Moving to The U.S. with Canadian Investments
Moving to the U.S. From Canada can be a strenuous task, especially if you have investments in Canada and does not know the right kind of people to take care of them. These investments usually include, but are not limited to:
- Canadian Real Estate and Canadian Rental Property
- Canadian Mutual Funds and ETFs
- Real Estate Investment Trusts (REITs)
- Non-Registered Accounts
- Registered Retirement Savings Plans (RRSP)
- Tax-Free Savings Accounts (TFSAs)
- Registered Retirement Income Funds (RRIF)
- Canadian Stock Options
- Registered Education Savings Plan (RESP)
- Locked-in Reregistered Plans (LIRA/LIF/LRIF)
- Home Buyer’s Plan (HBP)/Lifelong Learning Plan (LLP),
- Life Insurance Policies
Reviewing all your investments with an investment and tax advisor and knowing all your options can help you formulate a solid financial plan that is tax efficient. The earlier this process is initiated before moving to the U.S. the better it turns out for your settlement tax wise. Don’t forget to learn how to file your Canadian tax return while being in the U.S.
Canadian Real Estate and Canadian Rental Property
Canadian citizens holding Canadian real estate for personal use after moving does not have to deal with yearly CRA tax filing obligations. On other hand, rules are very strict when it comes to selling as a Canadian real estate as a non-resident.
Non-residents are prohibited from buying mutual funds, real estate investment trusts (REITs), and ETFs however, one can continue to hold the existing ones.
Non-residents holding Canadian rental property must remit 25% withholding tax from the rent and file with CRA on yearly basis. And when it time to sell, notify the CRA in 10 days and obtain T2062 clearance certificate.
Canadian Mutual Funds in Non-Registered Accounts
Non-residents are prohibited from buying mutual funds, real estate investment trusts (REITs), and ETFs however, one can continue to hold the existing ones.
The ownership of Canadian mutual funds, ETFs, or real estate investment trusts (REITs) in non- registered or TFSA accounts puts one under the umbrella of “passive foreign investment corporation” (PFIC) tax reporting in the U.S. that carries punitive tax filing and higher tax rates.
Moreover, if not sold, these investments become a subject to the departure tax upon leaving the country and might have to Canadian capital gains tax.
Non-Registered Accounts in Canada
Non-registered accounts comprise a significant part of investments and must be dealt with properly to avoid any documentation related issues and trading restrictions. For example, holding an investment account located in Canada while being in the U.S might require you to provide your taxpayer identification information to avoid U.S withholding tax.
“Tax-Free Savings Accounts” (TFSAs)
The contribution to the “Tax-free savings account” (TFSA) is dependent upon Canadian tax residency. Hence, once you leave Canada you can no longer contribute to the TFSA. However, the account itself remains intact and all the assets, earnings, and withdrawals will still be non- taxable for “Canadian tax purposes”. But this tax-free status will not be applicable for the U.S income tax purposes and all income earned even not distributed will be taxable by the IRS. There will be added filing requirements besides the all income earned plan if your TFSA is considered a foreign trust.
Registered Retirement Savings Plans (RRSP)
The U.S. equivalent of Canadian RRSP is “Individual Retirement Account” (IRA). However, the transfer of accounts from RRSP to IRA is highly discouraged and a few people keep their Canadian RRSPs always, even if they retire in the U.S.
Unlike Canada, since the income earned is taxed annually in the U.S, a tax deferral election is required to defer the recognition of income and tax. Although the U.S-Canada tax treaty allows the citizen to make tax deferral on the income annually on the federal level only, it is important to contact a tax advisor to find out if your resident state is adhering to tax treaty. For example, the state of California does not abide by the tax treaty deferral and will tax the income earned in the year you are a California state resident.
Three options to consider regarding your RRSP account before moving to the U.S: A complete withdrawal, converting to RRIF for distribution and to leave it alone. It is important to learn in detail about the options so you can make a sound decision according to your own tax situation.
