Moving from Canada to the U.S. comes with financial and tax-related complexities that can prove daunting. This guide is designed to help you navigate these challenges by providing accessible, concise, and accurate information on several key areas. Topics covered include tax implications of obtaining a Green Card, strategies to minimize tax liability, differences between U.S. and Canadian tax rules, and the benefits of hiring a cross-border tax specialist. Read on to understand these intricacies better and make your cross-border move smoother and more financially sound.
Here are some key things tax-savvy Canadians consider before they move to the U.S.
Deemed Dispositions
According to Canada’s Deemed Disposition Tax rules, when an individual ceases to be a tax resident, they are considered to have sold all their capital properties for their fair market value, and immediately reacquired them for the same amount. This process is known as “deemed disposition,” and it often results in a capital gain or loss. This rule applies to most properties, including stocks, bonds, and real estate, with few exceptions like Canadian real property, certain business properties, and pensions. The resultant capital gains are taxed at the appropriate rate, making it a significant consideration for those planning to move from Canada to the U.S. It’s crucial to understand these rules and plan accordingly to minimize tax liability during the transition.
Utilizing Foreign Tax Credits for Canadians
Foreign Tax Credits (FTCs) can be a valuable tool for Canadians moving to the U.S. As a Canadian resident, you may have paid taxes on income earned outside of Canada. The U.S. Internal Revenue Service (IRS) provides an opportunity to offset these taxes through FTCs. Essentially, FTCs aim to reduce the double taxation burden. When you transition from Canada to the U.S., you may be able to claim a foreign tax credit on your U.S. tax return for taxes paid in Canada. This credit can be used to offset U.S. taxes owed, although there are limits and complexities involved. It’s advisable to consult with a cross-border tax professional to ensure you correctly calculate and maximize your FTCs to reduce your total tax liability.
Terminating Canadian Residence
Terminating your Canadian tax residency is a crucial step when moving to the U.S. as it can significantly impact your tax obligations. It’s important to note that you don’t automatically cease to be a tax resident of Canada just because you move to the U.S. The Canada Revenue Agency (CRA) uses a set of factors to determine your residency status. Successfully terminating your Canadian residency ensures that you are not liable for Canadian taxes on your worldwide income, which could result in double taxation if you’re also taxed in the U.S.
There are key factors that the CRA considers when determining whether an individual has effectively severed ties with Canada, such as the permanence and purpose of your stay abroad, residential ties in Canada (like a home, spouse, or dependents), and social ties (such as memberships in Canadian recreational or religious organizations). It’s essential to carefully manage and document these aspects to convincingly demonstrate the termination of your Canadian residency. A tax professional with cross-border expertise can guide the steps necessary to prove your change in residency and help avoid potential tax pitfalls.
Employment Income After Ceasing Canadian Residency
If you are not a resident of Canada but you earned income from employment there, you must pay taxes on that income after ceasing your Canadian tax residency. Canada’s Income Tax Act stipulates that non-residents are taxed on employment income earned in Canada. However, the tax rate applied and the method of taxation can vary based on the details of your employment and any tax treaty that may exist between Canada and your current country of residence, in this case, the U.S.
For instance, under Article XV of the Canada-U.S. Tax Treaty, if the income does not exceed CAD 10,000 in the calendar year, it may be exempt from Canadian tax. More than CAD 10,000, the income would typically be taxable in Canada, but it may be exempt if you were in Canada for less than 183 days in the year and the remuneration was not paid by a Canadian employer.
Reducing Tax Withholding on Canadian Rental Income
As a non-resident property owner in Canada, you’re typically subject to a 25% withholding tax on the gross rental income. However, you can apply to reduce this withholding tax based on a method known as the “net rental income” method.
This method allows you to deduct applicable expenses related to the rental property (like property maintenance costs, interest on money borrowed to buy the property, property management fees, etc.) before the calculation of the withholding tax. To use this method, you need to file an NR6 Form with the Canada Revenue Agency (CRA) before the start of each tax year. This form requires an estimate of the gross rental income for the year and the associated expenses.
