Cardinal Point Wealth Management

Your Cross-Border Financial Advisor

Contact Us | Client Login

Terry Ritchie on Sending Money Between the U.S. and Canada

By

BNN Bloomberg recently featured the expertise of Cardinal Point’s Partner and Director of Cross Border Wealth Services, Terry Ritchie, in an article on the costs and conveniences of sending money between the U.S. and Canada. Regularly splitting his time between Calgary and Phoenix, Arizona, Terry has decades of first-hand experience in cross border transfers.

Topics discussed in the article include:

  • The convenience of transfers through traditional banks, which can carry higher currency conversion and transfer fees.
  • Canadian banks with U.S. affiliates that allow Canadians to open accounts without U.S. addresses or social security numbers.
  • Lower cost wholesale transfers using go-between services, such as Knightsbridge Foreign Exchange Toronto or OFX, which can take longer.
  • Documentation required to move large sums of money between Canada and the U.S.

Check out the article here to learn more.

The Politics of Investing

By

We all know politics is an uncomfortable topic for many people. In fact, a recent research paper from the University of Nebraska found that politics was making Americans physically sick. According to the study, nearly 40% of Americans reported that they were stressed out by politics, while 20% said they were losing sleep over politics. In recent conversations with clients, politics is certainly on many people’s mind and is hard to avoid.

With upcoming elections this month in Canada, both the Liberals and Conservatives have proposed budgets that would in varying degrees add to annual deficits in the near term. With a decent chance neither party will win a clear majority, more compromises will probably be needed, and the outcome will not be that dramatically different from the status quo.

While the Canadian election cycle is a concise 40 days, the U.S. election cycle never seems to end. When we see pitches and policies floated in the media on a daily basis with more than a year to election time, it’s natural to wonder what impact, if any, they will have on our investments. It’s also nearly impossible to avoid articles or pundits who are absolutely certain that if candidate X wins, the market will drop by Y%. While politics may be making us physically sick, does it also impact our investing habits?

A recent academic study from Professor Kemph of The Booth School of Business at the University of Chicago and Professor Tsoutsoura of the SC Johnson Colle of Business at Cornell University (“Partisan Professionals: Evidence from Credit Rating Analysts”) showed that bond credit analysts of both parties typically let their political biases impact their corporate bond ratings. The researchers found that analysts who voted for the opposite party of the president, tended to lower their bond ratings during that presidency.

This isn’t surprising when we view investing through the many lenses used in behavioral finance, such as confirmation bias – one’s tendency to search for, interpret, favor, or recall evidence that confirms one’s already existing belief. In other words, if you disagree with one political party, you probably look for reasons for why that party gaining or staying in power would be bad for your investments.

These are highly educated professional analysts who still had trouble disentangling their political persuasions from their day-to-day job of assessing the credit ratings of entirely unrelated companies. What hope does the average investor have?

Let’s take a step back from the political squabbling of 2019 and soon-to-be 2020 and realize that the medium- to long-term returns we see on most investments are likely to be impacted far more by the direction and strength of economies and company earnings than by an election result. Even if – hypothetically – the U.S. economy were headed for a 2020 recession, it likely doesn’t matter who wins the election since they will be jumping into the captain’s seat of a massive ship to which the president can only make minor changes of speed or direction.

Think back to 2008 and 2012, when it was common to hear investors worrying that an Obama presidency would wreck the stock markets and be the end of capitalism. In 2009, The Wall Street Journal ran an op-ed warning that “Obama’s Radicalism is Killing the Dow”, virtually at the bottom of the bear market – the time you would have benefited the most from being invested. Similarly, many investors had agonized that the Trump presidency would quickly send the economy into recession or worse. On election night, as S&P 500 futures were plunging, everyone was forecasting financial disaster as soon as he stepped into office. Investors who stayed invested over the last 10 years, regardless of who was in office, have been generously rewarded.

We tend to exaggerate the impact that any politician can have on the long-term value of companies. How much impact will the next Prime Minister’s or President’s policy decisions have on the future value of all the hamburgers McDonald’s will serve worldwide over the next 50 years, or parkas sold by Canada Goose?

Election results will soon be known in Canada, and whichever Democratic nominee emerges in the U.S. will shed a bit more light on what the range of U.S. policy differences may be after the 2020 election. In any case, we’d expect there to be some moderate shifts on both sides of the border regarding issues like tax rates and estate planning. The only constant in financial planning is change. No investment plan is meant to be stagnant over decades but should always be viewed as a living document – a document that incorporates changes in the investment and tax environments as well as your own unique circumstances. An investment plan ensures that your overall asset allocation is still the appropriate mix to meet your long-term goals.

