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.
We’ve seen a huge number of American’s move from the US to Canada over the last few years. Some suggest this is in part because of the “Trump effect”, however it’s more likely that these individuals had planned for this move as part of their retirement plans regardless of which party controlled the US government.
When making the decision to move to Canada couples must ensure they understand the tax and investment implications of holding their IRA and ROTH IRA accounts while becoming a Canadian tax resident. In these cases it’s also important to understand the cross border implications of maintaining these retirement accounts. Especially in cases where the move to Canada is permanent.
How are Traditional IRAs treated in Canada?
Traditional IRAs and ROTH IRAs are treated similarly for Canadian purposes, however there are some differences. First, in order to ensure ROTH IRA accounts are considered tax deferred for Canadian purposes a taxpayer needs to elect with the CRA under a prescribed format. This is not required for traditional IRAs to be considered deferred. Once the ROTH IRA election is made and assuming you meet the criteria for deferral, and you haven’t contributed to the ROTH after entering Canada, all withdrawals going forward from the ROTH will be tax free in the US and Canada.
Distributions from the regular IRA will be taxed first in the US (to a maximum of 15%) and then taxed in Canada. Any taxes paid on the IRA distribution in the US will be given as a credit on the taxpayer’s Canadian tax return.
Also note that traditional and ROTH IRAs are not required to be reported on T1135 foreign income verification forms to CRA.
What planning strategies are available before we move to Canada with these accounts?
It’s always wise to review your financial and tax plan before moving to Canada. Once you establish Canadian residency you will have a lot less opportunities to employ some of these planning tactics.
Planning strategies for traditional and ROTH IRAs can be quite different. Traditional IRAs will be taxable both in Canada and the US when distributions are made. Although you’ll get a credit in Canada of any US taxes paid (up to 15%) you’ll end up paying higher Canadian tax rates when the funds are distributed. One tax saving strategy includes pulling money from your IRA before entering Canada to ensure you’re not paying tax on these distributions while a resident of Canada. This however will only be efficient if your prospective Canadian tax rate will be more than the rate of US federal and state tax you’ll pay before the move.
You may also want to potentially convert some of your traditional IRA to a ROTH before moving to Canada especially in a year where your income may be lower than average. As discussed above, if proper elections are filed with the CRA after entering Canada the future ROTH distributions will be tax free for both Canadian and US purposes.