Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.
1. US Citizens File Taxes Even When They Live Outside the US
US citizens moving to Canada will still be required to file US taxes even though they no longer reside in the US. Tax filings will be required based upon their US citizenship rather than traditional physical residency.
In addition to regular 1040 income tax returns, US citizens living in Canada are subject to additional foreign reporting requirements such as FBAR forms (reporting of your Canadian and non-US financial accounts). Penalties for late filing of these forms can be as high as $10,000, therefore it is highly advisable that you seek out a knowledgeable tax professional to help you navigate your cross border tax filings.
Not only do US citizens need to continue to file US 1040 income tax returns, but they will also need to ensure additional foreign reporting forms are completed. Engaging an experienced cross border tax professional will be very important.
Also, note that when exiting the US you may need to file a final exit tax return for any State you will no longer be a tax resident of.
2. You Won’t Need to Pay Canadian Tax on Accumulated Gains to Canada
When you become a tax resident of Canada your previous gains accumulated before you entered are protected from Canadian tax. Technically speaking, the adjusted cost basis of your investments and property is increased to the fair market value at the date of your entry.
Proper tax planning is often warranted to ensure investments and real property are sold in a tax-efficient manner either before or after entering Canada.
3. You May Not Be Able to Keep Your US Investments While in Canada
Non-residents of the US are not legally allowed to maintain non-registered (non-retirement accounts) accounts in the US assuming their financial advisors do not have a Canadian investment license. Although, as a US citizen, you are still required to file US taxes, you are considered a non-resident of the US for purposes of opening or maintain a US investment account.
A review of existing life insurance plans and investments is an important task as life insurance products can be treated very differently between Canada and the US. Reviewing these plans before entering Canada will allow you to properly mitigate any negative issues regarding the plans going forward.
Discussing your asset mix and related investment structure with an investment specialist is highly advisable before you enter Canada to ensure you don’t run into any unwanted surprises down the road.
4. You May Want to Liquidate Some Assets Before you Enter Canada
As discussed above it may be advantageous to liquidate some of your assets before entering Canada. Tax and investment planning before you enter Canada becomes extremely important as you have fewer options available to you once you become a tax resident of Canada.
For example, specific investments like US municipal bonds that are not taxable for US purposes, but are taxable for Canadian purposes, can be sold as they will hold very little tax advantage in Canada.
You may also consider selling any investments with accrued losses to ensure you don’t run into a situation where you pay Canadian tax on investments that are in a historical loss position for US purposes.
Reviewing the potential sale of your US principal residence will be important to ensure you don’t end up paying Canadian tax on an eventual sale. In cases where you are not able to sell your US principal residence before entering Canada ensure you sell the property within 2 years of entry to maintain your US principal residence exemption.
ROTH IRA transfer strategies can also be beneficial for those with anticipated lower incomes in the year before the move. For example, transferring some or all of your traditional IRA to a ROTH IRA before moving to Canada can save a significant amount of future Canadian tax if structure properly.
5. You May Want to Review Your Investments Before Entering Canada
Having a competent cross border tax and financial planner review your investments before you enter is necessary to ensure all opportunities and pitfalls are considered. Once you become a resident of Canada some planning opportunities become unavailable.
As Canadian income tax rules do not allow for joint tax filings, in some cases it makes sense to transfer investment assets to a spouse to ensure investment income can be equalized between both spouses for Canadian tax purposes.
Certain dependent educational plans like 529(b) plans should also be reviewed to ensure they can be used for Canadian universities. In most cases 529(b) plans will be available for Canadian post-secondary education, however, the income earned within these plans will be subject to Canadian tax once you become a resident of Canada.
I speak to many newcomers to Canada that have failed to contact a professional before entering the country. At that point, their options are greatly reduced. Don’t let this happen to you and ensure you reach out well before you consider moving to Canada.
6. You Will be Subject to 2 Different Estate Tax Regimes
As a US Citizen living in Canada, you will be subject to both the US estate and gift tax regime, in addition to the Canadian deemed disposition upon death rules.
A comprehensive discussion of “death taxation” is beyond the scope of this article, however, please consider discussing your cross-border estate plan with an experienced tax accountant to ensure you properly plan for your wealth, beneficiaries, and your future.
7. The US Government Will Want to Know What Canadian Assets You Own
As mentioned above, in addition to regular 1040 returns you will also be required to complete foreign financial account reporting forms to the US Treasury department. The US government likes to keep tight tabs on the assets of its Citizens. It accomplishes this objective by requiring taxpayers outside of the country to file FBAR forms.
Form 114 requires that a taxpayer disclosure the highest balance in all her foreign (foreign to the US) financial accounts. Form 114 and related instructions can be viewed here.
8. Receive Specific Amounts of Income Before Entering Canada
In many cases, depending on the specific US state from which you are moving, Canadian taxes will be higher than your previously combined Federal and State taxes payable. If you are anticipating receiving a large bonus, retirement allowance, or IRA distribution it could be beneficial to receive the income before moving to Canada. In addition, one might consider exercising stock options earned in the US before entering Canada to ensure additional Canadian tax is not paid on these stock options.
Also, for individuals that are moving to Canada and working for the same employer, ensure you speak to your employer about the tax consequences of working for a US employer while maintaining Canadian tax residency. In many cases, US employers will report employment earnings of Canadian employees on US W2 forms including Social Security and FICA withholdings. Canadian employees working in Canada for US employers need to be set up on Canadian payroll withholdings (CPP and EI) and ultimately reported on a T4 slip.
Depending on your current tax rate, planning for such strategies could result in significant tax savings.
9. If Your Spouse is Not a Canadian Citizen They Will Need to Apply for Their Canadian Permanent Residency
The specifics of spousal immigration are beyond the scope of this article, however, although the media may lead you to believe that anyone can simply “move to Canada”, the rules certainly do not allow for such a move. If you do have a sponsor you may be able to obtain Canadian permanent residency. Your PR status would be similar to what we would consider a Canadian Green Card.
Non-US citizens may be eligible for working Visas or permanent residency if they meet certain criteria. Contacting a Canadian immigration lawyer to help with your non-Canadian spouse’s entry status is imperative.
10. Find a Cross Border Team That Can Work Together
From taxes, investments, immigration, and legal issues, moving to Canada can result in many challenges and complexities. Finding a good team consisting of a cross border tax accountant, investment advisor, and immigration lawyer is key to a seamless move across the border. Contact me today at Phil@PhilHogan.com and I’ll be happy to connect you to help you with your move.