Given Canada and the US share common borders it's not uncommon for Americans to move up North to Canada. Whether it's Canadians returning from working in the US, or US citizens moving up to Canada to pursue career opportunities I speak to many Americans thinking of making the move up to Canada on a weekly basis.
Tax laws between Canada and the US can be quite different and proper planning is imperative to ensure you don't run into unnecessary taxes or penalties.
In this article we'll walk through 3 mistakes clients will want to avoid when moving to Canada from the US:
- Don't forget to review your investments before the move
Although there may be similarities between the Canadian and US tax system there are also significant differences that can materially affect how investments are treated for both countries. Lots of planning strategies become unavailable to clients after you become a tax resident of Canada, therefore it's very important to plan for your investments before you actually make the move to Canada. Some potential planning items include:
ROTH IRA conversions
Given Canadian tax rates tend to be higher than US rates it's always a smart idea to try and reduce future Canadian tax liabilities as much as possible. This is not always efficient to execute, however in cases where the taxpayer is in a lower income bracket in the year before they move to Canada an IRA to ROTH IRA conversion could be a great planning opportunity. By converting some or all of your IRA to a ROTH IRA before moving to Canada you'll be able to withdraw your registered funds in both Canada and the US tax free in future years.
Granted, this strategy works best when your current US tax rates are low in the year before you move to Canada.
US investments and T1135 filings
Canada has foreign asset disclosures similar to the US FBAR requirements for US citizens. T1135 reporting allows for "simple" and "complex" disclosure filing options. Only US investments held within a Canadian investment account will be eligible for the "simple" filing options.
Therefore, if you move to Canada and continue holdings your US investments in the US inside of a US investment account you'll need to report the investments using the more "complex" filing options for form T1135. instead of only having to disclose the one investment account you'll be required to disclose specific information about each individual US investment.
As you can imagine, clients with large portfolios would incur significant time and cost to properly disclose in this way. That's why it's always advisable to move your non-registered investments to Canada with an investment advisor that has licenses in both Canada and the US.
- Recognize what tax returns will need to be filed after you move
As an American living in Canada you'll be required to file both US and Canadian income tax returns. Unlike the US, Canada taxes individuals based on residency and not citizenship. in most cases you client will only be required to file Canadian tax returns once they actually enter and take up residency. For US purposes however they will be required to file 1040 income tax returns regardless of whether or not they actually live in the US. Therefore after your client moves to Canada they will be required to file both Canadian and US income tax returns each year simultaneously.
Even though your client will be filing 2 sets of tax returns they will be able to avoid most issues of double taxation by applying foreign tax credits in each respective return pursuant to the Canada-US income tax treaty.
- Don't forget about foreign asset disclosures
In addition to filing both a Canadian and US income tax returns your client will potentially be required to file Canadian and US foreign assets disclosures. These disclosures are terribly important given the high inherit penalties attached to such forms if not filed on time.
Foreign Bank and financial account reporting (FBAR) - the US treasury department requires that if the aggregate highest balance in all their non-US bank and investment accounts exceed $10,000 FBARs will be required. In most cases clients will require FBAR filings as they will have Canadian bank and investment accounts after they enter Canada.
8938 foreign asset form - 8938 requirements have higher thresholds than FBAR requirements but report very similar balances.
5471 foreign company reporting - Americans with certain interest in non-US private companies may be require 5471 reporting forms.
3520/3520-A foreign trust reporting - clients that receive distributions or hold interest in non-US trusts may be required to file 3520/3520-A forms.
T1135 foreign asset reporting - Canadians with a cost basis exceeding $100,000 of non-Canadian investment, real property or bank accounts are required to report these assets and related income on form T1135.
T1142 foreign trust reporting - Canadians that receive distributions from non-Canadian trusts are required to report these distributions on form T1142
T1134 foreign company reporting - Canadians with interest in private non-Canadian companies may be required to file T1134 forms
As you can see from the list above, in addition to the actual tax returns, cross-border clients will require potentially significant foreign asset reporting after entering Canada.
It's evident from the discussion above that US citizens entering Canada have relatively significant filing requirement and potential planning opportunities. Although some of this reporting may seem overwhelming proper planning before moving to Canada can significantly reduce filing complexity and potentially reduce future Canadian and US taxes.
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