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Jeff Adema, Portfolio Manager

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Jeff Adema is a Portfolio Manager. As a CFP® he practices proactive wealth management in a conflict-free environment at Cardinal Point. Prior to Cardinal Point he spent nine years in the U.S. financial planning industry managing affluent clients’ financial affairs. He walks his clients through wealth accumulation, protection/preservation and tax-efficient distribution of their assets maximizing what goes to them / heirs and minimizing what is paid in taxes. Working as a teacher in his former life, he sees the value education brings when assessing the present and planning through issues for the future. Combining the financial acumen with education allows him to pinpoint current weaknesses, offer strategies and suggestions to address cross-border financial issues and solidify a financial plan. He values the opportunity to patiently coach using ideas that cut to the core of his clients’ needs, cultivating financial harmony in their families and businesses. He is passionate about the cross-border wealth management space as he and his wife have lived in this arena. Jeff can relate to those individuals working through the various facets that are unique to this lifestyle. He gets excited by the opportunity to partner with clients as they work through issues such as immigration, customs, income tax, cash management, risk management, retirement and estate planning.

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

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The upcoming U.S. presidential election in November has led to much media focus on U.S. citizens looking to move to Canada. So much, in fact, that we prepared an article a few months back entitled, Thinking About Moving to Canada? What You Need to Know.

As one moves from Canada to the United States or vice versa, a multitude of unique lifestyle, immigration, financial, tax and estate planning issues must be considered. Ideally, it is best to plan or be aware of these considerations prior to the move, not afterward. In this article, we will discuss some of the financial and income-tax implications you should be aware of when moving from Canada to the United States.

Residency for Canadian Income-Tax Purposes

Unlike the United States, Canada does not impose its income tax system based on Canadian citizenship. Income tax in Canada is based on residency—and thus it’s important to understand how residency is determined.

Residents of Canada are liable to pay Canadian income tax on their worldwide income. Non- residents of Canada, meanwhile, are liable to pay Canadian tax only on income from employment in Canada, as well as rents, royalties, interest and dividends. They must also pay Canadian tax on income from sources in Canada including a business that carries on in Canada (while the recipient is a non-resident) and income from the disposition of taxable Canadian property.

To further complicate matters, the term “resident” is not directly defined in the Canadian Income Tax Act. Rather, it is based on common-law principles and is related to the kind and types of residential ties that one has or maintains in Canada.

To better understand how the Canada Revenue Agency (CRA) might view residency from a Canadian income tax perspective, you might want to review CRA Income Tax Folio S5-F1-C1: Determining an Individual’s Residence Status.

Whether your residential ties in Canada are sufficient for you to be considered a resident for tax purposes is generally a question of fact. Some of the factors that CRA would likely take into consideration include:

  • Do you have a permanent home available to you in Canada?
  • Does your family live in Canada? In this case, “family” typically refers to a spouse and/or children.
  • Where are your social and personal ties, such as church, social clubs, professional organizations and so on?
  • Where are your economic ties, such as employment or business operations, bank accounts, driver’s license, etc.?
  • Have you established residential ties to another country, and are you resident in that country for tax purposes?
  • Do you intend to return to Canada at a later date?

When we work with clients to properly document their intention to sever their residency from Canada, we recommend that they take the following actions:

  • Consolidate your bank accounts by closing all unnecessary accounts and transferring all or a substantial portion of funds to a bank account in the United States. Once established in the United States and all cheques have cleared against the Canadian accounts, transfer the balances and close all Canadian accounts.
  • Close your Canadian non-registered brokerage accounts and transfer the investments to a U.S. account, or liquidate if necessary. Given that Cardinal Point Wealth Management is licensed and registered in both Canada and the United States for investment management purposes, we can create much value for our clients in this area, including maintaining Canadian-dollar investment accounts in the United States.
  • Advise all Canadian financial institutions with which you will have ongoing dealings of your move to the United States. They will begin to withhold non-resident tax from any investment income earned by you outside of your registered assets. The tax withheld under the Canada-U.S. Tax Treaty (0% for interest, 15% for dividends) represents your final Canadian tax obligation with respect to this income, and a Canadian tax return is not required to be filed to report this income. The same would apply to Canadian-source pensions (excluding Canada Pension Plan and/or Old Age Security).
  • Apply for a driver’s license in the United States as soon as possible, and then cancel your Canadian license.
  • Cancel or change your professional memberships to non-resident status. Cancel your memberships to clubs and other organizations. An individual can retain membership in any professional organization on the basis that he is required to perform duties abroad without significantly impacting non-residency status. However, one should arrange for the membership status to be designated “non-resident” if possible.
  • Sell or dispose of all personal possessions not accompanying you abroad. Where possible, it is preferable to avoid storing items in Canada, as the maintenance of personal property may be an indication that residency was not terminated.
  • Cancel your credit cards with Canadian financial institutions and obtain cards with U.S. institutions.
  • Terminate your Canadian healthcare and medical-insurance coverage.
  • Maintain a personal file outlining your efforts to cease Canadian residency. The determination of residency status is not straightforward, and although one may have a strong fact pattern, CRA can always assert that individual facts and circumstances do not support the contention that you have ceased residency from Canada. A personal file containing this information may be vital in demonstrating to CRA that you have sufficiently severed your ties with Canada.