The few investment changes that Cardinal Point has made over the last year have all been with the aim of making our portfolios more robust to potential stock market declines, regardless of whether those were to occur due to election results, geopolitical surprises or a further slowdown in economic growth. While we closely monitor global financial markets, speculating on the latest tweet is not a sound way to reach your long-term investment goals.

 

All for Naught?

By

As we approach the end of the year, it’s natural to take stock of how everything in our life is going: family, health, wealth and more. But when we reflect back, we may find that our wealth, at least that part which is tied to the stocks markets, probably hasn’t performed all that well in 2018.  The major Canadian and U.S. indexes are sharply negative for the year, a far cry from the strong 2017 returns. And a quick look at the rest of the world shows that most International Developed and Emerging stock markets have fallen, down 10% or more. Bonds have also had a below average year. With Central Banks hiking rates in both countries, bond prices have been under pressure from rising yields.

Yet these results don’t jive with the expectations coming into the year. In December 2017, Barron’s published their expert forecasts for 2018 returns in an article which ended: “So long as earnings are rising, rates are low, volatility is subdued, and every stock selloff is met with more buying, as happened again this past week, the bull will still rule over Wall Street.” While estimates varied, all 10 experts questioned for the article forecasted higher returns, with an average  gain of 7% on the S&P 500. And these forecasts came out before the U.S. corporate and personal tax cuts were passed at the end of the year.

Coming off a calm 2017 with solid returns around the globe, strong economies in North America, and tax cuts fueling companies’ bottom lines, what wasn’t to be excited about? In fact, 2017 was so tranquil, it was easy to get lulled to sleep thinking markets were a smooth escalator going up.

Yet at both the beginning and end of 2018, markets were impacted by worries of higher interest rates, increasing trade tensions, and doubts about the sustainability of phenomenal growth in the tech sector. Even as economies remain strong in North America, markets are forward looking and fears about a recession in the next 18 months have grown.

Those worries were reflected in day to day market performance over the course of the year.  As we can see in the chart , in 2017, investors in Canada and the U.S. saw 5 or fewer days with losses in excess of 1%, which is extremely low compared to historical norms. In 2018, though, with a couple of weeks of trading left in the year, we’ve already seen 26 days with a loss greater than 1%  in the U.S. and 16 such days in Canada.

Count of days in which Stock Market declined by more than 1%
Jan 1 ,2017 – Dec 7, 2018
stockmarketdeclinedays

Returns on most asset classes in 2017 were above historical averages, but in 2018 almost all will be below. By the time the year ends, most investors will look at 2018 and could see negative returns and think the year was a disappointment. While below average market returns are indeed disappointing, it’s rare that we ever do hit that exact average. But that’s what makes up those long-term averages. We witnessed positive returns of just 2.1% for the S&P 500 in 2011 and 1.4% in 2015, yet the average return over the 10 calendar years starting with a very poor 2008 was still 8.5%.

We can’t control what the market returns will be, but we can do several things to ensure we’re capturing as much of those returns as possible:

  • Determine the right overall asset allocation for your long-term objectives and risk tolerance
  • Create custom portfolios for you which blend stocks and bonds from a variety of distinct asset classes
  • Utilize the most efficient implementation options possible
  • Reduce company, sector and country risk by diversifying globally across thousands of companies
  • Avoid overconfidence when markets are rising, and panicked selling when markets are falling
  • Ensure that our financial planning projections are using prudent long-term estimates which account for up and down years along the way

In January we’ll have our quarterly recap out and will touch on the final numbers for 2018, and we’ll continue with ongoing communications throughout the year. If you have any questions, or topics you’d like to see us cover, don’t hesitate to ask.

 

 

How a U.S. resident can receive tax-free alimony from a Canadian

By

While most people know that alimony is normally taxable income to the recipient and tax deductible by the payer, in the case of cross-border taxes, alimony can be received tax free while the payer still gets a tax deduction.

Let’s look at an example where this would apply.

Sarah is a U.S. Citizen who has been transferred to Toronto for a job opportunity. While living in Canada, she meets and falls in love with John, a Canadian citizen. After a few years of dating, Sarah and John decide to get married and live together in Toronto. Five years into their marriage, due to irreconcilable differences, they decide to divorce. Sarah chooses to return to the U.S. to live close to her family. As part of the divorce settlement, John must pay Sarah alimony.

Since John is a Canadian tax resident, he will be able to deduct the alimony payments to Sarah on his Canadian tax return. But with the right cross border tax planning, Sarah can exclude her alimony from U.S. tax. How? By including specific language required by the IRS in the divorce agreement. In our couple’s case, they would include language along the lines that John agrees not to deduct the alimony payments for U.S. tax purposes. Since John is a Canadian tax resident only, he is still able to deduct the alimony on his Canadian taxes and is not affected by the agreement.

