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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

 

 

 

Thinking About Moving to Canada? What You Need to Know

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Irrespective of where you stand politically, the circus currently playing out in the contest for the next President of the United States has a number of Americans—both Democrats and Republicans—looking at options that might include leaving the United States and moving to Canada.

Indeed, by midnight of March 1—Super Tuesday in the United States—searches for “How to move to Canada” had spiked by 1,500%, according to Google Trends.

For some, leaving the country might seem rather extreme. However, we get it!

At Cardinal Point, many of us have a stake in the direction of our political system in both Canada and the United States. And we are intimately aware of the unique immigration, financial, tax, investment and estate-planning implications of becoming an American in Canada. We understand the immigration options and the challenges those decamping for the north might face.

Before Americans hop into their cars, fill their gas tanks (in gallons) and make their way to Canada, they first need to be aware that one can’t simply show up at the Canadian border and expect to live and work in Canada. Like the United States, Canada has a formal immigration process that must be adhered to.

In order to live and work in Canada, you might be able to secure your immigration via one of a number of business and family categories.

Canada’s family immigration laws differ from those of the United States. Notably, you cannot just marry a Canadian citizen and expect to automatically become a Canadian citizen. A formal process must be adhered to before a spouse of a Canadian citizen can live permanently in Canada and ultimately seek Canadian citizenship.

http://www.cic.gc.ca/english/helpcentre/answer.asp?qnum=357&top=5

If you are already employed in the United States, your occupation might qualify you for one of Canada’s Skilled Worker Entry programs. This would entitle you to a visa to live and work in Canada. And depending on your work or trade, you might be entitled to the new Express Entry application process.

http://www.cic.gc.ca/english/immigrate/skilled/index.asp

If you are self-employed in the United States, you might be able to qualify for business immigration to Canada under the Self–Employed Person program. If you have a specific occupation that fits into the Government of Canada’s Arts and Culture or Technical and Skilled Occupations in Art, Culture, Recreation and Sport, you might be able to immigrate to Canada under that program.

http://www.cic.gc.ca/english/immigrate/business/self-employed/index.asp

Under the Provincial Nominee Program (PNP), Canadian provinces and territories are allowed to nominate persons who wish to immigrate to Canada and who are interested in settling in a particular province. Each Canadian province – except Quebec – have agreements with Citizenship and Immigration Canada (CIC) that have developed programs to welcome certain nominees to settle and work in the province and contribute to the community.

http://www.cic.gc.ca/english/immigrate/provincial/index.asp

If you would like to start a business in Canada, you might be entitled to apply for the Start-up VISA. You would have to have a Letter of Support from a designated angel investor group, venture capital fund or business incubator. You must also meet specific ownership requirements in the business. Get scores of at least 5 in the Canadian Language Benchmark test in either English or French and finally meet sufficient settlement funds based on the size of your family.   You also must be able to secure a minimum investment of $200,000 from a designated Canadian venture capital fund or $75,000 from a designated Canadian angel investor group. No investment is required if you are accepted into a Canadian business incubator program.

http://www.cic.gc.ca/english/immigrate/business/start-up/eligibility.asp

The immigration process is definitely the first hurdle that you would have to overcome before entering Canada. It is a process and for some could be a rather costly one as well.

Working with appropriate Canadian immigration counsel, the advisors at Cardinal Point are well-positioned to assist you in partnering with the right attorney through this process.

But beyond the immigration hurdle, if you remain a U.S. citizen, you would still be considered a resident of the United States for income, gift and estate-tax purposes. So if you were hoping to avoid the tax policies of the previous and next administration, I’m afraid you’re out of luck.

As a U.S. citizen, you would be required to continue to file U.S. income-tax returns on your worldwide income (even if that income is only now in and from Canada). And you would have to comply with a number of other foreign reporting and compliance requirements.

Furthermore, as a resident of Canada, you would also be subject to tax in Canada on your worldwide income, including any income that might continue to trickle in from the United States.

Although both countries would have the right to tax you on your worldwide income, you would be entitled to apply foreign tax credits against the same source of income to help to reduce the perceived exposure to double taxation. However, without proper tax planning upon entering Canada, and without continued ongoing planning, you could find yourself exposed to double taxation and a number of nasty tax surprises.