CRA uses a questionnaire, Form NR73 Determination of Residency Status (leaving Canada) to establish an individual’s residency status. However, we recommend that clients not voluntarily submit this form to CRA. Once submitted, it can be difficult to change filing positions in Canada.

The Canadian Departure Tax

Upon departure from Canada, Canadian residents are generally considered to have disposed of most property, with exceptions as noted below, for deemed proceeds equal to the fair-market value of the property at that time. If the fair-market value of the property exceeds its cost base for income tax purposes, the individual must recognize a capital gain that is taxable in Canada on their final exiting Canadian tax return. You have the option of paying the tax on those gains, from the deemed disposal, when you file your tax return for the year you leave Canada. Or you can provide security (if required) to CRA, to defer payment until the property is sold.

Canadian real estate, stock options, certain employer-sponsored pension plans Registered Assets (RRSPs, RRSPs, LIRAs, etc.) and TFSAs will not be subject to the departure tax, as there are specific exclusions in the rules for these types of assets.

For the most part, non-registered investment assets, including shares within Canadian business interests and certain trusts, would be considered deemed sold as of your departure from Canada.

A requirement to file CRA Information Forms T1161 – List of Properties by an Emigrant of Canada and T1243 – Deemed Disposition of Property by an Emigrant of Canada would need to be included with your final return to CRA for the year of departure. Depending on the fair-market value of assets upon departure and/or the amount of deemed gains, these forms, and the requisite tax (or the posting of adequate security), might not be required.

We assist all of our clients in obtaining the necessary documentation to support the fair-market value of all of their assets on the date they cease residency for reference purposes. It is generally easier to gather this information at the time of their departure as opposed to when we are preparing their Canadian tax returns for the year of departure.

U.S. Income-Tax Considerations

The United States does not have a deemed-acquisition valuation when an individual enters the country for tax purposes. For this reason, an individual who sells appreciated property after entering the United States is subject to tax on the whole gain, not just the portion attributable to the period of residence in the United States. This can result in double taxation, first the Canadian departure tax and then U.S. capital-gains tax upon the sale of the assets while in the United States.

Because of this, we generally recommend that clients physically “trigger” any actual capital gains prior to exiting Canada, or take a specific Tax Treaty election to “step-up” the capital gains for U.S. purposes upon their exit from Canada. However, if a client would have any assets that would be in an unrealized loss position from a U.S. income-tax perspective (after adjusting the U.S. dollar-cost basis), we might recommend that no realization would occur for U.S. purposes so that we can preserve the losses to apply against future realized gains in the United States. Given our Canada/U.S. tax and investment expertise, we can provide great value to our clients upon their departure from Canada and entrance into the United States.

As we alluded to earlier in this article, there are still a number of factors that need to be addressed and reviewed upon a departure from Canada. These include immigration planning, currency exchange, tax preparation, compliance and planning, a comprehensive review of health and risk management programs, the consolidation of investment and retirement accounts and management, estate planning and much more.

At Cardinal Point, we are fortunate in that we provide a Comprehensive Wealth Management Solution that meets our clients’ specific and unique needs. We are not just “book smart.” The majority of our advisors actually live and work in both countries, and are recognized as leading experts in Canada/U.S. financial planning. If you are considering a move to the United States from Canada, we would encourage you to request our White Paper, Manage Your Canada – U.S. Cross Border Lifestyle and/or reach out to us directly at info@cardinalpointwealth.com

 

 

 

Options for U.S. IRA account holders when living in Canada

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At Cardinal Point, one of the most frequent inquiries we receive is from prospective clients asking what they should do with their U.S. retirement accounts after a move to Canada. These individuals are often caught off-guard by their U.S.-based financial advisor or institution after learning that their investment accounts must go into restricted status or be permanently closed. The reason they are often given is that their U.S.-based advisors and related custodian can no longer maintain accounts registered to a Canadian address.

