Renouncing Citizenship, US investments, Rental CCA and double tax

0
823



Question

Please let me know what your consultation fees are for advising on the questions listed below.

I am a 68-year-old, retired, US citizen and Canadian permanent resident since 2018. I am married to a Canadian and live in Quebec. We have assets and income in both the US and Canada.

I’ve created a generalized net worth spreadsheet that clarifies our US and Canadian assets and liabilities. If you believe that you can help me with the questions that I’ve listed below, I will send you the spreadsheet so that you have all the financial information that you would need to answer some of the questions.

I plan to become a Canadian citizen. From what I’ve read on Canadian IRCC websites and US Department of State websites, both countries honor dual citizenship, and my social security payments won’t be changed or be interrupted once I become a Canadian citizen.

Questions:
1. Is there any tax-related advantage to renouncing my US citizenship once I’ve gotten my Canadian citizenship?
2. Is there any tax-related disadvantage?
3. Is there any change to survivor’s benefits? My wife is Canadian.

I’ve read that a general rule of thumb for choosing whether to employ the foreign earned income exclusion or the foreign tax credit is: if the foreign country taxes at a higher level than the US – which Canada does (esp. living in Quebec) – using the foreign tax credit is usually more beneficial than the earned income exclusion. I also read that foreign rental income is considered earned income.

Questions:
1. Do you agree with the general rule of thumb as stated?
2. If not, please elaborate.
3. Do you agree that foreign rental income is considered earned income in the US?

There seems to be a “which comes first, the chicken or the egg” scenario when it comes to which income tax return to generate first. I also think I remember reading that it’s possible that both countries might possibly provide foreign tax credits.

Questions:
1. Based on the attached net worth spreadsheet and income streams, what is your recommendation for which to file first? Does it even matter, other than meeting tax due dates?
2. Is it true that it’s possible to get tax credits from both countries?
3. If so, it almost seems like a circular reference. How do you determine which one comes first?

A subset of the “chicken or the egg” scenario: I purchased a triplex as a co-owner with my sons at the end of 2020 and filed Canadian tax returns for the first time, but there was very little rental income and lots of capital expenses. Now we’ve had a full year of rental income and current expenses associated with the triplex. The US allows depreciation and application of current expenses against rental income on rental units. Canada allows application of CCA rules for depreciation and current expenses.

We have accumulated a fair amount of capital expense as part of closing costs, etc. that we will apply at the time of a sale, but we’ve also accumulated a lot of current expenses due to renovations to two of the apartments this year (see the spreadsheet for my share). I understand that any depreciation-type expenses taken to reduce taxes if CCA is applied will be reversed at the time of sale. I assume it’s basically the same in the US.

Questions:
1. Even though there is less income for me in Canada than in the US, the triplex income will be netted against current expenses and applied CCA. Is there any advantage to completing the Canadian income tax first based on this?
2. Is there any advantage to applying the US system of depreciation first?

We have about $XXXK in cash in a Fidelity investor checking account. It’s tax-free with the exception of a small amount of interest paid out against the balance each year.

Questions:
1. Is there any penalty for moving this large a sum of money to a Canadian bank and checking account? I know I would have to report the money by FBAR with my US income tax, which I do each year that I have over $10K in funds here.

I have about $XXk in IRA contribution funds. Taking a lump sum distribution would obviously have a big impact on my income tax. I could take a distribution of $15K to $20K each year over the next four years to minimize the tax impact.

Questions:
1. Is there any way to transfer this money to a Canadian investment that won’t have a big tax impact?
2. Would becoming a Canadian citizen affect such a transaction?
3. Is moving a little at a time over a few years a more sensible decision?

Here’s a potentially scary situation for me. I have an annuity payout as a supplement to my Social Security income. It’s an IRA-based investment and therefore taxable as distributed. I’m really most worried about residency conditions. I still use my old US address on my US brokerage, checking, and annuity accounts. (It is my brother’s home in California where I lived prior to moving to Canada and where the accounts were originally opened when I was a California resident).

It is a Nationwide Insurance variable annuity that I purchased through my brokerage house, Fidelity. It has a lifetime guaranteed annual income payout of about $18.6K regardless of the status the actual investment portfolio which is currently around $300K. I’ve always declared the $18.6K annual payout as part of my income in my US tax returns and paid taxes per the schedule. It also satisfies my RMD requirements annually.

Questions:
1. As a Canadian citizen, or even as a Canadian permanent resident, could Nationwide terminate the annuity because the funds are IRA-based and I’m no longer actually living in the US? If they had legal cause to terminate the annuity, I would not only lose my annual guaranteed payout, but if I had to liquidate the entire $300K, I’d take a huge tax hit.
2. Is keeping my US citizenship and the US address for these assets the best solution to this potential problem?
3. Do you see becoming a Canadian citizen having any impact on this annuity?

Answer

XXXXX, thanks for the email. You have quite a bit here and I’ll do my best to provide some general comments, however for an actual consultation you’ll want to book a call to further flush out these issues.

  • Yes, you can have both Canadian and US Citizenship at the same time and your social security payments should not be affected unless you’re collecting Canadian CPP (which you are not)
  • In most cases the one of the big advantages in renouncing your US citizenship is to avoid expensive compliance related to filing both Canadian and US income tax returns. However in some cases there could be tax advantages to keeping your Citizenship if Canadian income tax rate is less than your ultimate US tax rate (which is very uncommon).
  • In most cases we use the foreign tax credit method to reduce US tax as it can be applied to both General and passive pools of income. We can also carry-forward foreign tax credits to subsequent tax periods using this method.
  • Rental income will likely only be considered earned income for purposes of the 2555 if you actually run a “business” via the rental properties. This would likely require multiple employees to be employed to help run the rental properties.
  • We prepare and file both the Canadian and US tax return together and file at the same time. In some cases a taxpayer may file a US tax return later given the ability to extend the US income tax return.
  • Yes, unlike the US depreciation, Canadian CCA is not mandatory. If you take CCA in any particular year and subsequently sell the property at a profit you will “recapture” CCA claims as income in the year of the sale.
  • If you have non-registered investments in the US it almost always makes sense to move them to Canada to avoid significantly complex T1135 filings.
  • If you don’t need to take IRA distributions I would suggest simply moving the account to Canada with a Canadian broker than can hold the US retirement account. I can provide a referral if required. That way you can continue deferring income on the account.
  • Once again, for purposes of the annuity and whether it can be held by a Canadian resident you should review this investment with a cross-border investment advisor. Please let me know if you need a referral.

Hope that helps and let me know if you need to setup a further consultation.

Cheers

Phil

 

LEAVE A REPLY

Please enter your comment!
Please enter your name here