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.
Not many thought he could get this far through the election cycle, but as Donald Trump secures the Republican nomination many Americans are seriously considering a long-term move to Canada.
Unfortunately for most Americans a move to Canada may not be as simple as some may assume. Young skilled worker may have opportunities to move up North, but unless you can get sponsored by another Canadian Citizen it may be difficult to be eligible for immigration.
For those that have the opportunity to move to Canada one of the most important items to consider are the tax consequences of moving out of the U.S. into Canada.
Although similar in many respects, Canada and the US have fundamentally different tax systems. For example, U.S. citizens are taxable on their worldwide income regardless of where they live in the world, whereas Canadian’s who move out of Canada can potentially avoid continuing to file Canadian tax returns.
Proper tax planning before entering Canada from the US should be executed to ensure all related tax matters are reviewed.
For those that are considering a move to Canada the following list will provide as a template for tax items to consider:
Upon entry to Canada some of your assets are considered sold and reacquired. This tax rule is in place to ensure you’re not taxable on any accrued gains from assets you owned before entering Canada. Although this tax rule is often beneficial, it requires that you track your assets upon entry and any subsequent assets purchased after moving to Canada. Assets such as non-Canadian real estate and stocks are the most likely assets to be revalued for Canadian purposes.
In the year you enter Canada you’ll file both a part-year Canadian tax return and full year 1040 income tax return. You’ll only be taxable in Canada on income earned after entering Canada (and some types of Canadian source income you earned before entering). After the first year of filing you’ll continue filing a full Canadian and U.S. tax return as long as you maintain your U.S. Citizenship.
Filing dual status tax returns in Canada can be a lot more complex than filing individual returns. Some important cross border tax issues to consider:
- Although you’ll be filing both Canadian and US tax returns generally speaking you’ll only pay one level of tax. Income tax paid on Canadian source income can be used to reduce (via foreign tax credits) U.S. taxes calculated on the same income and vise versa. In most cases taxpayers with only Canadian source income will pay no U.S. tax upon filing.
- Capital gains/losses on securities sold in the year may be different for U.S. and Canadian purposes as currency rates shift. Also, as mentioned above your basis for Canadian purposes will be different than U.S. purposes because of the Canadian revaluation at entry.
- RRSP retirement accounts work well from a U.S. perspective, however you will not be allowed to deduct RRSP contribution on your U.S. tax return.
- TFSA and RESP accounts will not be tax free in the U.S. so planning is necessary to ensure additional U.S. is not payable upon filing.
- Holding Canadian mutual funds (or non-U.S. mutual funds) can carry adverse U.S. tax consequences as they investments are considered Passive Foreign Investment Companies (PFIC).
- Most U.S. citizens living in Canada will be required for file FBAR forms (foreign bank account reporting) with the U.S. Treasury department. It’s extremely important that these forms are filed on a timely basis as the penalties for non-filing can exceed $10,000 per unreported account.
- U.S. Citizens living in Canada are still subject to U.S. Estate tax as well as the Canadian deemed disposition tax upon death. Proper tax planning is necessary to ensure unnecessary tax is not paid.
Cross border tax rules are complex and not limited to the issues and items outlined above. If you’re thinking of moving to Canada it’s highly advisable that you contact a cross border tax professional to ensure you’ve assessed all your tax needs.
Phil Hogan can be reached at 250-381-2400 or by email at email@example.com.