You asked and we delivered! We are now launching Cross-Border Client Stories!
In today’s case, we will discuss a unique cross-border client situation involving a Canadian citizen relocating to the United States. This case highlights the challenges of managing tax and residency concerns when moving between two countries. We will walk through the issues, the analysis, and actionable solutions.
The Email:
“Context about my situation:
- I am moving to the US for work for longer than 183 days as a Canadian Citizen which would make me a US resident alien by the IRS and a Non-Resident of Canada by the CRA
- I will be leaving Canada in early September
- I plan to stay for 1-2 years — will re-evaluate after a year to see if I should stay adjust the duration of my stay working in the US
- I only rent so no home ownership and will rent in US as well
- I will keep my Canadian bank and credit card accounts
- I will keep my RRSP
- I will keep my Canadian Driver’s License
- I will keep my Canadian Passport
- Not married/common-law
- No dependents in Canada
- Not a part of any membership/club based activities
- I believe I have OHIP until I become a non-resident of Canada
Questions:
1. Whether or not I should close my TFSA account (less than $20k CAD) to ease the tax filing difficulties. Please list pros and cons, focusing on things like cost of filing in either scenario and what type of documents are needed as well as how to proceed in either case. For example, if I decide to keep my TFSA open, should I halt any further transactions?
2. How will the CRA determine Non-Residency after I move? I plan on filing CRA Form NR73 to help determine my residency status.
3. When will I have to file my “final tax return”? Is it before I leave for the US or after I become a Non-resident of Canada? Please let me know if you can help and if I need to provide any further information, thanks!”
Watch the Video
Before diving into the questions, let’s discuss some key issues with this case.
Issues:
đźš© Issue #1: What to do with TFSA
Our client reached out with a question regarding their TFSA, which they had set up in Canada. Since they were planning to move to the U.S., they were concerned about how this account would be treated under U.S. tax laws. While the TFSA is a tax-advantaged account in Canada, the U.S. doesn’t recognize it in the same way. The question is whether they should keep the TFSA or close it before moving.
đźš© Issue #2: How will Canada Determine my Residency
As the client is transitioning from Canada to the U.S., one of the critical concerns is determining their residency status for tax purposes. This will influence how they report their income and which country has taxing rights over their earnings. With both Canadian and U.S. tax rules to consider, understanding their residency status is crucial for proper tax compliance.
đźš© Issue #3: When/How do I file my “final tax return”
The client is moving in 2024, and the year of departure will require filings in both Canada and the U.S. This is a particularly complicated year as they must understand the requirements in both countries and file accordingly. Ensuring proper filings is key to avoiding penalties and ensuring everything is in order for future returns.
Analysis:
The TFSA:
In Canada, a TFSA is a tax-free account where any contributions and growth within the account are not taxed. However, the U.S. does not treat the TFSA the same way. For U.S. tax purposes, the TFSA may be classified as a foreign trust, which could require additional reporting. This gray area can complicate tax filings, especially since some tax professionals may treat the TFSA differently. Given these complexities, the client was unsure whether they should keep the account open or close it before relocating.
Residency for Tax Purposes:
When moving between Canada and the U.S., residency is determined by both countries based on a variety of factors. For Canada, primary ties like your home, family, and job are considered, along with secondary ties such as investments. The U.S. follows different rules, focusing on factors like the Substantial Presence Test. The client needed clarity on how to determine their residency status and how that would affect their tax filings.
Tax Filing in Both Countries:
The client’s departure year involves tax filings in both countries. On the Canadian side, the client will need to file a departure return, indicating they are no longer a resident for tax purposes. On the U.S. side, they must file a U.S. return and establish their residency status. The complexity of filing in both countries, especially in the first year, can create a lot of confusion. It is essential to work with professionals who understand the tax requirements in both nations to ensure everything is filed correctly.
Solutions:
🔑 Solution #1: Close your TFSA
Given the complexities surrounding the TFSA and its ambiguous treatment in the U.S., our recommendation is to close the TFSA before moving. While each situation is different, closing the TFSA can simplify the reporting process on the U.S. side. If you do decide to keep it, be prepared for possible complications, including the need to file additional forms like the 3520 and 3520-A, which could be seen as a foreign trust. Closing the account ensures a cleaner tax filing on both sides, especially in your first year after moving.
🔑 Solution #2: If You’re Not Sure, File Form NR73
If you are unsure about your residency status for tax purposes, the Canadian Revenue Agency (CRA) offers a form, NR73, which can help determine your residency status. It’s worth filing this form if you’re uncertain. This can give you clarity and provide the necessary documentation for your tax filings. If you are sure of your residency, you should proceed with your departure return (RT1) and notify the CRA of your change in residency.
🔑 Solution #3: Get Cross-Border CPA Help for Year 1
For the year you are moving, filing both Canadian and U.S. tax returns is critical. This year will involve a departure return in Canada and an entry return in the U.S. It’s crucial to get a tax professional who understands both tax systems to ensure that you don’t miss any reporting requirements. U.S. tax laws are more complex and involve foreign reporting, which can lead to significant penalties if not handled properly. Therefore, for the first year, it’s strongly recommended to work with a cross-border tax expert to avoid mistakes and ensure full compliance.
Final Thoughts:
Cross-border tax situations can be complicated, especially when it comes to determining residency and managing accounts like the TFSA. Moving from Canada to the U.S. requires careful planning, both for tax filings and for managing financial accounts. The key is to seek expert advice early to avoid costly mistakes. Remember, the first year after your move is critical, so don’t hesitate to work with a tax professional who understands both countries’ tax laws.
If you’re facing a similar situation or need help navigating cross-border tax issues, feel free to reach out to us at [email protected]. We’re here to guide you through the process and ensure your financial future is secure!
