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Same House, Different Tax Rules: Selling a House in Canada

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Cross-border couples often enjoy the best of both worlds: travelling between the U.S. and Canada, experiencing two distinct cultures and exploring the natural beauty unique to each country. Indeed, Canada and the U.S. are different in many ways. For married homeowners in Canada, one important difference is how the U.S. and Canadian tax systems treat selling a home.

capitalgainstax-cp-thumb Let’s take a look at Laurie-Anne and Jack’s story. Laurie-Anne is a Canadian citizen, married to Jack, a U.S. citizen. They had owned and resided together in their home in Montréal for ten years before selling it this year. In a robust market, they sold their house for $380,000 more than they had paid for it.
After the sale, Laurie-Anne and Jack were concerned about tax on their capital gain, so they sought our advice. What they learned is that even though they are splitting the proceeds equally, the tax burden will not be the same for each of them.

As a Canadian citizen, Laurie-Anne will not have to pay tax on the capital gain; Canadian tax law does not require taxation on the sale of a home when it has been the principal residence for the entire duration of ownership. In fact, the couple will not even have to report the sale on their tax return in Canada.

Jack files his U.S. tax returns as “married filing separately.” U.S. regulations require that Jack declare all income—worldwide—including his share of the capital gain on the sale of the couple’s home in Montréal. There is an exclusion that benefits Jack: if he has owned or lived in the home long enough to qualify, he is allowed to exclude up to US$250,000 of capital gains from the sale of the house in Canada.

The same house, sold by the same couple, will be regarded entirely differently depending on which side of the border your paperwork is filed. Knowing your rights and obligations—and how they differ between the U.S. and Canada—can help you hold on to your “gains” as you prepare for your next big investment.

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

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

Establishing a Business Presence in the United States

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Is your Canadian company considering expanding its presence to the U.S.? Whether setting up an office across the border is your first foray into international expansion or a single aspect of your globalization plan, the complexities of U.S. business regulations require careful planning and meticulous attention to detail.

stock-photo-39709826-jigsaw-puzzles-on-the-table-3d-illustration Establishing an international presence is an important step forward for many companies—one that can open doors to new markets, supply chains, and capital & local expertise. Becoming a global corporation sends a message that your company is growing in scope and relevance. If the time has come for your business to establish a division in the U.S., we are here to help make that process seamless.

Setting up shop in the U.S. involves much more than leasing an office. One of the first considerations is what type of legal entity to form: this will affect every aspect of your operation across the border so it’s worthwhile to explore your options with an expert. Once you have decided on the type of entity, you will be better prepared to choose where to locate; the 50 states offer varying incentives depending on your industry. Furthermore, some states offer tax incentives to companies that “go green” by taking specific steps to protect the environment.

Whether your firm sets up in the Big Apple or Silicon Valley—or anywhere in between—you will contend with a mix of state and federal regulations that govern employment, banking and taxes, along with considerations unique to Canadian companies with a branch or branches in the U.S. From the earliest planning stages, establishing a business presence in the U.S. requires taking all the right steps in the proper order.

We’re here to help you with:

  • Forming the most appropriate type of legal entity for doing business in the United States;
  • Determining the most favorable states in which to form a U.S. entity from a tax and legal standpoint;
  • Complying with employment and immigration laws applicable to staffing your operations in the U.S.;
  • Establishing banking and investment accounts;
  • Structuring financial transactions between your home office and U.S. branches; and
  • Assessing the costs of establishing and maintaining a presence in the U.S.

Congratulations on growing your business to the stage at which you’re considering this step. You have no doubt made investments of time, talent and treasure to get this far. As you move forward, an informed, expert strategy with your best interests at heart will protect you and your Canadian business in the long run. The value of peace of mind? Priceless.

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

Are Cross-Border Social Security Benefits Taxable?

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If you’re a U.S. citizen living in Canada, you may be wondering about the impact on your U.S. Social Security benefits. Or maybe you’re a Canadian citizen with questions about how your U.S. residency will impact your CPP/OAS benefits. What are the tax implications for these programs when you live across the border?

social-security-cardsFortunately, there’s been a lot of cooperation between the U.S. and Canada on the subject of Social Security. Since 1984, a totalization agreement has been in place between the two nations regarding their respective Social Security programs. (Note: Quebec has its own agreement because of a special pension plan operated in that province.)

In a nutshell, those who have earned Social Security credits in either country may qualify for benefits from one or both countries. Those meeting the necessary requirements under one country’s program will get a regular benefit from that country. Those who don’t meet the basic requirements may still qualify for a benefit under the totalization agreement.

