If you’re planning to move from Canada to the U.S., get ready for a very different system of taxation. Tax strategies that are helpful as a Canadian-only resident, may produce less than efficient tax results after a move. Pre-immigration planning with a cross-border tax specialist is advised.
Here are ten things tax-savvy Canadians consider before they move to the U.S.
#1. RESPs, TFSAs and U.S. Foreign Trusts Rules
Under Canadian tax rules, Registered Education Savings Plans (RESPs) and Tax Free Savings Accounts (TFSAs) are amazing tools for deferring, or avoiding tax. A move south of the border may wipe these benefits out! Why? The income earned in a Canadian RESP and TFSA account is included on a U.S. return the year the amounts are earned. The RESPs and TFSAs of a U.S. person do not enjoy the Canadian status of being tax deferred, or tax free.
In addition, given differences in the timing of the taxation of RESPs, double taxation on the same income may arise. Further, RESPs are usually captured under U.S. grantor trust rules – meaning, there is some extra paper work that must be completed annually, to avoid a hefty fine from the IRS.
So, in addition to the risks of double taxation on the same income, there are additional compliance costs that should be considered.
#2. FBAR & FATCA
U.S. persons and “specified individuals” are required to report both foreign financial accounts and specified foreign financial assets that exceed certain thresholds. There are two primary sets of requirements governing the U.S. reporting of foreign financial accounts and foreign assets – FBAR and FATCA. Each has a different threshold and method of filing. FBARs are e-filed via the FinCEN BSA e-filing system, while FATCA requirements are met as part of filing your main tax return.
If moving to the U.S., consider consolidating, or eliminating accounts altogether to simplify your life.
#3. U.S. Gift and Estate Tax
Most individuals give some thought to the basic income tax rules. Under U.S. tax law, gifts may also be subject to U.S. gift taxes and other reporting requirements if adequate consideration is not received by the giver. For the 2019 and 2020 tax years, individuals domiciled in and out of the U.S. can exclude annual gifts of up to US$15,000 per donee. Gifts to spouses have a higher limit. For a U.S. citizen spouse, unlimited gifts may be transferred without being subject to tax. If your spouse is not a U.S. citizen, an annual exclusion of US$155,000 for the 2019 tax year and US$157,000 in the 2020 tax year is available.
Under U.S. tax rules, the transfer of property during one’s lifetime, as well as at death is subject to taxes. For estate tax purposes, both U.S. citizens and individuals domiciled in the U.S. have their worldwide assets subject to U.S. estate tax. Fortunately, there are deductions, credits as well as tax treaty relief that may be utilized. Consideration should be given to the impact of these rules before a move.
#4. Obtaining a Certificate of Coverage
While the Canada/US tax treaty covers tax laws in general, there is also a social security treaty called a totalization agreement. Depending on whether you expect to be in the U.S. for the short, or long term, or where you intend to spend most of your working career, obtaining a Certificate of Coverage that exempts you from U.S. Social Security Tax may make sense.
In short, this agreement helps to eliminate dual social security coverage and taxation. Plus, the worker usually gets to maintain coverage in the country they will have the greatest attachment. Obtaining a Certificate of Coverage prior to departure may help.
#5. Applying to Reduce Tax Withholding on Rental Income Earned in Canada
If you hold a Canadian rental property after becoming a Canadian non-resident, the Canadian tenant is generally required to withhold and remit a flat 25% of the gross rental income to the Canada Revenue Agency. Even if your net rental income is low after deducting rental expenses, this basic rule applies.
Fortunately, it is possible to apply to the Canada Revenue Agency to have withholding reduced and be based on the net rental income after expenses, rather than the gross amount. This may free up cash that would not otherwise be available until a return is filed following the tax year the income is earned.
#6. Canadian Principal Residence
U.S. and Canadian tax rules on the disposition of your main home vary significantly. Under Canadian tax rules, gains realized on the disposition of your primary residence are generally tax free. U.S. tax rules however differ. Under those rules, a single filer can exclude up to US$250,000 in capital gains on the sale of a principal residence from tax. This jumps to $500,000 for married filers who file a joint return. U.S. tax rules generally require you to have lived in the property for two of the last five years to claim the entire amount.
If your home is based in a city such as Toronto, or Vancouver and you will realize a significant gain on a sale, you may want to carefully consider when you choose to dispose of your main home.
#7. Getting a Green Card
Many Canadians move to the U.S. on a work, or student visa and later apply for and receive a Green Card. However, few consider the tax impacts. Individuals who hold green cards long enough are considered “covered expatriates” if an expatriation event occurs. Covered expatriates are subject to a special “exit tax” upon being removed from the U.S.
#8. Maximizing RRSP Contributions
Both Canadians and dual US/Canadian tax-filers may benefit from maximizing Canadian Registered Retirement Plan (RRSP) contributions. Fortunately, unlike other Canadian tax deferred plans, such as RESPs and TFSAs, an RRSP generally maintains its tax-free status in the U.S. For this reason, most individuals find that maintaining an RRSP may make sense.
However, all the benefits of an RRSP are not retained. For instance, your ability to defer tax under the Canadian Home Buyers Plan (HBP) will no longer exist. In addition, your U.S. reporting requirements may increase given the FBAR & FATCA rules. So, it’s important to assess the pros and cons based on your specific circumstance.
#9. Terminating Canadian Residence
Canadian taxation is based on residency. Determining whether you are a resident or not, is not simply a function of whether you have flown to the U.S. for a long time. A number of facts and circumstances are usually considered, including residential ties to Canada. Factors such as where your spouse and dependents reside, whether you have maintained provincial medical coverage, childcare benefit payments and other social memberships in clubs may factor in to determine whether you are resident for Canadian tax purposes.
If you determine that terminating Canadian residency is best in light of your circumstance, establishing a date of termination is key.
#10. Hiring a Cross-Border Tax Specialist
Given the differences in the tax rules between 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 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 Accountant in Oakville, Ontario?
Got U.S. or Canadian tax compliance needs? Contact Cross-Border Financial Professional Corporation – When Perspectives Matter!
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.