Many advisors and/or firms in the U.S. – even some of the largest – are not properly registered and licensed to provide investment advice for a client living in Canada (even if the client is a U.S. citizen). In fact, there are few U.S.-based firms that carry the proper licenses and registrations to be able to service taxable, IRA or 401(k) accounts held by Canadian residents. And because of the additional rules and compliance requirements associated with servicing a client physically living outside of the United States, many U.S.-based firms have policies against providing services to non-U.S. residents.

The situation is equally troubling when an individual looks to a Canadian financial advisor to help. Yes, these advisors carry the proper Canadian securities licenses and they can manage accounts domiciled in Canada. But because they are not registered in the United States, Canadian advisors cannot oversee a U.S.-based retirement account. The situation leaves the Canadian resident frustrated and with few options for what to do with their U.S.-based retirement account.

Unfortunately, some advisors have tried to find workarounds that are not only illegal but not in the best interest of the client. Over the years, prospective clients have shared with us the “advice” that they have received from both U.S. and Canadian advisors. In the United States, these suggestions include leaving an old U.S. address on file or using a friend’s or family’s U.S. home address. To the advisor’s compliance officer and firm, it makes it appear as if the client is still residing in the United States. Not only is this illegal under U.S. securities laws and very likely against company policy guidelines, it could also suggest to the U.S. state in which the account is held, that the client is still a tax resident of that state. Given some of the fiscal challenges facing many U.S. states, we have seen state tax authorities use this as a phishing expedition to generate or pursue more tax revenue. In Canada, frequently given advice includes selling out the U.S. retirement account and moving the proceeds to Canada, so that the Canadian-based advisor can manage the assets. Simply following this advice without fully understanding or determining the tax impact of such a move, can be costly and harmful.

So what options are there for Canadian residents with U.S. retirement assets? While it may seem like a no-win situation, there are options available. The first step is to find a qualified Canada-U.S. cross-border advisor that is registered and licensed to provide investment and financial planning advice in both countries. Although there are very few who meet these requirements, these cross-border advisors can not only legally manage your investment and retirement accounts in both countries but can also provide the accompanying financial, tax and estate planning services that are required for those individuals with investment assets and interests in both Canada and the U.S. To take it a step further, when choosing a cross-border financial advisor, make sure that they are bound by the fiduciary standard and not the less strict suitability standard used by most Canada/U.S. investment and bank owned firms. The fiduciary standard is the highest standard of care in the investment industry. As a fiduciary, the advisor must operate in a way that puts the client’s needs ahead of his or her own through a transparent and conflict-free service model.

Because there is no one-size-fits-all approach when it comes to addressing Canada-U.S. cross-border financial planning matters, a fiduciary-bound, cross-border advisor will take the time to properly understand your complete and unique situation. The advisor will then develop a comprehensive Canada/U.S. financial plan including options on how best to address your U.S.-based retirement accounts. In the case of a Canadian resident holding a U.S. retirement account, some of the factors that must be considered include but are not limited to the following: age of the client, likelihood of the client returning to live in the U.S. one day, size of the IRA/401k account, type of IRA (traditional vs. Roth), client tax situation, citizenship, U.S. estate tax exposure, future income needs and residency of beneficiary.

Once a thorough assessment of the client’s situation is completed, the advisor will likely recommend one of the following courses of actions if the individual holds a traditional or rollover IRA*:

