
Perhaps the most significant item associated with the TCJA is the historically high Lifetime Gift and Estate Tax Exemption. The current $12,920,000 is slated to rise for 2024 and 2025, then drop to between $6 and $7 million for deaths in 2026.
If a spouse dies while the exemption is high, it is usually a good move to file an estate tax return to elect portability of the DSUE even if the estate of the deceased is well below the exemption amount. For example, assume that E and F are married. E passes when her estate is worth $2 million, and the exemption is $13 million. If an estate and gift tax return is filed, E is the Deceased Spouse, and her Unused Exemption (DSUE) is $11 million. F passes when his estate is worth $10 million, and the exemption is $7 million. None of F’s estate is taxable because he has a DSUE of $11 million from E to add to his $7 million personal exemption.
The annual exclusion for gifts is $17,000 for 2023 and will rise to $18,000 for 2024. You may elect to make a larger gift and have it considered to be given ratably over five years. This is a great way to front-load an education savings plan or help your adult child buy a home. Split gifts, i.e. where a couple makes a joint gift of $34,000 or more, will require filing a gift tax return, as will five-year ratable gifts.
Also U.S. citizen spouses have an unlimited marital exemption for gifting, only gifts of $175,000 per year, ($185,000 for 2024) to non-citizen spouses may be given without eating into your lifetime gift and estate tax exemption.
2023 limits for contributions to Health Savings Accounts (HSAs) are $3,850 for self-only plans and $7,750 for family plans. If you are 55 or over at the end of the year you may make a $1,000 catch-up contribution for a self-only plan or $1,000 per spouse for a family plan if both spouses are at least 55 years old by the end of 2023. Be mindful that contributions to an HSA are only allowed if you are covered by a qualifying high-deductible health insurance plan – at the time of the contribution.
Health Flexible Spending Accounts (FSAs) maximum contributions are $3,050 for 2023 and will be $3,200 for 2024.
Some new…
Inflation Reduction Act
Energy Credits are fully available for 2023 and will continue through December 31, 2033. There was a phase-in of various requirements and limits during 2022. There are credits for commercial clean energy and builders but we will look at the credits for individuals.
For the residential property credits, the qualifying property must be installed – not just paid for – on the U.S. home in the year that the credit is claimed. Here is the IRS landing page for Home Energy Credits. https://www.irs.gov/credits-deductions/home-energy-tax-credits
Qualified solar electric installations, solar water heaters, fuel cell property, small wind energy property, geothermal heat pumps and battery storage technology expenditures all fit into the Residential Clean Energy Credit. This credit is 30% of the qualified expenditures and has no annual or lifetime maximum credit amount. The excess credit carries forward.
The Energy Efficient Home Improvement Credit covers windows, doors, building envelope (insulation), central air conditioners, water heaters, furnaces, boilers and heat pumps, biomass stoves and boilers, and home energy audits. Different items in this category have different lifetime credit limits but they are generally 30% of the expenditure. The credit claimable in this category has an annual $1,200 limit with an additional $2,000 annual credit amount for heat pumps, biomass stoves and boilers. There is no lifetime limit for credits in this category, but the credit is non-refundable and does not carry forward. If you have insufficient tax liability to offset with this credit, consider spreading your improvements over several tax years in order to get full credit for your improvements.
There are Clean Vehicle Tax Credits for new and for used clean energy vehicles. Here is the IRS landing page for Clean Vehicle Tax Credits. If you are a U.S. citizen living in Canada, be aware that this credit is for personal vehicles purchased for use mainly in the U.S. Maybe this becomes your snowbird vehicle.
For vehicles placed in service between January 1 and April 17, 2023, the credit is generally a maximum of $7,500 made up of three components. First, we have a base amount of $2,500 for EV, plug-in, hybrid and fuel cell vehicles. If the vehicle doesn’t have 7 kilowatt hours (KWh) of battery life, $2,500 is the maximum. Then we have $1,251 for the first 7 KWh of battery capacity and $417 per additional KWh over 7 to a maximum of $7,500.
