What To Do With Your U.S. Taxable Investment Accounts When You Become A Canadian Resident

Written by Carson Hamill CIM®, CRPC®, Associate Financial Advisor and Assistant Branch Manager & Dean Moro BComm, CIM®, Associate Financial Advisor

Canadian residents are required to report foreign financial assets to the Canadian Revenue Agency (CRA). Therefore, if you have a U.S. taxable investment account it must be reported to CRA. Due to differences in reporting, accounting for these investments can be very inconvenient and expensive if you continue to hold your investment accounts with a U.S. brokerage firm. In this blog, we will explain the benefits of working with a qualified dual-licensed Canadian financial advisor to streamline the reporting process, minimize costs, and avoid costly issues down the road.

Key issues to consider:

• Importance of Maintaining Accurate Records
• Simplify Your Foreign Income Reporting
• Working With Cross-Border Professionals for A Smooth Transition

Importance of Maintaining Accurate Records

It is very important to maintain accurate records of your cost basis before moving to Canada. What does cost basis mean? For stocks and bonds, as well as mutual funds and ETF’s, the cost basis is the price you paid to purchase the securities. That includes purchases made by reinvestment of dividends or capital gains distributions and incorporates costs such as commissions or other fees you may have paid to complete the transaction.

Cost Basis example:

You purchase 1000 shares of a stock in 2017 for $10 per share. Adding the $100 commission, the total cost basis is $10,000 plus $100 commission = $10,100. If the share price has since risen to $15, the capital gain is $15,000 less $10,100 = $4,900.

Differences between Canada and the U.S. when it comes to Cost Basis

For Canadian tax purposes, when you move to Canada your cost basis will be the fair market value of the securities on the day that you become a Canadian tax resident. If you have moved your investments to a Canadian brokerage firm, the cost basis will be tracked from that point on. Now, when it comes to cross-border things get tricky. Cost Basis in Canada is tracked using a different method than in the United States. Canada tracks cost basis using the Weighted Average method, whereas the U.S. tracks cost basis using the First In, First Out (FIFO) method by default, where the securities purchased first are sold first. The taxpayer can choose a different cost basis method, but the average cost method is only available for mutual funds and dividend reinvestment plans.

Here is a helpful scenario of an individual moving from the U.S. to Canada:

Jacques is moving back to Canada after living and working in the U.S. for several years. Jacques is not a US citizen nor a green card holder.

Question: What will Jacques’ cost basis be since he is leaving the United States and entering Canada as a Canadian resident?

Answer: Previous gains accrued before Jacques entered Canada are protected from Canadian tax. When Jacques moves from the U.S. to Canada, he will not be taxed in Canada on any accrued gains that he earned before he became a Canadian resident. Jacques’ new adjusted cost basis for Canadian tax purposes will be the market value of the securities on the day he became a became a Canadian resident.

Here is an example to provide more detail: Jacques purchased a stock when he lived in the United States with a cost basis of $10,000. Jacques has decided to move to Canada, and when he becomes a Canadian resident the value of the security has increased to $20,000. Jacques can sell the stock immediately and he will not be subject to tax in Canada because the cost basis for Canadian tax purposes becomes $20,000, which is the current market value.

Essentially, Jacques gets a reset when he moves to Canada for any accrued gains that he earned on his investments (Please note this does not include things like pensions or US real estate). Jacques will use the closing price of the security on the day he became a Canadian resident to determine the Fair Market Value and that becomes his new cost basis for Canadian tax purposes. The cost basis reset also applies to securities with an accrued loss to reduce the cost basis. Therefore, consider selling securities in a loss position before establishing Canadian tax residency.

As a Canadian resident, your options for leaving your taxable investment account with a U.S. brokerage firm are going to be limited. You can read this blog to learn why. But you will also be required to maintain accurate records which can be very cumbersome and prone to errors. Keeping track of your purchases and sells, including dividends received and the foreign exchange rates on various dates, can be a burden. That is why it is important to have a plan for your taxable investment accounts when you are moving to Canada. Working with a cross-border accountant and a qualified dual-licensed Canadian financial advisor will ensure the transition is smooth and efficient.

It should also be noted that if you leave your taxable investments in a U.S. brokerage account you will be responsible for manually tracking the cost basis for Canadian tax purposes, and this will not be reflected on your U.S. brokerage statements. Mistakes can lead to paying too much or too little tax on your returns. These issues can be avoided by transferring your assets to a Canadian brokerage when you leave the United States.

Simplify Your Foreign Income Reporting

Canadians who own foreign assets are required to report these assets to the Canadian Revenue Agency (CRA) by completing Form T1135.

What is Form T1135?

Form T1135, also known as the Foreign Asset Verification Statement, helps the Canada Revenue Agency (CRA) obtain information on the foreign investment property held by Canadian residents.

Who must file Form T1135?

Canadian resident individuals, corporations and certain trusts that, at any time during the year, owned foreign property with a total cost amount exceeding $100,000 Canadian dollars.

Typically, a Canadian brokerage firm will produce a report that can be used to prepare the T1135 for tax purposes. Again, when it comes to cross border things get tricky. If you decide to keep your investment accounts in the United States, you will be responsible for tracking your foreign holdings for reporting purposes. As a result, completing the T1135 becomes more work and could lead to costly mistakes.

A new Canadian resident with foreign assets can simplify their T1135 tax reporting by transferring their investments to a Canadian brokerage. When completing Form T1135, one can choose a Part A Simplified method if they have less than $250,000 CDN fair market value in foreign assets. If their foreign assets exceed $250,000 CDN in value, they can complete Part B on an aggregate basis for each country. This is not an option if the assets are held with a U.S. broker. Their accountant will have to report each individual security line by line, by country, by cost, by income, by capital gain/loss. This can be quite burdensome if the investor’s assets are all US securities.Simplifying your foreign income reporting by working with a Canadian cross-border advisor can reduce your accounting expenses and minimize the opportunity for costly reporting errors. To learn more about the benefits of working with a dual licensed cross-border financial advisor, click here.

Working With Cross-Border Professionals for A Smooth Transition

As you can see from the above, when moving to Canada from the United States, transferring your non-registered investment portfolio to a Canadian broker is often the preferred option. And planning well ahead will ensure the transition is efficient and the appropriate records are maintained to properly account for your U.S. investments. Simple tasks like downloading and saving historical investment statements will pay dividends down the road when your cross-border accountant requires them. An experienced cross-border financial advisor will be able to walk you through this process and ensure the appropriate records are maintained. And when you are ready to put those dollars to work in Canada, your cross-border advisor will be aware of the investments you may want to avoid – PFIC is the most common issue - along with the account structures that can cause issues for U.S. tax filers residing in Canada. To learn more about the issues around Passive Foreign Investment Companies (PFIC) click here.

Next Steps:

If you are planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email us at Snowbirds Wealth Management, as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have a team behind you.

About Snowbirds Wealth Management

Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate financial advisors with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders. To schedule an introductory call, please click here.

Statistics and factual data and other information are from sources RJLU believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJLU is to be under no liability whatsoever in respect thereof.

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