  • Close out the IRA and withdraw the funds: Under this scenario, if the owner of the account is a Canadian citizen, there would be a 30% U.S. withholding tax applied to the withdrawal. (This tax can be reduced to 15% if there is a signed IRS W-8BEN form on file. It is important to note that we are finding an increasing number of U.S. institutions that do not honor or understand the role of a W-8BEN form.) Depending on the client’s tax situation, the account owner may be able to recoup some, if not all, of the withholding tax applied through the use of foreign tax credits. If the individual is a U.S. citizen, there is no mandatory withholding tax applied. If the plan owner is under the age of 59 ½, an additional 10% early withdrawal penalty will be assessed on the value of the distribution. The entire amount withdrawn from the IRA account would then be picked up as income for Canadian income tax purposes for Canadian tax residents. If you are a U.S. citizen, the amount would be picked up as income for Canadian and U.S tax purposes. Through the application of foreign tax credits, this form of double taxation could be eliminated. It is important to be very careful when considering redeeming the entire IRA/401k account because the tax treatment tends to not be beneficial in most client situations.
  • Close out the IRA and move the proceeds to an RRSP: If you are not a U.S. citizen or tax resident, under the right circumstances this might be a worthwhile option to consider. Under U.S. tax laws, transfers for an RRSP or RRIF cannot be made into a U.S. IRA. However, Canadian tax law does provide for the transfer of proceeds from a U.S. retirement account to an RRSP. Under Canadian tax rules, there are two provisions under the Income Tax Act that with proper planning, the transfer of IRA or 401(k) proceeds can be made to any existing or new RRSP without compromising one’s RRSP contribution room. That being said, although Canadian tax on the U.S. retirement account distribution can be reduced or eliminated, the U.S. treaty withholding tax of 15% – and the 10% penalty if it applies – cannot be eliminated or reduced. Therefore, if the Canadian wanted to contribute the gross amount from the U.S. retirement asset to a Canadian RRSP, they would have to provide the 15% amount themselves from other financial resources.
  • Leave the IRA account in the U.S.: For many account owners, this course of action makes the most sense given that the Canada-U.S. Tax Treaty allows a Canadian resident with an IRA to leave the account in the U.S. and receive the same tax-deferred treatment the individual would enjoy if still living within the United States. Under this scenario, the plan owner could let the account grow until he or she is required to take out the annual Minimum Required Distributions (RMDs) after turning 72. At that time, a 30% withholding tax would be applied to each annual distribution received by a Canadian citizen (potentially reduced to 15% with a W-8BEN or recovered through the filing of a U.S. tax return and application of treaty benefit). For a U.S. citizen, no withholding requirements are necessary. The plan holder could continue to receive the RMD each subsequent year the same way the individual receives annual Canadian RRIF minimum withdrawals.Any withdrawals or distributions would be picked up as income for Canadian tax purposes (for Canadian residents) or as income for Canadian and U.S. tax purposes (for U.S. citizens or tax residents). Again, foreign tax credits up to a treaty maximum rate of 15% could be applied to eliminate this double taxation for U.S. citizens. There are additional benefits to holding the account in the United States. These include continued currency diversification (USDs), and less expensive investment options, as well as more variety of investment options, than can be found in Canada.

    * For the purpose of this short article, we are not listing the pros and cons of each scenario identified.

Many of the same tax rules outlined above for an IRA account would also apply to a 401(k) account holder who is a resident of Canada. However, we would suggest that the account owner consider “rolling over” the 401(k) account to an IRA account. The key benefit to completing this tax-free rollover is that an IRA account typically allows for more investment options within the plan.

If an individual is an owner of a Roth IRA account, the options are far greater and easier to navigate. This is because any withdrawal received from a Roth IRA after the account owner turns age 59½ is considered tax free for Canadian (if a specific first-year election is made when coming to Canada) and U.S. tax purposes. No withholding taxes are applied either. Like the traditional IRA, the account can grow tax deferred indefinitely for Canadian and U.S. tax purposes. Further, there is no RMD for Roths, meaning the account holder can take out as little or as much as the individual wants once turning 59½ years old.

A thoughtful plan must be put in place after a move to Canada. After all, many of us work hard our entire lives to save for retirement and a cross-border move shouldn’t jeopardize a person’s long-term financial health. When choosing an advisor, take the time to find a qualified individual or firm licensed to provide investment advice in both Canada and the United States. In addition, the advisor must bring a firm understanding of cross-border financial and tax planning matters and, just as importantly, the appropriate Canada-U.S. investment platform to support the recommended course of action.

Cardinal Point is a Canada-U.S. cross-border advisor firm with offices in Canada and the U.S. We specialize in assisting individuals and families with their investment, tax, financial and estate planning needs. We have the unique ability to manage U.S. retirement accounts on behalf of Canadian residents and operate solely under the fiduciary standard. If you wish to discuss the options for your U.S.-based retirement accounts, please feel free to reach out to us. One of our cross-border advisors would be happy to assist you.

 

Cross-Border Spouses: Beware of U.S. Gift-Tax Surprises

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When a U.S. citizen or U.S. resident alien is married to a Canadian spouse who is not a U.S. citizen, then property transfers between the spouses could be taxable in the United States or subject to U.S. gift-tax rules.

Most Canadians are not familiar with a gift tax or an estate tax because Canada doesn’t have such taxes. In the United States, however, gift and estate taxes exist alongside regular income tax, and can run as high as 40% of the value of a U.S. taxpayer’s wealth over a certain amount.

Inter-spousal transfers can take place via a gift, a sale or incident to a divorce. For U.S. tax purposes, a gift is treated as a transfer of property without receiving full consideration in return. For married couples where both spouses are U.S. citizens, transfers are not subject to regular income tax or gift tax. But problems arise when one or both spouses are not U.S. citizens.