U.S. Social Security Benefits for Americans Living in Canada
Let’s look at a case study as an example. Our client Robert is a U.S. citizen who lived and worked in the U.S. for 25 years before moving to Canada for a job five years ago. He plans to work for five more years before retiring in Canada. Robert came to us with questions about Social Security benefits since he has lived abroad and plans to retire outside the U.S.

When it comes to taxes, the totalization agreement between the U.S. and Canada is quite favorable to Robert when it comes to the taxation of his U.S. Social Security benefits. These benefits will be subject to tax only in Canada, meaning Robert will be taxed the same way as other Canadian residents even though he’s a U.S. citizen. Here’s the math. In his Canadian taxable income, Robert will include 85% of his Social Security benefits and the remaining 15% will be exempt from Canadian taxes.

Robert’s Canadian tax situation will determine how much Canadian tax, if any, Robert will pay on his U.S. Social Security benefits. Of course, if Robert retired in the U.S., the tax would be lower, but in this situation the additional tax isn’t too onerous.

CPP/OAS Benefits for Canadians Living in the U.S.
How does it work with Canada Pension Plan (CPP) and Old Age Security (OAS) benefits from Canada? What if our case study example Robert was a Canadian citizen residing in the U.S.?

Essentially, if Robert was a Canadian living in the U.S., his benefits would only be taxable in the U.S. When it comes to taxes, the Internal Revenue Service sees CPP/OAS benefits as equivalent to U.S. Social Security benefits. This means that Robert should report this income on his 1040 form, and it will be taxed at the 85% inclusion rate. Another upside of the U.S./Canada totalization agreement: CPP and OAS income aren’t taxable in Canada and aren’t subject to Canada Revenue Agency withholding for non-residents.

Need help exempting your U.S. Social Security benefits from U.S. taxes? Questions about the taxation of your CPP or OAS? Whichever side of the border you’re on, the cross-border experts at Cardinal Point Wealth Management can help you maximize your benefits and avoid double taxation of your income.

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

Moving to the U.S.? Don’t Leave Your Canadian Investments Hanging

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iStock_boxes-xlarge-1280x768 A frequent question we hear from Canadians thinking of a move to the U.S. is this: What will be the tax consequences for my Canadian investments?

Let’s look at a case study to see how this plays out. Meet Diane, a Canadian client who is moving to the U.S. for a job opportunity. As we help Diane plan with her cross-border transition, she has questions about what to do with her Canadian investments. Should she use her sister’s Canadian mailing address for her Canadian investment accounts? What are her tax obligations to the Canadian Revenue Agency (CRA) after she leaves Canada?

For starters, we recommend that Diane change her mailing address to her U.S. residence and not a Canadian relative’s address. Once she leaves Canada and sets up residential ties to the U.S., Diane is deemed a non-resident of Canada. As such, she must notify her Canadian financial firms of her non-residency status for tax purposes and also establish that her current country of residence is the U.S. This helps ensure that the proper amount of Canadian tax will be deducted from her investment earnings.

As for her Canadian tax obligations once she resides in the U.S., the CRA sums it up this way:

“After you leave Canada, you are a non-resident for income tax purposes provided you have severed your residential ties with Canada. As a non-resident, you pay tax on income you receive from sources in Canada. This applies in the year you leave Canada and for each year afterwards, provided you remain a non-resident for income tax purposes.”

Once she becomes a non-resident of Canada, Diane will pay tax on the Canadian income she receives, also known as the Part XIII tax. According to the CRA, the most common types of Canadian income subject to Part XIII tax are:

  • dividends;
  • rental and royalty payments;
  • pension payments;
  • old age security pension;
  • Canada Pension Plan and Quebec Pension Plan benefits;
  • retiring allowances;
  • registered retirement savings plan payments;
  • registered retirement income fund payments;
  • annuity payments;
  • management fees.

But what about interest income generated from Canadian holdings? Such interest is typically exempt from Canadian withholding tax if you’re a non-resident and the payer isn’t related to you. In Diane’s case, the Canadian institutions from whom she receives income must deduct tax from the income paid to her, generally at a non-resident tax rate of 25% on Canadian income, but this can vary according to the source of income. This deducted tax fulfills her tax obligation to CRA for this income, and it is not necessary to report the income by filing a Canadian tax return.

If you’re a non-resident of Canada and have concerns about the tax consequences for your Canadian investments, the cross-border experts at Cardinal Point Wealth Management are here to help.

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