Fortunately, we have the unique expertise to assist you so that you can enjoy the Canada-U.S. lifestyle.

To that end, we would encourage you to request our Cardinal Point White Paper: Manage your Canadian and U.S. cross-border lifestyle.

This paper will provide you with additional insight into how a Cardinal Point cross-border financial advisor can assist you with your unique cross-border financial planning complexities.

And if it does not make sense to move to Canada, bear in mind that our offices in the United States can provide you with comprehensive, U.S.-only wealth management services.

Canadian Tax Filers: Report Your Foreign Property Annually—Or Else

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A lot has been made of the IRS’ onerous foreign-account and property-reporting requirements, and understandably so. But largely overshadowed by that discussion is a similar requirement that the CRA has inflicted on Canadian tax filers.

As part of its efforts to address tax noncompliance involving foreign property, CRA, in 2013, introduced a revised Form T1135 Foreign Income Verification Statement. Form T1135 now requires significantly more detailed information regarding foreign property owned by Canadian residents.

What’s more, the form must be filed by the taxpayer’s income tax return due date (generally April 30), and no extension is available. Taxpayers who fail to comply with the filing requirements face stiff penalties—up to $2,500 for late filing. Form T1135 is similar to the U.S. Form 8938, Statement of Specified Foreign Financial Assets. To assist our clients, we’ve put together the following Q&A summary about the T1135:

Q: Who is required to file Form T1135?
A: Any Canadian resident who, at any time during the year, owned specified foreign property with a total cost in excess of $100,000 is required to file Form T1135 for that taxation year. Individuals who immigrate to Canada are not required to file Form T1135 in the taxation year in which they first become Canadian tax residents (unless they were previously Canadian tax residents). However, Form T1135 must be filed for all subsequent taxation years, including a taxpayer’s year of departure from Canada. In addition to Canadian individual residents, Form T1135 must also be filed by corporations and trusts resident in Canada.

Q: What is specified foreign property?
A: The definition of specified foreign property is quite broad. It includes most non-Canadian assets, such as funds held outside of Canada, shares in non-Canadian corporations, indebtedness owed by a nonresident, an interest in a nonresident trust that was acquired for consideration, as well as real property situated outside of Canada. Specified foreign property excludes personal-use property, such as a vacation home.

Specified foreign property also includes most non-Canadian investments (i.e. U.S.-traded securities) held in Canadian non-registered brokerage accounts. Thus, in certain cases, taxpayers whose assets are all physically located in Canada may still be required to file Form T1135.

Q: What is new about the revised Form T1135?
A: It requires filers to disclose significantly more information regarding foreign assets. For each foreign asset, the revised form requires the following information to be disclosed on a per-asset basis:

  • Name of the foreign entity holding the funds, name of the foreign corporation or foreign trust, or description of the foreign property;
  • Country where the foreign asset is located;
  • Maximum cost of the foreign asset during the year;
  • Cost of the foreign asset at year-end;
  • Amount of income (or loss) related to the foreign asset; and
  • Amount of any capital gain (or loss) realized on the disposition of the foreign asset.

Q: Does the revised Form T1135 provides any reporting exemptions?
A: Yes, an exemption is available for reporting specified foreign property for taxpayers who have received Canadian tax slips related to such foreign property (e.g., a T3 or T5 slip). In these instances, no additional disclosure related to such foreign assets is required. However, while this relief may exclude specific reporting for foreign assets held in a Canadian brokerage account for which income has been reported on a T3 or T5 slip, it would not exclude foreign securities held in the same Canadian brokerage account for which there was no income to be reported on a T3 or T5 slip.

In addition, each stock or bond held in a foreign investment portfolio is required to be reported separately on Form T1135. This will require taxpayers to compile a significant amount of additional information.

Q: How is Form T1135 filed?
A: Taxpayers should begin collecting the necessary information to complete the T1135 early in the new year, rather than waiting until April 30, when the form is due. Form T1135 currently cannot be filed electronically. Taxpayers who electronically file their income tax returns should forward a signed copy of Form T1135 to the CRA by the due date.

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.