Considering a move from the USA to Canada? Ensure you’re fully prepared and avoid any surprises with our expert guidance for your upcoming transition. In this blog we discuss some of the various considerations you may face, and the opportunities available to your pre-exit.
Your Status Dictates Your Planning
The strategies will vary depending on your status, whether you’re a U.S. citizen, Green Card or a Visa holder relocating to Canada and the type of assets that you own. If you are a U.S citizen or Green Card holder moving to Canada, you will undoubtedly be faced with a more challenging tax situation, as you will have to file tax returns in both countries. Fortunately, the Canada/U.S. tax treaty helps provide relief from double taxation. However, double taxation can still occur if you encounter certain tax pitfalls, hence the importance of working with a cross border financial planner that can help guide you through the various financial decisions you will be making. Green Card holders can cease their U.S. tax filing obligations once they relinquish their Green Card, however, it is crucial to first ensure that you do not meet the definition of a covered expatriate.
Generally, increasing asset ownership tends to correlate with greater complexity, underscoring the importance of initiating the planning process sooner rather than later. Before changing residency, you must consider your options regarding your US retirement accounts (make sure to read our blog “Maximize Your US Retirement Account Options Before Moving to Canada” for more information) and other tax favored accounts, such as 529 plans.
Beware of Tax Pitfalls
U.S. citizens and Green Card holders must continue to file US tax returns, which adds complexity and increases the potential for encountering various tax pitfalls. While certain types of accounts or investment products are beneficial for Canadian residents, they can lead to additional taxes or compliance costs for U.S. citizens and Green Card holders. Some examples include PFICs, which stand for Passive Foreign Investment Companies. Canadian mutual funds, ETFs, REITS and even money market funds would fall under these criteria. PFICs require additional tax filing disclosures with the IRS via Form 8621 and are taxed unfavorably. The Canadian Tax-Free Savings Account (TFSA) can potentially be an issue as well, although its application for U.S. citizens and Green Card holders remains subject to debate among cross border tax professionals. That is due to the potential of the TFSA meeting the definition of a foreign trust for US tax purposes, which necessitates filing Form 3520/3520-A with the IRS, with substantial penalties for failure to comply. These are just a few examples of the potential tax pitfalls that U.S. citizens and Green Card holders may encounter while living in Canada. Many more exist, ranging from corporate structures to insurance policies and more.
Cross Border Estate Planning
Your estate plan is the next priority, as your change in residency will impact the effectiveness of your current estate plan. For example, it is common for US residents to own assets in a Revocable Trust, for probate avoidance, however Canada Revenue Agency (CRA) perceives the Revocable Trust as a separate taxpayer, requiring additional tax filings (Form T-3) and leading to a potential of double taxation.
Cross Border Tax Compliance
Equally important is working with the right accountant to ensure your tax returns are properly filed in both countries. While i2 Wealth does not directly prepare tax returns, we collaborate with an extensive 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.
Where to Begin?
A financial plan from i2 Wealth Cross Border Planning can provide the personalized guidance you need to make all the important decisions and lay out a roadmap for your future. Book a consultation with us today to get started!