Moving From Canada to the United States: What You Need to Know
The upcoming U.S. presidential election in November
has led to much media focus on U.S. citizens looking to move to Canada. So much,
in fact, that we prepared an article a few months back entitled, Thinking About Moving to Canada?
What You Need to Know.
Residency
for Canadian Income-Tax Purposes
Unlike the United States, Canada does not impose its
income tax system based on Canadian citizenship. Income tax in Canada is based
on residency—and thus it’s important to understand how residency is determined.
Residents of Canada are liable to pay Canadian
income tax on their worldwide income. Non- residents of Canada, meanwhile, are
liable to pay Canadian tax only on income from employment in Canada, as well as
rents, royalties, interest and dividends. They must also pay Canadian tax on
income from sources in Canada including a business that carries on in Canada
(while the recipient is a non-resident) and income from the disposition of
taxable Canadian property.
To further complicate matters, the term “resident”
is not directly defined in the Canadian Income Tax Act. Rather, it is based on
common-law principles and is related to the kind and types of residential ties
that one has or maintains in Canada.
To better understand how the Canada Revenue Agency
(CRA) might view residency from a Canadian income tax perspective, you might
want to review CRA Income Tax Folio S5-F1-C1:
Determining an Individual’s Residence Status.
Whether your residential ties in Canada are sufficient
for you to be considered a resident for tax purposes is generally a question of
fact. Some of the factors that CRA would likely take into consideration
include:
n Do you have a permanent home available to
you in Canada?
n Does your family live in Canada? In this
case, “family” typically refers to a spouse and/or children.
n Where are your social and personal ties, such
as church, social clubs, professional organizations and so on?
n Where are your economic ties, such as employment
or business operations, bank accounts, driver’s license, etc.?
n
Have you established residential ties to another
country, and are you resident in that country for tax purposes?
n
Do you intend to return to Canada at a later date?
When we work with clients to properly document their
intention to sever their residency from Canada, we recommend that they take the
following actions:
n
Consolidate your bank accounts by closing all
unnecessary accounts and transferring all or a substantial portion of funds to
a bank account in the United States. Once established in the United States and
all cheques have cleared against the Canadian accounts, transfer the balances
and close all Canadian accounts.
n
Close your Canadian non-registered brokerage accounts
and transfer the investments to a U.S. account, or liquidate if necessary. Given
that Cardinal Point Wealth Management is licensed and registered in both Canada
and the United States for investment management purposes, we can create much
value for our clients in this area, including maintaining Canadian-dollar
investment accounts in the United States.
n
Advise all Canadian financial institutions with which
you will have ongoing dealings of your move to the United States. They will
begin to withhold non-resident tax from any investment income earned by you
outside of your registered assets. The tax withheld under the Canada-U.S. Tax
Treaty (0% for interest, 15% for dividends) represents your final Canadian tax
obligation with respect to this income, and a Canadian tax return is not
required to be filed to report this income. The same would apply to Canadian-source
pensions (excluding Canada Pension Plan and/or Old Age Security).
n
Apply for a driver’s license in the United States as
soon as possible, and then cancel your Canadian license.
n
Cancel or change your professional memberships to non-resident
status. Cancel your memberships to clubs and other organizations. An individual
can retain membership in any professional organization on the basis that he is
required to perform duties abroad without significantly impacting non-residency
status. However, one should arrange for
the membership status to be designated “non-resident” if possible.
n
Sell or dispose of all personal possessions not
accompanying you abroad. Where possible,
it is preferable to avoid storing items in Canada, as the maintenance of
personal property may be an indication that residency was not terminated.
n
Cancel your credit cards with Canadian financial
institutions and obtain cards with U.S. institutions.
n
Terminate your Canadian healthcare and medical-insurance
coverage.
n
Maintain a personal file outlining your efforts to
cease Canadian residency. The
determination of residency status is not straightforward, and although one may
have a strong fact pattern, CRA can always assert that individual facts and
circumstances do not support the contention that you have ceased residency from
Canada. A personal file containing this information may be vital in
demonstrating to CRA that you have sufficiently severed your ties with Canada.
CRA uses a questionnaire, Form NR73
Determination of Residency Status (leaving Canada) to establish an individual’s residency status. However,
we recommend that clients not voluntarily submit this form to CRA. Once
submitted, it can be difficult to change filing positions in Canada.
The Canadian
Departure Tax
Upon departure from Canada, Canadian residents are generally considered
to have disposed of most property, with exceptions as noted below, for deemed
proceeds equal to the fair-market value of the property at that time. If the
fair-market value of the property exceeds its cost base for income tax
purposes, the individual must recognize a capital gain that is taxable in
Canada on their final exiting Canadian tax return. You have the option of
paying the tax on those gains, from the deemed disposal, when you file your tax
return for the year you leave Canada. Or you can provide security (if required)
to CRA, to defer payment until the property is sold.
Canadian real estate, stock options, certain employer-sponsored pension
plans Registered Assets (RRSPs, RRSPs, LIRAs, etc.) and TFSAs will not be
subject to the departure tax, as there are specific exclusions in the rules for
these types of assets.
For the most part, non-registered investment assets, including shares
within Canadian business interests and certain trusts, would be considered
deemed sold as of your departure from Canada.
A requirement to file CRA Information Forms T1161 – List of Properties by an Emigrant of Canada and T1243 – Deemed Disposition of Property by an
Emigrant of Canada would need to be included with your final return to CRA
for the year of departure. Depending on the fair-market value of assets upon
departure and/or the amount of deemed gains, these forms, and the requisite tax
(or the posting of adequate security), might not be required.
We
assist all of our clients in obtaining the necessary documentation to support
the fair-market value of all of their assets on the date they cease residency
for reference purposes. It is generally easier to gather this information
at the time of their departure as opposed to when we are preparing their
Canadian tax returns for the year of departure.
U.S. Income-Tax
Considerations
The United States does not have a deemed-acquisition
valuation when an individual enters the country for tax purposes. For this
reason, an individual who sells appreciated property after entering the United
States is subject to tax on the whole gain, not just the portion attributable
to the period of residence in the United States. This can result in double
taxation, first the Canadian departure tax and then U.S. capital-gains tax upon
the sale of the assets while in the United States.
Because of this, we generally recommend that clients
physically “trigger” any actual capital gains prior to exiting Canada, or take
a specific Tax Treaty election to “step-up” the capital gains for U.S. purposes
upon their exit from Canada. However, if
a client would have any assets that would be in an unrealized loss position
from a U.S. income-tax perspective (after adjusting the U.S. dollar-cost basis),
we might recommend that no realization would occur for U.S. purposes so that we
can preserve the losses to apply against future realized gains in the United
States. Given our Canada/U.S. tax and investment expertise, we can provide
great value to our clients upon their departure from Canada and entrance into
the United States.
As we alluded to earlier in this article, there are
still a number of factors that need to be addressed and reviewed upon a
departure from Canada. These include immigration planning, currency exchange,
tax preparation, compliance and planning, a comprehensive review of health and
risk management programs, the consolidation of investment and retirement
accounts and management, estate planning and much more.
At Cardinal Point, we are fortunate in that we provide
a Comprehensive Wealth Management Solution that meets our clients’ specific and
unique needs. We are not just “book smart.” The majority of our advisors
actually live and work in both countries, and are recognized as leading experts
in Canada/U.S. financial planning. If you are considering a move to the United
States from Canada, we would encourage you to request our White Paper, Manage Your Canada – U.S. Cross Border Lifestyle and/or reach out to us directly at info@cardinalpointwealth.com
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