Planning to leave Canada permanently? It’s an exciting venture, but also one that requires careful financial planning. Navigating the complexities of cross-border finances can be challenging, but with the right guidance of i2 Wealth, you can avoid costly mistakes and ensure a smooth transition. Here’s a comprehensive guide to get you started.
The Departure Tax: What You Need to Know?
First on your checklist is understanding the departure tax. When you emigrate from Canada, the Canada Revenue Agency (CRA) deems that your assets were sold at fair market value, triggering a potential capital gains tax. However, not all assets fall under this rule. For instance, your Canadian real estate, Canadian retirement savings plans, Registered Retirement Savings Plan (RRSP), and Tax-Free Savings Account (TFSA) are exempt from the departure tax. Unfortunately, the new capital gain inclusion rate, introduced in the 2024 federal budget, will apply to clients departing as of this year. If you own shares of a corporation, possibly one you created from the ground up, this can result in a significant tax liability. Planning ahead is crucial to minimize this burden before you leave.
Managing Your Accounts and Pensions as A Non-Resident
You can keep your Canadian accounts even after you cease to be a Canadian resident. However, there are caveats. Managing these accounts from abroad can be tricky, and they might not be tax-efficient from a U.S. tax perspective. For example, IRS does not recognize the tax-free status of the Tax-Free Savings Account (TFSA), and investment income such as dividends, interest and realized capital gains must be reported to the IRS (Form 1040) on annual basis, defeating the purpose of having the TFSA in the first place. In addition, your cross-border accountant might also consider the TFSA to meet the definition of a foreign trust, requiring further reporting (Form 3520/3520-A) and more complexity.
The type of investments you hold in non-registered accounts can also pose challenges. Certain types of investments, such as Canadian mutual funds, might be classified as passive foreign investment companies (PFICs) and face punitive taxation by the IRS.
On the flip side, there is an opportunity for tax savings by withdrawing funds from your RRSP as non-resident. The RRSP tax withdrawn at source can be as low as 15% if set up appropriately with a Retirement Income Fund (RRIF), as a non-resident of Canada, there is an opportunity for tax savings by withdrawing funds from your RRSP or Registered Retirement Income Fund (RRIF) at a tax rate as low as 15% if set up appropriately. Moving forward, it is important to understand how to track your cost basis for U.S. tax purposes for your RRSP/RRIF accounts. We can provide guidance on this matter and help identify pre-departure strategies to help increase the non-taxable basis for U.S. tax purposes. In addition, your entitlements to the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) will continue based on your past contributions. Similarly, your eligibility for Old Age Security (OAS) will depend on your years of Canadian residency.
Healthcare and Insurance Considerations
As you become a non-resident of Canada, you will lose your provincial health coverage and will need to consider the type of U.S. health coverage to choose from. Depending on your age and immigration status, you might be eligible for ACA plans (often referred to as Obamacare) or Medicare. Often, it’s wise to secure a private global health plan to bridge any gaps until you’re eligible for U.S. healthcare. Your disability and life insurance policies are likely to remain valid, but their benefits may have U.S. tax implications. For example, a life insurance benefit will be included in the taxable estate for U.S. estate tax purposes. In addition, if you have a universal or whole life insurance policy in Canada, the tax-exempt status might not be recognized by IRS, making investments within the policy taxable.
Cross-Border Tax Compliance
Navigating tax returns in both countries can be daunting. While i2 Wealth doesn’t prepare tax returns directly, we collaborate with a network of cross-border accountants who specialize in this area. Through our collaborative approach, we ensure the planning strategies and tax events are reflected on the tax returns.
Conclusion
If you are considering a move south of the border, i2 Wealth is here to support you. Our expertise can help you implement pre-exit strategies to minimize tax liabilities and maximize the opportunities available to you as a non-resident of Canada. Emigrating from Canada is a significant step, but with careful planning and professional guidance, you can make your transition as smooth and financially sound as possible.