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.
Hello Mr. Hogan,
I’ll be moving from California to Canada in February of next year and I just wanted to get a sense for any tax implications that I need to be considering before I make the move.
Let me give you some background of my situation:
I’m 59 years old. I’m married, with kids outside the house. We have assets of under $500,000 USD. I also have a $200,000 IRA, a $100,000 in stocks and bonds, $50,000 401k and the remainder in cash. I don’t own any real estate property in Canada or the US, but I plan on buying a condo in Vancouver to live in when we move up in February.
I was considering giving up my citizenship but I’m not sure if that’s gonna happen, depending on the tax implications of doing so. Anyways that’s it for me and it would be great to get some advice on my situation.
Well, there’s a couple of things to consider when you’re moving from Canada to the US for tax purposes. First, all of your assets, other than registered accounts, are revalued as you enter Canada. So essentially the cost base of your US assets aside from your retirement accounts are stepped up to fair market value and if you end up selling these accounts at later dates, you won’t pay any accrued gains on the properties from the time you moved up to Canada.
You’ll also want to consider the timing of your move. If you’re going to move up February, it’s advisable to try and ensure any income that you’re going to earn in that year be paid before you entered Canada. For example, if you’re going to be receiving a bonus from employment, I would try to get that bonus before entering Canada as to avoid any additional Canadian tax you would have to pay on that bonus. This is because you will be taxed in Canada on any income you earn or receive after moving to Canada
In terms of the 401K and the IRA accounts, there’s nothing necessarily precluding you from bringing these accounts with you when you come up to Canada as long as you can find someone to manage them. You can also keep them in the US and have them managed down there. Consider however that it’s difficult for US brokers, if not impossible nowadays, to manage these funds if the holder of the account is living in Canada. You’ll have to contact your agent to see if they can actually manage these funds if you’re living in Canada. If not, I do have some contacts that can help you move these 401Ks and IRAs up to Canada and manage them from here.
Another option is to liquidate the 401Ks and the IRAs before getting to Canada and rolling them into a Roth. This however will result in additional tax on the distributions from the IRA and the roll over to the Roth. This additional tax however, can be deferred to 2011 and 2012. Please note that this strategy has to be closely reviewed for each taxpayer’s individual circumstances. The numbers would have to be crunched to see if the deferral makes sense before the entry to Canada.
Another issue to consider is the potential revocation of your citizenship. Once your citizenship is revoked, it’ll be impossible to actually get it back, hence making it more difficult to travel back and forth to the US. For most of my clients it’s not an option as they enjoy the freedom of traveling back and forth through the border. If however you decide to relinquish your citizenship, there are a few items to consider.
- If you have assets over 2 million USD, you have earned an average income of $139,000 for the last 5 years or you failed to file your last 5 years of US tax returns, you will be subject to expatriation tax and be required to submit form 8854 along with any required tax (on you final 1040). See here for more information: http://www.irs.gov/businesses/small/international/article/0,,id=97245,00.html
These are complex rules and we’d really have to sit down and discuss your particular situation before we can figure out if this is an option for you. Also consider if you were going to keep your citizenship, you would have to file both a Canadian tax returns and US tax returns each year. Given the benefits of the Canada-US tax treaty, you won’t end up paying double tax, but what would end up happening is that you’ll end up paying a higher rate of tax overall being a Canadian tax resident.
Hope this information has been helpful, however it’s always difficult to assess each taxpayer’s individual circumstances without having a more comprehensive meeting to “hammer out” all the details. Please don’t hesitate to give me a call and we can discuss these matters further.
Phil Hogan, CA