For vehicles placed in service after April 17, 2023, the maximum credit of $7,500 has only two components: critical minerals and battery components.
There is a price test and an income test. If Modified Adjusted Gross Income (MAGI) is no more than $150,000 for singles ($300,000 married filing jointly) in the year of purchase or the immediately prior credit, you may take the credit. It is non-refundable.
The possibility of MAGI disallowing the credit for the first purchaser of the vehicle leads us to the credit being available for Used Clean Vehicles. If the seller can certify that they did not take a credit for their original use purchase, that credit may be available for the next buyer of that vehicle.
SECURE 2.0
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in December 2019. SECURE 2.0 was passed in December 2022. As you might infer from the name of the legislation, it concerns itself with promoting retirement savings.
Participants in retirement plans such as IRAs and 401(k)s must take an annual Required Minimum Distribution (RMD) once they reach a certain age. The required beginning date for RMDs was April 1 of the year after you turned 72.
- If you turned 72 in 2022, your first RMD for 2022 was due on April 1, 2023, and your second RMD for 2023 is due by December 31, 2023, and annually thereafter.
- The certain age is now 73. If you turn 72 in 2023, your first RMD is due April 1, 2025, and your second is due by the end of 2025.
- On January 1, 2033, the certain age will be 75.
For more on how Required Minimum Distributions are calculated, check out our blog
Inherited IRAs are generally required to continue annual RMDs if the original holder was already required to do so at the time of their death. The plan also needs to be fully distributed within 10 years (five years if there is no designated beneficiary). Eligible designated beneficiaries (spouse, minor child or a disabled or chronically ill individual) may still stretch the IRA distributions over their lifetimes.
The IRA contribution limit for 2023 is $6,500 ($7,000 for 2024). Individuals 50 years and older may make an additional $1,000 catch-up contribution. There are additional general catch-up contribution limits for individuals aged 60 through 63.
401(k) contribution limits for 2023 are $22,500 plus up to $7,500 in catch up contributions if the employee is at least 50 years of age. The contribution limits rise to $23,000 plus $7,500 for 2024. Consider making your maximum contribution to take advantage of employer matches where available. As a reminder, Cardinal Point Capital Management is now able to manage your 401(k) program. Speak with your Private Wealth Manager for more information.
There are multiple and complicated changes to the catch-up contribution limits for employees who are participants in a 401(k). If they earn over $145,000 in 2024 their catch-up contributions must be treated as Roth contributions.
After paying for education, do you have leftover funds in your 529 (college savings) account? Beneficiaries of 529 plans are permitted to rollover up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. These rollovers are subject to Roth IRA annual contribution limits and the 529 plan must have been open for at least 15 years.
Beneficial Ownership Information
Do you, or did you, have an interest in a Limited Liability Company, small corporation, limited partnership or some similar entity? If so, the U.S. government now wants to know who the beneficial owners are or were. It may not matter that you put the entity on the back burner, haven’t thought about it for a long time, or that it may be dormant and unused. Beneficial Ownership Information (BOI) reporting must still be addressed, starting in January 2024.
Although this is not a tax measure, we believe that you should give the U.S. Corporate Transparency Act and the required Beneficial Ownership Reporting a few minutes attention. It’s happening and it’s starting in January 2024. It may not apply to you at this moment, but you do need to be aware of this reporting requirement in case you open a company in the future. Since the purpose of the legislation is to combat money-laundering and funding crimes, penalties for non-compliance are significant. Reporting is through FinCEN – the Financial Crimes Enforcement Network. Here is FinCEN’s landing page for Beneficial Ownership Reporting.
There is an article on our blog titled “Will the U.S. Corporate Transparency Act Affect You?”
The only significant changes since this article was posted are that the time to report a new entity has increased from 30 to 90 days before penalties will be imposed and the exceptions for dormant companies have been expanded.