Once the NR6 Form is approved by the CRA, you or your agent can withhold tax on the net rental income instead of the gross amount. However, it’s crucial to note that you have to file a Section 216 return by June 30 of the following year to report the actual income and expenses.
If you fail to do so, the CRA will assess the tax based on the gross rental income without any expense deductions, and you might face penalties. Again, due to the complexities involved, it’s advisable to consult with a cross-border tax professional to ensure you comply with all relevant tax laws and take advantage of the potential tax savings.
Tax Implications of Holding a Canadian Corporation After Becoming a U.S. Tax Resident
As a U.S. tax resident holding a Canadian corporation, you could face several tax implications. The United States taxes its residents on their global income, which includes income from foreign corporations. If your Canadian corporation is classified as a Controlled Foreign Corporation (CFC), you may be subject to Subpart F income inclusions or Global Intangible Low-Taxed Income (GILTI) inclusions on your U.S. tax return. These inclusions may lead to U.S. tax liability, even if no distributions are made by the corporation. Additionally, U.S. information reporting may be required relating to your ownership in the Canadian corporation. The application of these rules can be complex and is highly dependent on the specific facts of your situation, so it is advisable to consult with a tax advisor experienced in cross-border tax issues.
Benefits of First-Year Choice Election on a U.S. Tax Return
The First-Year Choice Election, allows an individual to be treated as a resident for tax purposes for part of the first tax year they are in the U.S. This choice typically benefits single taxpayers who have been in the U.S for at least 31 days in a row and have been present for 75% of the days in the 2 months starting with the initial day of presence. By making this election, a taxpayer can take advantage of certain tax benefits available to U.S. residents sooner.
Tax Implications of Retaining RESPs and TFSAs After Moving from Canada to the U.S.
Registered Education Savings Plans (RESPs) and Tax-Free Savings Accounts (TFSAs) are popular investment vehicles in Canada, offering various tax advantages. However, if you move to the U.S., the tax implications change significantly.
RESPs are not recognized as tax-deferred accounts by the U.S. Internal Revenue Service (IRS), meaning the income and growth inside an RESP could be taxable on your U.S. return. Each year, investments within an RESP grow, and this growth may be subject to U.S. income tax. You may also face tax implications when withdrawals are made for a beneficiary’s post-secondary education.
Similarly, TFSAs are not recognized as tax-protected accounts by the IRS. Interest, dividends, or capital gains earned within a TFSA are taxable on your U.S. tax return.
In light of these potential tax burdens, Canadians moving to the U.S. may want to consider collapsing their RESP and TFSA accounts before becoming a U.S. resident for tax purposes or seeking advice from a cross-border tax professional.
Hiring a Cross-Border Tax Specialist: Why It’s Essential
Given the differences in the tax rules between countries in the U.S. and Canada, hiring a cross-border tax specialist should be considered. The tax tools that work well in one country, may yield painful results when you move to another. A cross-border tax specialist will be familiar with these nuances, including special tax elections, such as the “first-year election” that may be beneficial to make on a U.S. tax return.
While this means including your worldwide income on a U.S. tax return, there are some benefits. This election means you are treated as a U.S. resident for tax purposes, giving you access to deductions and credits not otherwise available. In addition, with Canadian taxes generally being higher, it may also be possible to claim foreign tax credits against foreign-sourced income.
Need Help from a Cross-Border Tax Preparer in Toronto or Oakville, Ontario?
Karlene J. Mulraine, EA, CPA, CA, CPA (NH) is the President of Cross-Border Financial Professional Corporation. Follow us on Linkedin and Twitter, or hang out on Facebook.
The views expressed in this article are those of the author and should not be relied on to make decisions. Consider discussing your specific circumstances with an appropriate specialist.