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What do I do with my U.S. revocable trust if moving to Canada?

September 13, 2016 By Cardinal Point Wealth

Affluent individuals living in the United States often use a U.S. revocable living trust (RLT) for estate-planning purposes. Such a trust provides confidentiality and flexibility in how assets are managed, as it eliminates the specter of probate.

A revocable living trust is transparent for U.S. income, gift and estate-tax purposes. The individual who transfers (settles) property to the trust is also its trustee and beneficiary. The trust is considered a U.S. grantor trust, which is ignored for U.S. income tax purposes. All income, losses and expenses are claimed on the individual’s personal U.S. tax return.

Moving to Canada: Canadian tax issues and administrative burdens
For individuals moving to Canada (both Canadian and U.S. citizens), continuing to hold a U.S. RLT will present tax and administrative challenges. Under Canadian tax laws, once the trustee(s) become residents of Canada, the trust will be considered a separate taxable entity and will be treated as a Canadian resident trust. This will then require the trustee(s) to not only file a Canadian Trust return but also to pick up all of the income earned by the trust on their personal Canadian and U.S.  tax returns.

Although foreign tax credits can be used to reduce and/or eliminate double-taxation issues, continuing to hold the U.S. RLT complicates tax filings. Further, the trust would have both a Canadian and U.S. cost basis that would have to be tracked and reported. The Canadian basis would be equal to the value of the assets within the trust on the day the trustee(s) moved to Canada. The U.S. cost basis would be equal to the original value of the assets at the time they were acquired.

In some cases, an exception exists under Canadian tax law that allows the taxpayer to deem all the income and capital gains/losses associated with the trust property as taxable to the taxpayer as an individual, effectively making the trust disregarded for both U.S. and Canadian tax purposes. Under this exception, there would be no double taxation on income earned by the trust during the taxpayer’s lifetime.

Double Taxation at Death
Double taxation issues become a greater concern if the trustee happens to die as a Canadian resident after the trust had been in existence for 21 years. Under this scenario, the trust would form part of the trustee’s estate and, depending on the size of the estate, U.S. estate tax could be payable. In Canada, the trust would also be taxed once the assets were sold on or after the 21st year anniversary of the trust. There would be no foreign tax credits available to offset these two taxes, which could result in double taxation.

Subject to Canadian departure tax
Meanwhile, U.S. citizens temporarily living and working in Canada could be subjected to departure tax on their trust when they return to the United States. U.S. citizens are afforded a five-year period (See article: “Americans Exiting Canada: Understanding the Five-Year Deemed Disposition Rule”) living in Canada in which they are not subjected to Canadian departure tax upon a return to the United States. As stated earlier, because the trust is considered a separate legal entity from a Canadian tax perspective, it would not be granted the same five-year exemption from exit tax because it is not a personally owned asset.

Financial institutions unable to hold or administer trust
An additional complication, unrelated to the tax issues outlined above, is the fact that most U.S.-based financial institutions will not hold a U.S. RLT once the trustee becomes a resident of Canada.

Most U.S.-based financial institutions are not registered and licensed to oversee a taxable (or trust) investment account on behalf of a Canadian resident, even if that individual is a U.S. citizen. Many individuals try to get around this regulation by registering the U.S. RLT to a family or friend’s U.S. address. Not only is it illegal to misrepresent your residency, but it could also create tax issues because the IRS and state will continue to receive tax slips showing you live at a U.S.-based address.

Although it is a great estate-planning tool for those residing in the United States, a RLT presents many tax and administrative challenges once you move to Canada. For those individuals intending to live in Canada for the foreseeable future, it would likely be wise to unwind the trust structure before or soon after arriving in Canada. This would prevent any adverse Canadian income-tax consequences. At Cardinal Point, we assist individuals and families moving from the United States to Canada with their financial, tax and estate-planning needs. If you are moving to Canada and own a U.S. RLT, we can advise you on whether it is in your best interest to keep the entity intact or close it down.

Filed Under: Articles, Cross-Border Estate Planning Articles Tagged With: Americans living in Canada, Americans Moving to Canada, Canadians Moving to U.S., moving to canada, US revocable trust

O Canada! A Very Brief Primer on Canadian Immigration and Citizenship

June 23, 2014 By Cardinal Point Wealth

move-to-canada According to the most recent data from the Association for Canadian Studies in the United States, more than 11,000 Americans moved to Canada in 2008. While some Americans dream of such a move, others view it as an act of treason on the U.S. Regardless of your point of view, immigrating to Canada and pursuing Canadian citizenship can be confusing.

What are the basic, long-term options for living and working in Canada? Living year-round or working at any time in Canada requires either the proper permit or Canadian citizenship. In the long term, those who aren’t citizens should decide whether to seek a temporary work permit, permanent residence, or citizenship. Considerations include tax implications, cost of living, health care, and lifestyle issues.

A Cautionary Tale

We’ve seen too often how a lack of planning in this area can result in unfortunate consequences. Take this case study as an example. Our new client had accepted a teaching position at a Canadian college but his initial immigration strategy hadn’t addressed the work permit situation for his spouse. While he was able to work in Canada, his spouse was left at home in a new city and country because she was unable to work. The lack of family or support structure added to the strain, and within a year, the couple contacted us to assist with their transition back to the U.S.

Our couple illustrates the importance of planning early and working with a knowledgeable professional who can help design your Canadian immigration strategy from beginning to end and achieve your goal of attaining temporary or permanent residence or citizenship.

Status in Canada

Generally speaking, there are three categories of “status” in Canada:

  1. Temporary Residents: This category consists of anyone who is not a permanent resident or citizen, including all visitors (for a maximum of six months), foreign workers, and international students.
  2.  Permanent Residents: Those in this category can work and study in Canada with no restrictions and also have the right to enter and stay in Canada indefinitely. The five sub-categories of permanent residents include: Family Members, Skilled Workers/Professionals and Investors, Entrepreneurs and Self-Employed Personas, Provincial Nominees, and Quebec-Selected Skilled Workers.
  3.  Citizenship: In most cases, children who are born in Canada will be Canadian citizens, regardless of their parents’ status. Otherwise, one must become a permanent resident to be eligible to apply for Canadian citizenship. Canada does allow for dual citizenship, in which a person can be granted Canadian citizenship without having to give up his/her U.S. citizenship or passport.

Of course, the points above discuss Canadian status in the broadest of terms. The cross-border specialists at Cardinal Point Wealth Management can conduct a detailed analysis of your particular situation to help determine the best immigration strategy to achieve your needs and goals.

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

Filed Under: Articles, Canada-U.S. Financial Planning Articles, Cross-border Transition Planning, Immigration Tagged With: Americans Moving to Canada, Canada-U.S. financial planning, Canadian Immigration and Citizenship, Immigration, Transition Planning

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“Cardinal Point” is the brand under which dedicated professionals within Cardinal Point Capital Management, ULC provide financial, tax and investment advisory, risk management, financial planning and tax services to selected clients. Cardinal Point Capital Management, ULC is a US registered investment advisor and a registered portfolio manager in Canada (ON, QC, MB, SK, NS, NB, AB, BC). Advisory services are only offered to clients or prospective clients where Cardinal Point and its representatives are properly registered or exempt from registration. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.