We suggest that you apply for a FinCEN ID early in 2024 as that will protect your personally identifiable information from those who don’t need to know.
Miscellaneous – Good to Know
The drop in the 1099-K reporting threshold from $20,000 to $600 has been delayed another year per Notice 2023-74. The IRS plans to drop the threshold to $5,000 in 2024 as part of a phase-in. In case you are not familiar with 1099-K, this is an information reporting form that reports ‘gross receipts’ to you through credit card, PayPal and similar payment platforms. The presumption is that the gross receipts are income, but they could very well be reimbursement from your friends for concert tickets or reimbursement from your family for that cottage vacation you booked on their behalf. All of this is a bit problematic since the 1099-K number will have to go on your tax return even if it is backed out with an explanation.
The maximum compensation (wages and net self-employment income) subject to Social Security Tax is $160,200 for 2023.
If you are drawing early Social Security Benefits and are under your full retirement age, you may earn $21,240 from work in 2023 and still collect the benefits without a claw-back.
Kiddie Tax applies to children under age 19 or under age 24 if a full-time student with unearned passive income and whose gross income is less than $12,500. In the situation where the child does not have any earned income, the first $1,250 of investment income is not subject to tax. The next $1,250 is taxed at the child’s marginal tax rate and the remainder is taxed at the parent’s marginal tax rate. For 2024, $1,250 becomes $1,300 in both instances.
Here is some random minutia for trivia night. There is a U.S. federal tax on the first sale by a manufacturer, producer or importer of Arrow Shafts. It will rise from $0.59 to $0.62 per shaft in 2024.
Cross Border Financial Planning – Non-Arm’s Length Cross-Border Gifting
The desire to gift assets between parties where a personal relationship exists constitutes a non-arm’s length transaction. Gifting is often born from an innate wish to see those who are closest to you enjoy the fruits of your successful financial life. That’s true whether it’s to celebrate or commemorate a birthday, wedding, graduation, job promotion, anniversary, or other milestone – or just to share your generosity. There are also other reasons why gifts may be made, such as:
- Grandparents may want to help their grandchildren pay for higher education as college tuitions skyrocket.
- Spouses may decide to retitle assets held in individual accounts into a joint account, for estate or tax planning purposes.
- Parents often make a gift of down payment funds to help a child purchase their first home.
- Sentimental art or jewelry can be passed from parent to child as a gift.
- Aunts or uncles may want to gift an automobile to a niece or nephew.
But when viewing such scenarios through a cross-border lens, it’s vital to know how gifts may be affected by financial and taxation rules and regulations based on such things as the immigration, residency, and relationship status of the donor and recipient. The type of asset being gifted as well as where the asset is domiciled (for example, Canada vs. the U.S) should also be considered. The following article explains some of the nuances of non-arm’s length gifting including non-charitable gifts, and examines common scenarios to help you strategically plan your gifts for the greater benefit of both you and the designated recipient.
Summary and Takeaways
When you gift assets to someone with whom you share a personal relationship, that is deemed a non-arm’s length transaction. A mother may give family heirloom jewelry to her daughter. A grandparent may help pay a grandchild’s tuition, or an uncle may give his nephew an automobile as a graduation present. But if it is a cross-border transaction, it may be subject to complex financial and taxation rules and regulations which can be difficult to grasp. This article provides information to help you understand the rules so you can comply with them while taking steps to avoid unnecessary taxation and preserve your wealth.
Key Takeaways
- When planning for non-arm’s length gift giving in a cross border context, important considerations include both the donor’s and the beneficiary’s country of residence and immigration status.
- Those – and the nature of the personal relationship – will play a significant role in your planning. So will the type of asset that is being bestowed and what country it is located in at the time the gift transaction occurs.
- If the gift is tuition, you may want to use a 529 savings plan – but that can require filing specific tax documents when you provide the funds to the recipient.
