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 Are 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.
Not only do US citizens need to continue to file US 1040 income tax returns, they will need to ensure additional foreign reporting forms are completed. Engaging an experienced cross border tax professional will be very important.
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. 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.
Note however that accounts such as IRAs and 401k can still be maintained by Canadian residents.
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 once you become a tax resident of Canada.
For example, reviewing principal residence or ROTH IRA strategies before the move can save a significant amount of tax in the future.
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.
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.
6. You Will be Subject to 2 Different Estate Tax Regimes
Some US Citizens are not aware that although you have left the US, you will still be required to file US tax returns as a Canadian resident. US taxation and reporting is required based on citizenship and not 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.
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 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.
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.