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.
As one moves from Canada to the United States or vice versa, a multitude of unique lifestyle, immigration, financial, tax and estate planning issues must be considered. Ideally, it is best to plan or be aware of these considerations prior to the move, not afterward.In this article, we will discuss some of the financial and income-tax implications you should be aware of when moving from Canada to the United States.
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. For further about canadian expats in america. They must also pay Canadian taxon 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.
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 Lifestyleand/or reach out to us directly at info@cardinalpointwealth.com
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