Moving to Canada with US Revocable Trust

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Question

Hi Phil

I found your contact information online. My husband and I will be moving to Nanaimo from Colorado some time mid next year. Most of our assets are in a revocable trust including investments, our house and a rental property.

On on of your blog posts you mentioned there could be some tax issues with having the trust in Canada. However our lawyer told us we should have the trust for estate tax purposes.

Any thoughts on this?

Thanks for your time

XXXXXX

Answer

Thanks for the email. Yes, moving to Canada with a living revocable trust can cause some issues. I’ll outline some thoughts in this email, however we’ll want to schedule a full cross-border tax and investment consult to review your situation in full.

Once you become a tax resident of Canada the trust will also be considered a tax resident of Canada (assuming you control the trust), and as such you will have to file a separate T3 Canadian trust tax return. This can add significant costs to your annual filings.

For US purposes the revocable trust does not file separate trust returns and the income is reported by the taxpayer directly on her US 1040 income tax return. For Canadian purposes the income is first reported by the trust and can then be subsequently flowed through to the taxpayer.

Your lawyer is correct that these types of trusts are often setup for estate tax purposes, but considering how high the estate tax exemption is currently, and the added complications of having the trust in Canada, it’s often advisable to wind up the trust before moving to Canada. The benefits inherit in setting up the trust likely don’t outweigh the costs of maintaining the trust while in Canada.

Once again, you’ll want to review the benefits of having the trust over the additional cost and complexity of having to report the trust for Canadian purposes. In most cases it would make sense to wind up the trust before moving to Canada.

If you continue to hold your investments in the trust when you cross the border you’ll need to file a Canadian trust return in addition to your Canadian return and US tax return. As mentioned above this can add significant costs to your annual filings.

Regardless whether the trust is dissolved before entering Canada your investments will be revalued for Canadian purposes and T1135 filings will be required (for the T3 trust or individual return). When you move to Canada with investments that have embedded capital gains those gains will not be taxed in Canada going forward. You’ll received a “bump” in your cost basis for investments up to fair market value “FMV” when you enter. For example, let’s say you bought $100,000 of AAPL stock before you entered Canada and now it’s worth $150,000. You’ll only pay capital gains tax on any appreciation over $150,000 for Canadian purposes. However, the $50,000 US gain will still be taxable in the US upon an eventual sale.

As you can see from the discussion above reviewing your investments before moving to Canada is extremely important as much of the planning potential is greatly reduced once you move.

I hope the information above helps and please let me know if you would like to setup a proper consultation.

Cheers

Phil

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