- Also note that the U.S. lifetime gift tax exemption in 2023 is $12.92 million, but will revert to only $5.49 million starting in 2026
Grandparents Gifting Money to Grandchildren for College Education
Scenario A Assumptions
- Dual citizen grandparents and grandchildren residing in the U.S.
- Cash domiciled in the U.S. represents the gift
In this specific case, one common gifting option suggests that the grandparents contribute funds to their grandchild’s 529 education plan. Details about 529 plans can be found in Cardinal Point’s Ebook: Cross-Border Implications of Holding a 529 Plan. For the tax year 2023, the annual gift tax exclusion to a non-spouse beneficiary is $17,000 USD. If both grandma and grandpa were to perform gift splitting, the annual gift tax exclusion is doubled. In the latter case, a gift tax Form 709 would need to be prepared and filed with the same due date as the grandparents’ U.S. income tax return. No gift tax would be owed given the current lifetime gift and estate tax exemption amount of $12.92M USD per person (2023).
From time to time, grandparents choose to “front load” the 529 plan by contributing up to five years’ worth ($170K USD for 2023) of annual gift tax exclusion funds to a grandchild’s 529 account. In this case, no additional excludible contributions can be made for another five years. Even if front loading of the 529 plan via cash gifts beyond the annual gift tax exclusion took place, it is unlikely that gift tax would be owed − unless the current lifetime gift and estate tax exemptions dramatically fell or if grandma and grandpa had already used up their lifetime exemption. There will be an additional tax preparation cost, but that is normally not very significant. Keep in mind that although the IRS does not allow a tax deduction for contributions to a 529 plan, some states do. Furthermore, some states also set contribution limits for 529 plans.
Scenario B Assumptions
- Canadian citizen / U.S. Green card holder grandparents residing in the U.S.
- Grandparents properly exited Canada and filed their Canadian departure / exit tax return when they moved to the U.S.
- Canadian-only parents and grandchildren residing in Canada
- Cash located in the U.S. is the gift consideration
Unlike Scenario A, Canada has a separate college funding account mechanism called a Registered Education Savings Plan (RESP). For more information on RESPs visit Cardinal Point’s blog on Canada & U.S. Education Savings Options. The U.S. tax resident grandparents can help fund the RESP and allow those contributions to attract Canadian Education Savings Grants (CESG) from the Canadian government.
From a Canadian tax perspective, neither the grandparents, parents, nor grandchildren need to report the gift. In instances other than a contribution to a registered plan, income attribution rules would need to be considered – but those complex laws are beyond the scope of this article.
From a U.S. tax perspective, it is unlikely there would be a need to report the gift on a U.S. gift tax Form 709, since contribution limits on RESPs are much less than in the U.S. Although the amount of contributions are significantly less in RESPs than in 529 plans, the cost of tuition in Canada is typically substantially lower.
It’s important to note that there are U.S. income tax issues for U.S. tax residents when they are the subscriber on a Canadian RESP. Therefore, in this case, if the U.S. grandparents wanted to partake in subscriber duties, the income within the RESP would become taxable to them in the U.S., which is something to avoid. If a non-U.S. person were the subscriber the tax liability would be much lower.
Scenario C Assumptions
- Canadian citizen / resident, non-U.S. citizen grandparents
- Dual citizen grandchildren residing in the U.S. who plan to attend college in the U.S.
- Cash located in Canada in Canadian dollars for gift consideration
This scenario is not as common as the first two. The tax benefits of an RESP for a child planning to attend a U.S. college are not consistent with Scenario B. That said, grandparents can gift funds to their grandchild’s 529 plan − but have the additional hurdle of FX rates to overcome. If this scenario were to occur, Cardinal Point has business relationships with online FX providers to optimize FX rates between CAD and USD.
From a Canadian tax perspective, any income (not including realized capital gains) generated by the gift to the minor grandchild would technically need to be attributed back to the grandparent since 529 accounts are not recognized in Canada for their tax-sheltered status.
