Many of us joked about moving to Canada if Mr. Trump won the presidential election, which he did this week. Subsequently, the Canadian immigration website was overwhelmed with traffic and crashed shortly after the election result was announced.
Whether there will be an exodus of Americans remains to be seen, and those seriously thinking about it ought to consider these delicate and specific financial planning elements.
Tax Planning
As long as you are a U.S. citizen or permanent resident, you will need to stay compliant with U.S. tax rules, summarized in the following:
- The U.S. (and Canada) has authority to tax its citizens’ “worldwide” income. Your overseas earnings and investment income need to be reported, but certain amount is excluded from your U.S. tax base (known as the Foreign Earned Income Exclusion[1]).
- Annual filing of U.S. as well as Canada tax returns require special knowledge and expertise of both countries’ complex tax codes. For example, U.S. tax returns are due April 15 but the deadline in Canada is April 30.
- Tax treaty between the U.S. and Canada provides certain relief in double taxation. However, it is not comprehensive and taxpayers can easily fall into tax traps. Qualified tax advisors need to be consulted with regards to your unique situation.
Rules regarding gift and estate taxation are very different between the two bordering nations.
Taxable gifts made by a U.S. citizen/taxpayer, regardless of location, are governed by the U.S. gift tax rules. Equivalent gift tax is absent in Canada; however, gifting of capital property (real estate, investments, etc.) is deemed a sale of such property at fair market value (FMV). The person making such gift will have capital-gain tax liability.
Estate Planning
Estate tax is another area where stark differences exist. U.S. citizens can transfer up to $5.45 million of assets free of federal estate/gift tax in 2016. Assets held at death receive step-up of basis to FMV. Canada, on the contrary, does not impose estate/inheritance tax on death. Instead, the Canada Revenue Agency (CRA) treats the estate as a sale (as in the situation of a gift discussed above).
As a result of different relevant tax treatments, estate minimization strategies are critical for U.S. citizens residing on Canadian soil who possess substantial assets and/or capital gains.
Wills written in the U.S. may not be valid in Canada unless they meet the requirements of an “international will.” Otherwise, especially involving real property in different locations, multiple wills may be necessary. Living trusts established under U.S. state law may not be recognized by foreign jurisdictions either for similar reasons.
Surviving spouses who are not U.S. citizens do not qualify for the unlimited marital deduction unless assets are held in a Qualified Domestic Trust, or QDOT (the trustee has to be a U.S. citizen).
Investment Management
U.S. citizens will also need to navigate different rules and make decisions about their various investment vehicles. For instance:
- Holding Canadian-traded mutual funds and ETFs in taxable accounts can create harsh U.S. income tax consequences. Distributions and income from these “Passive Foreign Investment Companies,” or PFICs, are automatically treated as “ordinary income” to a U.S. taxpayer and taxed accordingly.
- Moving retirement assets (IRA, 401(k), etc.) to a Registered Retirement Savings Plan (RRSP) in Canada could result in a taxable distribution if not done correctly.
- The two tax agencies also exchange and share taxpayers’ information to ensure reporting requirements and compliance rules are met, as well as avoid tax evasion.
Is Expatriation the Answer?
The path to U.S. citizenship requires one to jump through a number of hurdles such as passing the knowledge test, being in good health, and satisfying tax obligations. Renouncing your citizenship is more complicated than you might think.
For the formal process of renunciation, visit the Dept. of State’s website (link).
Your U.S. tax responsibilities do not necessarily end with renunciation. “Covered expatriates”[2] will be deemed to have sold all of his or her property for FMV on the day before the expatriation date. Any “phantom” gains will be included in taxable income after certain adjustments.
What is more important is that renunciation is a voluntary but irrevocable process. Without first becoming a citizen of another country, one could end up with a “stateless” status, making international travel impossible.
This blog post hardly scratched the surface of the topic. In short, moving out of the U.S. and maintaining resident status in more than one country requires very careful and exhaustive planning and coordination between various advisors in their respective professional areas. It should not be taken lightly or based on emotional factors.
[1] https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion
[2] https://www.irs.gov/individuals/international-taxpayers/expatriation-tax