While this is a very simplified example – the rules to make this legitimate are more complex – the fact remains that in Sarah’s case, a U.S. resident can receive alimony tax free for U.S. tax purposes. In John’s case, he also gets to reap the tax benefits from this strategy, unless he decides to take up a job in the U.S. and become a U.S. tax resident.

Canadian Expat – Principal Residence

By

Question:

I am looking to move to the U.S. and am not sure if I will sell my home before I leave Canada. Could you please outline the tax ramifications if I were to sell it before departing Canada versus selling while a tax resident of the U.S.?

Answer:

You have requested that we provide you with some comments related to the tax implications of the upcoming disposition of your Canadian residence.  This analysis has been completed based on the following assumptions:

  • The property is a residence located in Canada
  • The property was purchased while you were a tax resident of Canada
  • You have been a tax resident of Canada during the entire period of ownership of the residence
  • The property has always been a personal use property and has never been used as an income producing property
  • There is no other property for which the principal residence exemption has been used during the period of ownership
  • You will become a non-resident of Canada at some time during 2018, and the sale of the residence may potentially take place while you are a non-resident of Canada.

Canada

Property Sold as a Resident of Canada
If the property is sold while you are still a tax resident of Canada, you will report the disposition and will claim the principal residence exemption in the exact same manner as if you were a Canadian tax resident for the entire year. In other words, you will disclose the disposition on Schedule 3 of your 2018 Canadian income tax return, and will also complete Form T2091, Designation of a Property as a Principal Residence by an Individual.  The property will qualify for the full exemption, and no special reporting is required.

Property Sold as a Non-resident of Canada
Capital Gains Exemption
If the property is sold while you are a non-resident of Canada, some additional analysis is required. Based on the assumptions above, the property is eligible for the principal residence exemption for any year that you own it as a Canadian resident, even if you are a Canadian resident for a portion of the year. In other words, if you were to become a non-resident of Canada in 2018, you are still able to claim the exemption for the entire 2018 tax year. In addition, the principal residence exemption formula contains a “plus one” in the numerator (only applicable if the property was purchased while you were a tax resident of Canada). As such, based on our assumptions, it would be possible for you to sell the property in 2019 as a non-resident of Canada and have the ability to exempt the entire gain from Canadian taxation.

Reporting Requirements
If the property is sold as a non-resident of Canada, some additional compliance is required, even if there is no taxable capital gain.

By default, the purchaser of the property is required to remit 25% of the gross proceeds from the sale to CRA, unless a clearance certificate is obtained from CRA. They must do this even if they know that the property was sold at a loss, or if the entire gain is exempt from taxation. In order to avoid this, you must file Form T2062, commonly referred to as a clearance certificate, to request that only the potential taxable gain be subject to the 25% withholding tax. Assuming that there will be no taxable gain based on the principal residence exemption, the clearance certificate would be to request that no Canadian withholding tax be remitted. If the form is properly filed, CRA will send the approved form to the purchaser of the property, and you will be able to receive your entire proceeds without having any Canadian tax withheld. We will not go into detail on the specifics of filing the clearance certificate at this time, but are happy to assist you in the future in the event that it is required.

Assuming that the property is sold in 2018, a Canadian non-resident tax return will need to be filed by April 30, 2019 to report the disposition of the residence, even if there is no tax payable. Schedule 3 and Form T2091 will need to be completed.

USA

Property Sold as a Non-Resident of the U.S.
There will be no U.S. tax implications if the sale of the Canadian property occurs prior to U.S. tax residency.

Property sold as a Resident of the U.S.
Based on the assumptions that we have listed, the property will meet the criteria of having been your principal residence for at least 2 of the last 5 years. The U.S. does not have any requirement that the property be owned as a U.S. resident for 2 of the last five years, just that the property be the principal residence. There are other criteria that need to be met, but it is highly likely that these would be met so they do not require analysis.

For U.S. income tax purposes, there is a limit to the amount of gain that can be excluded. However, there is an article in the Convention between the United States and Canada (the Treaty) that provides for a bump-up in the cost basis of the principal residence when an individual becomes a non-resident of Canada and a resident of the U.S. This makes it highly likely that your capital gain on the disposition of your residence would be minimal for U.S. tax purposes. It is highly likely that the entire capital gain, if one exists at all, will qualify for the principal residence exemption from a U.S. tax perspective.

It is not necessary to report the sale of a principal residence on a U.S. resident income tax return if the property is sold at a loss, or if the entire amount is exempt from taxation.

One often overlooked U.S. income tax rule is that of the currency exchange gain that can result when a U.S. resident pays off a foreign mortgage. If you pay off a Canadian mortgage while you are a U.S. tax resident, depending on exchange rates, it could be possible that you have a foreign currency gain. We would require more information to determine if this is applicable to you. If it was applicable to you, it would be in your best interest to pay off the mortgage prior to U.S. residency, if possible.