A lump sum withdrawal from an RRSP as a U.S. resident carries a 25% withholding tax at the source. If you take intermittent withdrawals through RRIF, a lower withholding 15 %t ax rate of 15% tax is applicable. Reporting RRSP distribution on U.S. 1040 tax return is also a daunting task and you should learn how to report RRSP withdrawal to limit or eliminate double taxation.
Registered Retirement Income Funds (RRIFs)
A large part of a similar arranging and expense issues as talked about for your RRSP will apply to your RRIF. However, like with an RRSP, one does not need to deregister RRIF after leaving Canada: all the arrangements can be kept intact. Moreover, as part of the “U.S-Canada tax treaty”, withdrawals from RRIF as a resident of the U.S. might be dependent upon a diminished Canadian non-resident retaining charge rate of fifteen percent, contingent upon the measure of installments.
Registered Education Savings Plan (RESP)
For a person residing in the U.S, the income added in the Registered Education Savings Plan (RESP), is not tax-deferred. Therefore, typically tax advisors recommend disposing of the RESP upon leaving Canada. The tax implications for the RESP are dependent upon the residency of the contributor as well as the beneficiary. For instance, the income added in the RESP including CESG, interest, dividends and all the recognized capital gains, is taxable annually for the U.S purpose. Learn how to report RESP income on the U.S. 1040 income tax return.
However, upon withdrawal, the amount is taxable only due to the Canadian purposes. This creates a “double-taxation” issue. If the contributor resides outside of the U.S. but the beneficiary resides in the U.S, the income earned will be taxed at a special rate upon withdrawal to the beneficiary. Moreover, an interest rate is charged based on the total amount distributed from the plan.
On the bright side, RESP is no longer considered foreign grantor-type trust thus holder of RESP is long required to file form 3520 and 3520-A. A big relief that was long overdue.
Canadian Stock Options
Contrary to the popular belief, the Canadian non-residents are liable to the tax accrued from the employee stock options if the options are bought during their residence in Canada. Sometimes the tax is applicable even if the exerciser is not a tax resident of Canada. To report the benefit from the stock options, one will be required to file a “Canadian non-resident tax return”. Moreover, residing in the U.S. at the time of exercising the stock option also makes one liable to the “U.S. income tax”.
According to the “U.S-Canada tax treaty”, each country can only tax a portion of the accumulated benefit of an employee as long as the person was employed in that country. A simplified way to estimate the taxable amount is to find the ratio between the number of days a person was employed in the country during the duration of holding the stock and the total number of days that the person held the stock. Taxation of these stock options is a tedious process and a cross-border taxation advisor must be consulted to avoid any sort of inconvenience.
“Locked-in Registered Plans” (e.g. LIRA/LRIF/LIF etc.)
The tax implications for “Locked-in Registered Plans” barely differ from those of “non-Locked- in Registered plans” in both U.S. and Canada. The “locked-in Registered plan” is generally rigid, however, certain exceptions can be made in the case of government or common benefits enactment for non-residents of Canada, any monetary difficulties, or sickness leading to death.
Life Insurance Policies
An interest accrued as a result of investment in a “segregated fund life insurance policy” in Canada remains intact and the beneficiary is compensated at a fair market value which is a taxable amount. On the other hand, an interest accrued as a result of an investment in a typical
life insurance policy is rejected from the disposition rules in case of leaving the country. A good action would be to consult the cross-border accountant in case of a migration to the U.S. The Canadian insurance policy for U.S. tax purposes should be discussed in-depth with the accountant.
“Home Buyer’s Plan” (HBP)/ “Life Long Learning Plan” (LLP)
In case withdrawing the amount from “Home Buyer’s plan” (HBP)/ “Life-long Learning Plan” (LLP) upon leaving the country, the entire HBP, LLP amount will be payable. Failing to pay the withholding amount by the due date adds the outstanding amount to the calculation of the tax liability of the year of your departure from the country.