Sale of property to a spouse
If both spouses are either U.S. citizens or U.S. tax residents, then an inter-spousal transfer by sale or divorce is tax-free. If, however, one spouse is a non-resident alien for tax purposes, then the transferring spouse will recognize a gain or loss for U.S. tax purposes.

Gift of property to a spouse
When one spouse is not a U.S. citizen, then U.S. gift-tax rules could apply. Unlike the unlimited marital gift tax deduction applicable to U.S. citizen spouses, a gift to a non-citizen spouse is only exempt from gift tax up to $147,000 (for 2015). This rule applies regardless of whether the receiving spouse is a green-card holder or otherwise a U.S. tax resident. As a result, care must be taken to analyze transactions between spouses to determine whether a gift tax return needs to be filed to pay any gift tax.

Let’s look at an example of when this situation would apply. Neil Youngman is an American citizen living in Malibu, Calif., and his wife, Cinnamon, is a Canadian citizen living in Toronto. Neil is a musical legend. Because Neil has a Heart of Gold, he decides to give his Canadian wife a gift of $500,000 to buy a home Down By The River in Muskoka. Unfortunately for Neil, only $147,000 of the gift is tax-free. The remaining $353,000 will need to be reported on a gift tax return, and is subject to gift tax.

As you can see, failing to plan ahead for spousal transfers could leave you afoul of complex tax rules—and subject you to unexpected tax surprises.

Marc Gedeon is a CPA (U.S), CPA (Canada) and Tax Attorney at Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada.  Marc specializes in  providing Canada-U.S. cross-border financial, tax, transition, and estate planning services.  This piece is for informational purposes only and should not be considered legal or tax advice. Online readers should not act upon this information without seeking professional counsel.

Canadians Living in California, California Tax Filing with a Canadian Spouse

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canadians living in californiaOur previous article discussed the concept of California domicile and the application of California community-property rules to Canadians domiciled in the state. This article is the second installment in our series explaining about Canadians Living in California and how California community property laws can impact Canadians.

At Cardinal Point, we regularly deal with cross-border couples who maintain cross-border lifestyles due to career commitments or other obligations. It’s important to understand how California’s community property laws apply when one spouse is domiciled in California and the other in Canada.

Imagine a married couple in which the wife lives in Toronto (and is domiciled in Ontario) and the husband lives in Los Angeles (and is domiciled in California). Both spouses are dual American and Canadian citizens and they file a joint U.S. Form 1040 tax return. The husband, Drew, is a professional hockey player who plays for a California-based NHL team. Drew’s wife, Amber, is a top fashion model based out of Toronto. The couple owns homes in both Toronto and Los Angeles. Since Amber is mainly working in Toronto, New York, London and Paris, she only spends two weeks a year in Los Angeles with her husband. Moreover, Amber does not earn any California-sourced income.

One might assume that Amber does not need to file a California tax return and pay California tax, given that she doesn’t earn any California income and isn’t domiciled in California.

But as we stated in our previous article, California follows its own rules for determining tax residency. Unlike federal tax treatment, an immigrant to California is normally a California resident from the date of arrival. No 183 physical presence test or green card is required to determine California residency status. Moreover, since California is not a party to the Canada-U.S. tax treaty, the treaty is not applicable for purposes of determining California residency (similarly, California does not allow a foreign tax credit or the federal foreign earned income exclusion).

Going back to Drew and Amber, because they are filing jointly on their federal return, California requires the same joint filing status on their California return, and they would pay California tax on their worldwide income.
There is, however, a little-known legal exception that will allow our imaginary couple to file separately instead of jointly for California tax purposes. To file separately in California, two criteria must be met: (1) Amber must not be a resident of California and (2) she must not have any California-sourced income, including California wages and income from California real-estate property.

With Amber filing separately under the exception, she would still need to file a California 540NR non-resident return to pay tax on 50% of her husband’s California income. That’s because Drew is domiciled in California. Moreover, she would need to disclose her non-California-sourced income on the California return to determine her California tax rate.
Because of the complexities facing cross-border couples, they are well advised to seek out tax advisers who specialize in navigating the cross-border tax landscape.

Marc Gedeon is a CPA (U.S), CPA (Canada) and Tax Attorney at Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada.  Marc specializes in  providing Canada-U.S. cross-border financial, tax, transition, and estate planning services.  This piece is for informational purposes only and should not be considered legal or tax advice. Online readers should not act upon this information without seeking professional counsel.