Moving from the US to Canada? Don’t Forget Taxes!

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Even in years were Americans don’t move (or threaten to move) to Canada because of a potential presidential change, thousands of Americans move to up North every year. Although the immigration issues related to the move can be relatively complex, Americans should spend a significant time planning their tax situation as well.
 
Outlined below are some of the more important tax issues to consider when making the move to Canada:
You’ll be filing two sets of tax returns
The Canadian and US tax systems are quite different. Canadians file on a residency basis and in most cases, Americans file based on their citizenship. For example, a Canadian can move from Canada, sever their residential ties and discontinue filing Canadian returns. Americans on the other hand are required to file US tax returns regardless of whether they live in the US and will continue to file as long as they maintain US Citizenship.
 
After a move to Canada, and once you’ve setup residency, you’ll be required to file both a Canadian (T1 return) and US (1040 return) income tax return each year. Your worldwide income will be reported on both returns, however, special tax elections and disclosures will be utilized to ensure you don’t pay tax twice (more on this below).
 
In addition to the tax return filings you’ll also be required to report certain foreign accounts and transactions to each respective tax authority (the IRS and CRA). Foreign disclosures are discussed below in more detail.
 
You’ll want to ensure you don’t pay tax twice
In the absence of a tax treaty between Canada and the US, American taxpayers filing in both countries could be subject to double tax. In order to avoid the application of double tax between both the Canadian and US tax returns we use the concept of foreign tax credits to ensure the total amount of tax is properly calculated between both countries.
 
Very generally speaking, Canadian income will be taxed on the Canadian return and US income will be taxed on the US return. This is not always the case as certain types of income such as interest, capital gains and social security payments have different sourcing rules. When certain types of income are sourced to a specific country the taxpayer is allowed to apply a tax credit to help offset the extra tax. Let’s use an example to better clarify the concept.
 
Assume an American living in Canada earns $10,000 of US source pension income. When reported on their Canadian and US returns let’s assume that $2,000 and $1,000 is calculated for tax respectively. In the absence of foreign tax credits the taxpayer would pay $3,000 on this US source pension income. If calculated properly the taxpayer should pay the $1,000 of US tax on the pension income and only $2,000 of Canadian tax after applying the US taxes already paid. So, in essence the taxpayer avoids double tax on the pension and pays $2,000 of tax in total on the US source pension income.
 
Look out for foreign asset reporting requirements
In addition to dual tax requirement filings, American taxpayers in Canada need to be very aware of their “foreign account” disclosures. Both Canada and the US have rules that require taxpayers to report foreign assets and income from outside of their home country. Because Americans living in Canada file in both countries they have foreign disclosure forms to prepare for both Canadian and US purposes.
 
The most common forms of foreign asset disclosure include, but are not limited to, form T1135 for Canadian purposes and FBAR forms (foreign bank account requirements) for US purposes. The details of these disclosures are beyond the scope of this article however it’s important to recognize the importance of these forms considering the high penalties that can arise if these specific forms are filed late.
 
Choose your investments wisely
Because tax and disclosure rules are different between Canada and the US it’s important to ensure that an integrated investment approach is maintained . Beside foreign asset reporting disclosures, Americans living in Canada with Canadian investments need to ensure they understand which investments are right for them. Below is a list of more common investment issues:
  • Canadian mutual funds held by Americans can be considered Passive Foreign Investment Companies. As such, special PFIC reporting via form 8621 should be reviewed
  • Tax Free Savings Accounts held by Americans will not be tax deferred for US purposes. Taxpayers will need to ensure the income from these accounts are reported on their US 1040 income tax return. Foreign trust reporting may also be required for these accounts
  • In many cases US brokerage accounts, IRAs and 401k accounts in the US may not be held by residents of Canada. In these cases it’s wise to contact a cross border investment advisor to ensure you can manage these accounts from Canada.
 
Estate planning can be complex
Planning your wealth transfer can be complex from a cross border perspective as both Canada and the US have different sets of estate planning regulations. Upon death the following will occur from a Canadian and US tax perspective (assuming you will not be transferring your estate tax free to your spouse):
  • Canada – You’ll be taxed on the accrued gain on your assets at the time of death
  • US – You’ll be taxed on the excess of your estate over the US estate tax limit (current approximately $10,000,000)
Although the Canada-US tax treaty does have provisions to ensure double tax is not imposed upon death, proper tax planning is always advised to ensure both Canadian and US tax requirements are fully met.
 
As outlined above the complexity of the US and Canadian tax system for Americans resident in Canada cannot be overstated. A proper understanding of the tax, investment and estate planning issues is imperative to an efficient personal tax structure.
 
 
 
Phil Hogan is a Canadian and US CPA working with clients throughout Canada and the US. Phil advises on cross border tax and financial planning matters. Phil can be reached at phil@hutcheson.ca or via telephone at 250-381-2400. You can also read more about Phil at Hutcheson.ca/phil.