Proactive Financial Planning is Essential for Americans Moving to Canada
Relocation brings exciting opportunities for personal and professional growth but can be burdensome at the best of times. When this relocation includes a cross-border move, changes such as new tax regimes, different investment structures and additional annual reporting requirements are also added.
Here are essential investment and financial tips to help you navigate the Canadian financial landscape effectively as a US citizen or resident moving to Canada.
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Plan Before You Go
Moving across the Canada-US border brings with it a host of challenges, particularly when it comes to financial and tax matters. Different tax regulations, investment options, retirement plans, and estate planning structures exist on either side of the border, making the transition a potential minefield for the uninformed. Failing to address these complexities could lead to unintended financial consequences, including high tax liabilities, compliance issues, and missed opportunities.
Cross-border planning should start at least six months before you pack up the moving van. Contact multiple cross-border professionals including an immigration consultant, investment advisor and tax professional to ensure no steps or requirements are missed, easing your lifestyle change.
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Understand the Cross-Border Tax Implications
As a US citizen or green-card holder living in Canada, you are subject to both the Canadian and US tax systems. While Canada taxes only its residents on worldwide income, the US is one of only two countries that imposes income tax on worldwide income regardless of where you live. You must report Canadian-source income to the Internal Revenue Service (IRS), and potentially pay US taxes on that income.
Fortunately, the Foreign Tax Credit (FTC) system through the Canada-US Income Tax Treaty can ease the potential burden of being “double taxed” by both countries on the same income. Canadian tax rates very often exceed US rates. Americans living in Canada can receive foreign tax credits for tax paid to the CRA and these credits can then be used to either reduce or completely offset tax owed to the IRS. However, double taxation cannot always be avoided.
As a US person, you’ll also have lifelong tax and filing obligations south of the border. If you live and invest in Canada, you’ll likely have to file such forms as:
- Statement of Specified Foreign Financial Assets (Form 8938)
- per the Foreign Account Tax Compliance Act (FATCA)
- FinCEN Form 114per Report of Foreign Bank and Financial Accounts (FBAR).
To ensure that all US tax obligations are severed, some US citizens living in Canada and abroad choose to relinquish their US citizenship. This decision will depend on your long-term goals of staying in Canada or having the option of moving back to the US.
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How to Manage US Retirement Investment Accounts
American citizens living in Canada may have already contributed to one or more US retirement accounts prior to moving, including a Traditional Individual Retirement Arrangement (IRA), a Roth IRA, a 401(k), a 403(b), and/or a 457(b).
Often, Americans living in Canada want to know whether they should retain these accounts. The answer varies with each unique situation. IRAs and 401(k), 403(b), and 457(b) accounts all receive tax-deferral treatment in the US. Fortunately, Americans living in Canada continue to enjoy tax-deferral on these accounts as long as they file the proper elections with the CRA.
Although options to transfer US retirement accounts to Canadian registered accounts, such as a Registered Retirement Savings Plan (RRSP) exist, keeping your US retirement accounts open is generally the simplest method of handling them. However, when withdrawals are made down the line, they will be subject to higher Canadian tax rates as both the CRA and IRS will tax this income. Foreign tax credits are available from the CRA, but they may not fully offset the cost of US tax. Fortunately, planning solutions exist.
Once you move to Canada, it is likely that US-based investment professionals will no longer be able to continue to work with you so working with a Canadian cross-border investment advisor will be your best option.
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What Canadian Investment Accounts Make Sense
The basic Canadian registered investment accounts include the Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP) and Registered Disability Savings Plan (RDSP) among others.
RRSP
US persons living in Canada should strongly consider RRSP contributions if they produce RRSP contribution room. When a U.S. person contributes to a RRSP, an automatic tax deferral is granted in the U.S. on income or capital gains earned in these plans. RRSPs are also exempt from the complex Passive Foreign Investment Company (PFIC) filing requirements in the US (more info below).
Upon withdrawal from an RRSP or RRIF, the entire amount is taxable in Canada. But, in the U.S., the original contributions are non-taxable. This calculation can be complex. Ultimately, double taxation is typically eliminated via the foreign tax credit.
TFSA/RESP/RDSP
Income earned in a TFSA is tax-free for Canadian tax purposes. For a US person, it’s fully taxable in the US. Unlike the RRSP, the Tax Treaty doesn’t cover it and it doesn’t receive the same favourable treatment. TFSAs are not exempt from PFIC reporting, creating costly and time-consuming annual reporting requirements.
There are situations where investing in a TFSA makes sense for US persons depending on your unique situation. Like a TFSA, RDSPs and RESPs are taxable for U.S. persons. Speak with cross-border tax and investment professionals to see if these accounts make sense in your situation.
Non-Registered (Taxable) Investment Accounts
For non-registered (taxable) investment accounts, the Canadian tax treatment is no different than if you weren’t a US person. The only difference is that you can claim the FTC on the US taxes paid/payable.
Within a Canadian taxable or non-registered account, Canadian mutual funds, exchange-traded funds (“ETFs”), and real estate investment trusts (“REITs”) are classified as passive foreign investment companies (“PFICs”) by the IRS, with extremely punitive tax treatment. If you will be establishing a taxable or non-registered account, you should avoid holding these securities.
Non-registered investment accounts pose a considerable challenge when moving between the U.S. and Canada. After relocating, you cannot operate the account from the other country. If the account remains in the U.S., it usually freezes and limits you to sell-only transactions. U.S. financial advisors often suggest transferring these accounts to a cross-border financial advisor in Canada because the account freezes and restricts transactions upon disclosure of your new Canadian address. This is more than just an inconvenience; it can lead to substantial financial complications.
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Minimizing Passive Foreign Investment Companies (PFIC) Reporting
Canadian mutual funds, ETFs, and REIT holdings are not subject to the PFIC classification within RRSP accounts. If you invest in a Canadian mutual fund or exchange-traded fund (ETF) outside of your RRSP, you own a PFIC and are required to submit Form 8621 annually with your US tax return.
This form is complex and must be submitted for each individual PFIC held which can take several hours for tax professionals to complete and annual accounting costs are increased accordingly. As mentioned above, RRSPs are exempt from the PFIC filing requirements.
To avoid PFIC reporting requirements and costs, investors should purchase US-listed ETFs and direct investments in individual securities such as stocks and bonds as they are not considered PFICs.
Conclusion
Transitioning to Canada as an American or green card holder requires careful consideration of your investment strategy. By understanding tax implications, opening a Canadian bank account, diversifying your investment portfolio, exploring real estate opportunities, and considering retirement savings options, you can set yourself up for financial success in your new Canadian home. With informed decisions and a proactive approach, you’ll be well on your way to achieving your investment goals in Ontario.
Contact us to reach Steven and learn more about investment strategy and immigration strategy for Americans moving to Canada.
