Moving to Canada With a Health Savings Account (HSA) - What You Need To Know

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

A common question we get asked is what happens to a Health Savings Account (HSA) when a person moves to Canada from the United States. In this blog, we’ll discuss the implications of moving to Canada with an HSA and strategies to minimize the tax burden of these accounts as a tax resident of Canada.

• What Is a Health Savings Account (HSA)
• HSAs For U.S. residents – The U.S. Perspective
• What Happens When You Move to Canada
• Tax-Free Withdrawals for U.S. Tax Purpose
• Tax-Free Withdrawals for Canadian Tax Purposes
• Planning With Your HSA Before Moving to Canada
• HSAs and Form T1135

What Is a Health Savings Account (HSA)

A Health Savings Account is a type of personal savings account one can set up to pay certain health care costs. The HSA allows you to set money aside and withdraw from it tax free, as long as it is used for qualified medical expenses, like deductibles, copayments, coinsurance, and more. Generally, insurance premiums are not considered qualified medical expenses.

HSAs For U.S. Residents – The U.S. Perspective

From a U.S. perspective, individuals can establish Health Spending Accounts (HSAs) and receive tax deductions for contributions made to these accounts, subject to specific conditions. Moreover, any income generated within the account is tax-deferred until withdrawn.

Withdrawals from the HSA are tax-free as long as they are used for qualified medical expenses. Qualified medical expenses typically include costs associated with diagnosing, treating, mitigating, or preventing illness or disease. This can include payments for doctor visits, prescription medications, medical procedures, and medical supplies. Additionally, certain dental and vision expenses may also qualify. However, it's important to check with the Internal Revenue Service (IRS) or a tax advisor for a comprehensive list of qualified medical expenses, as there may be specific criteria and exceptions.

If money from the HSA is spent on anything other than qualified medical expenses, it is taxed in the United States, and there is an additional 20 percent penalty, (unless the taxpayer is disabled or under 65 years old).

What Happens When You Move to Canada

Upon moving to Canada, individuals can no longer add money to their Health Savings Account since they are no longer covered under a U.S. health plan. Consequently, they will not get U.S. tax deductions for subsequent HSA contributions. In Canada, the Health Savings Account is NOT treated as a tax-deferred account, but as a regular investment account.

Similar to other investment accounts, when individuals move to Canada, they receive a step-up on the adjusted cost basis (ACB) of the investments within the HSA based on the fair market value (FMV) of the account at the time they become a Canadian tax resident. When assets within the HSA are sold, resulting capital gains are taxable on the individual’s Canadian tax return. It’s important to note that if the individual uses the HSA funds to pay for qualifying U.S. medical expenses, there will not be any U.S. tax implications. Depending on their income level, they may be eligible to claim a medical expense tax credit in Canada.

Tax-Free Withdrawals for U.S. Tax Purposes

To ensure tax-free status for withdrawals under US tax regulations, they must be utilized for qualifying medical expenses as defined by the IRS. You can refer to the IRS publication at the following link for a comprehensive list of eligible expenses for US purposes - IRS Publication 502It's important to note that medical expenses incurred outside of the US should still qualify under these guidelines.

Tax-Free Withdrawals for Canadian Tax Purposes

Regarding Canadian tax regulations, selling assets within the Health Savings Account to facilitate a withdrawal would constitute a taxable event and may result in taxable capital gains. However, if the withdrawal is intended for eligible medical expenses, individuals may be able to claim a medical expense tax credit, which can help offset any income tax liabilities. On the other hand, if the HSA contains only cash, and individuals withdraw cash from the account to cover medical expenses in Canada, this action should not result in a capital gain.

From a Canadian tax perspective, in years in which there are no withdrawals from the HSA account, any interest, dividends, and realized capital gains within the account are subject to taxation in Canada.

Planning With Your HSA Before Moving to Canada

In preparation for a move to Canada, rebalancing the portfolio within the Health Savings Account - to reset the cost base - can be a tax effective strategy.In addition, prioritizing capital gains, by holding “growth" stocks for instance, that generate capital gains rather than interest and dividend-paying investments, can also be tax effective. This strategy defers capital gains taxation in Canada until the assets are sold, limiting the taxable gain to the increase in value during their Canadian residency period, thanks to the step-up in cost basis. Additionally, since only 50 percent of capital gains are taxable compared to 100 percent of dividends and interest, this approach offers further tax advantages.

HSAs and Form T1135

The Health Spending Account (HSA) may fall under the requirements of Form T1135, a Foreign Income Verification Statement. It must be filed by Canadian resident individuals, corporations, and certain trusts who, at any point during the year, own specified foreign property costing more than $100,000. This requirement applies annually, except for the first year they become a Canadian tax resident.

In Summary

The Health Savings Account (HSA) is an effective planning tool for U.S. individuals. Upon moving to Canada, it’s important to understand the tax implications of the account from a Canadian tax perspective. Planning in advance, and utilizing the strategies noted above, can yield substantial tax savings. As always, it’s important to speak to an experienced cross-border professional to determine the best strategies for your particular situation.

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 portfolio managers 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.