If the Canadian resident grandparents subscribe to an RESP instead of a 529 plan for their U.S. resident grandchildren, be aware that the grandchildren will not be able to access the CESG (government grant) portion of the RESP unless they become Canadian residents while attending their university.
From a U.S. tax perspective, if the gift exceeded $100K USD equivalent, a “Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” would need to be filed by the owner of the 529 account for the year of gift.
For these reasons, this scenario is uncommon.
Gifting in Estate Planning – Retitling Assets from Individual to Joint Tenancy with Rights of Survivorship
In many good estate plans, “will substitutes” are maximized in order to avoid probate. This is done by retitling assets owned individually into joint tenancy, so the surviving tenant can maintain full control of the asset after the death of the other. The transfer to the survivor happens outside of probate. This alleviates potential tax owed on the decedent’s ownership of the asset (if certain elections are made on the decedent’s tax return) and allows the survivor to avoid lengthy court proceedings to distribute their late spouse’s estate at a time when they are grieving the loss. Furthermore, probate costs are minimized. It should be noted that tax-advantaged plans such as an RRSP, TFSA, Roth IRA, and Traditional IRA, can only be owned individually. But retirement plans such as these can have beneficiary designations allowing the inherited funds to also avoid the probate process.
Assuming both spouses are comfortable with amalgamating applicable assets into joint titling, there is an unconscious “gift” that takes place. This is true whether the asset and/or person resides in Canada or the U.S. Multiple scenarios can quickly develop, and we will outline a few of those below.
Scenario A – Canadian citizen and resident spouses
Forms are required for non-real estate assets in order to reregister the individual bank and non-registered accounts into joint tenancy. There is a deemed disposition for the original owner at cost, resulting in a continuation of that spouse’s original book value for their 50% share of the joint account. Canadian income tax rules dictate that all income and capital gains within the joint accounts attribute back to the original owner prior to the reregistration. The original owner still reports all the income, but upon their death probate may be avoided.
With respect to changes in real estate titling, there are a couple of additional items to consider. The method of title transfer is a more formal process, typically via an attorney deeding the property title transfer. Secondly, there can be a land transfer tax, and in some jurisdictions (i.e., Toronto), there is both a provincial and municipal land transfer tax. This can easily result in tens of thousands of dollars of taxes when retitling, given the “deemed disposition” for these types of assets. Fortunately, in Ontario, retitling the property between spouses exempts the property from land transfer tax.
Scenario B – Dual citizen spouses residing in the U.S. who plan on returning to Canada in a few years
As U.S. citizens, spouses are entitled to the unlimited marital gift tax exemption. This allows spouses to transfer an unlimited amount of assets or gifts between one another. Therefore, if all assets are domiciled in the U.S., any shift from individual to joint tenancy avoids income and gift tax altogether. There is no “deemed disposition” as there would be in the case of Canadian residency. However, it is a good idea to file a gift tax return to report and document that the transfer is eligible for the unlimited marital exemption.
Scenario C – Dual citizen husband residing in the U.S. with Canadian citizen / U.S. Green Card wife residing in the U.S. There are U.S. “situs” assets only.
Without U.S. citizenship, special rules apply if the recipient spouse is a U.S. Green Card holder. For non-U.S. citizen spouses, the marital deduction is limited to $175,000 USD for tax year 2023. Therefore, attempting to create a smooth estate plan by retitling applicable assets into joint names could potentially trigger negative U.S. gift tax consequences. Let’s look at an example.
