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RRSP Withdrawal Tax Implications for Non-Residents

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From The Globe and Mail article:

Mr. Ritchie says he increasingly receives inquiries from well-to-do Canadian retirees who want to spend even more time at their homes in sunny Florida, California or Arizona than the rules allow…

Read the article here

Moving from Canada to the U.S.: Essential Tips and Information

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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

 

 

 

Canadians Beware of California Community Property Rules

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Canadians find many things in California to be foreign, like the sun, surf and In-N-Out Burgers.

But when it comes to Canadians who have family in California, or who spend considerable time in the Golden State, California’s community-property laws make Canadians realize just how foreign the state can be.

WelcometoCaliforniaAs we’ve discovered over the years, California tax laws and the concept of community property are foreign to Canadians and their Canadian tax preparers. While many Canadians are aware that California taxes its residents on worldwide income, few truly understand the complex interplay of California’s tax and community-property laws on California tax filings.

We’ve seen many Canadians and their Canadian tax advisers incorrectly prepare California tax returns by not taking into account Canadian-sourced income on a California non-resident return, or by failing to apply California community property laws.

Since California’s community property laws are fairly complicated, this article will be the first in a series of articles explaining how the state’s laws apply to Canadians who are living or working there.
To start, California is one of only nine U.S. states that is a community-property state. Texas, Arizona and Nevada are among the others.

In a nutshell, California defines community property as any asset acquired by, or income earned by, a married person. As a result, California considers property and income derived during a marriage to be owned 50/50 between the spouses. Any property or income not considered community property is treated as separate property.

California community-property rules have a profound effect on the federal and California tax returns for Canadians who are domiciled in the state. This is especially true when spouses have different domiciles—where, for example, one spouse is domiciled in California while the other is domiciled in Canada.

Because community-property laws only apply to taxpayers domiciled in California, this first article will discuss the concept of California domicile.

Domicile is a legal term of art. As such, there is no bright-line test that defines when a person is domiciled in California. This is different from how the IRS uses an objective test to determine residency for federal tax purposes.

Instead, for California tax purposes, domicile is defined as the place where an individual has their true, fixed, permanent home and principal establishment, and to which they intend to return after being absent. Another way to look at: You are a resident of the place where you live, and you are domiciled in the place to which you intend to return. Therefore, the question of domicile boils down to a taxpayer’s intention as demonstrated by the taxpayer’s actions.

Most people would think that where you reside is where you are domiciled. In most cases, this is absolutely true. For Canadians facing cross-border issues, however, “residence” and “domicile” do not necessarily mean the same thing. While a person can have several places of residence, such as Toronto and Los Angeles, they can only have one domicile.

When assisting Canadians with their California domicile determination, we apply the following factors to determine a taxpayer’s intention for maintaining a California domicile:
Is the taxpayer on a temporary work assignment in California?

  • Where is the taxpayer employed?
  • Where is the taxpayer’s immediate family located?
  • Where does the taxpayer vote?
  • Where does the taxpayer own property?
  • How long did the taxpayer live in California?
  • Where does the taxpayer have their business and social ties?

California maintains a rebuttable presumption (an assumption that something is true unless someone proves otherwise) that someone living in the state for at least nine months out of the year is presumed to be domiciled in the state. On the other hand, if someone is in California for less than six months in a calendar year, California presumes the person is a not domiciled in the state. In cases where a Canadian is spending considerable time in California, such as working for Google on a TN visa, the community property rules would not apply if the Canadian still maintains a domicile in Canada.

Generally, a Canadian in California working on a temporary visa is probably domiciled in Canada. As such, income earned in California is not community property. Conversely, a Canadian who obtains a green card and moves to California is very likely to be subject to community property rules.

A little-known exception to applying community property rules for federal tax purposes applies when a Canadian is filing a dual-status federal return. In this case, the community property rules do not apply during the period of residency in a dual-status year. Therefore, for federal tax purposes, income earned is treated as separate property. Unfortunately, California does not conform to this exception for California tax purposes.

One situation we often run into illustrates the impact of California community property laws well. In this situation, a Canadian spouse is working in Canada and the other spouse is working in California.

For example, George is a Canadian television personality who exclusively works in Canada on a popular hockey program. George owns a home in Toronto where he lives while working in Canada. He’s married to an American, and they own a house together in Venice Beach, Calif. George files a Form 1040NR under the Canada-U.S. tax treaty, and his wife files a Form 1040 with a married-filing-separately status. George’s wife only works in California. On a regular basis, George makes trips to Los Angeles to be with his wife, and he spends the offseason in Los Angeles.

Although George lives and works in Toronto, he still maintains a home for his family in California. And his regular trips to Los Angeles demonstrate that California is where he intends to return when able to do so. Therefore, George and his wife are considered to be domiciled in California, and are subject to worldwide taxation as California residents.

Consequently, George’s Canadian income is considered community-property income, and his wife would have to pay federal and California tax on her 50% share of George’s out-of state earnings.

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.

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.