John is a U.S. citizen and Jane is a Canadian citizen with a U.S. Green Card. John has a taxable brokerage account worth $2M USD. John would like to minimize gaps in his estate plan and maximize future income tax splitting in preparation for his move to Canada, by adding Jane on the account title. If John were to follow through with that plan, he would be gifting 50% of the account, or $1M USD, into Jane’s name. However, this gift exceeds the maximum marital deduction to a non-U.S. citizen spouse by $825K USD. Essentially, John would have to file a U.S. Form 709 Gift Tax Return and decrease his lifetime gift and estate tax exemption amount from $12.92M USD to $12.09M USD or less. This may seem insignificant, but tax laws are in flux and in 2025 the current lifetime gift and estate tax exemption amounts are scheduled to revert to what they were prior to the 2017 Tax Cuts and Jobs Act. Future exemption levels could be substantially lower, resulting in John having a smaller unused Lifetime Gift and Estate Tax Exemption available at his death.
In Summary
Domestic or cross-border gifting strategies involving non-arms-length transactions can take many different forms, each requiring its own unique strategies and considerations. We’ve outlined just a few in this article, and with any type of gift the Canadian and U.S. tax issues and corresponding opportunities are important to understand and dissect. The immigration, residency, and relationship status of the donor and recipient have significant implications when it comes to cross-border financial planning. That’s why it is critical that you integrate and coordinate your gift giving plans in full alignment with your overall cross-border investment, tax, and estate planning. The educational insights provided in this article are general in nature, but to review your specific circumstances and objectives, please contact Cardinal Point.
Cross-Border Investment Management | Canadians and Americans living and working in the U.S. and Canada
Cross-Border Investment Management | Canadians and Americans living and working in the U.S. and Canada
Cross-border investment management involves allocating and managing investment portfolios that span both countries. The approach considers key factors such as regulatory differences, tax implications, currency fluctuations, and market conditions in order to optimize returns and minimize risks for investors in both countries. Cardinal Point provides expert guidance and tailored solutions to assist individuals and families with their cross-border Canada-U.S. investment management needs.
Cross-Border Investment Management | Americans and Canadians Living and Working in the U.S. and Canada
Cross-border investment management involves allocating and managing investment portfolios that span both countries. The approach considers key factors such as regulatory differences, tax implications, currency fluctuations, and market conditions in order to optimize returns and minimize risks for investors in both countries. Cardinal Point provides expert guidance and tailored solutions to assist individuals and families with their cross-border Canada-U.S. investment management needs.
Why is Cross-Border Investment Management Crucial for Americans and Canadians Living and Working in the U.S. and Canada?
Cross-border investment management significantly benefits those who have lived or worked in both Canada and the U.S. and have accumulated investment accounts in both countries.
Cross-border investment management brings the cohesion and integration needed to properly manage investment accounts and assets under one uniformed strategy. Assets within Canadian and U.S. dollar accounts can be allocated in a way that can reduce currency risk, optimize diversification and taxes, comply within the regulatory framework, maximize returns, reduce currency risk and overall cost to the account owner. It also allows for one centralized advisory voice versus having to work with multiple practitioners that are only licensed to provide investment management on one side of the border.
How Cardinal Point Wealth Management Helps with Cross-Border Investment Management
At Cardinal Point, we specialize in helping Americans and Canadians living and/or working across the border with their cross-border investment management needs. We understand the unique challenges of managing investments across the two countries, and we provide tailored solutions to help you navigate these complexities.
Cardinal Point can simultaneously manage Canadian assets such as RRSPs, pensions and taxable accounts, as well as U.S. assets such as trusts, IRAs, 401Ks and 529s. This structure allows for an integrated cross-border investment strategy under one platform. We offer comprehensive guidance on tax considerations, helping you optimize your investment strategies, minimize or eliminate tax liabilities, and ensure compliance with all relevant tax requirements. We know that tax implications can significantly impact your investment decisions, and we provide experienced knowledge and expertise to help you to make informed choices.
Our approach to asset allocation and investment management is personalized, based specifically on your own unique financial goals, your risk tolerance, and your particular cross-border circumstances. Whether you are planning for retirement, strategizing estate plans, funding education, or preserving your wealth, we will design investment portfolios that align with your unique needs.