Canada ---> U.S.A.: Essential Steps Before Moving to the United States
Written by Carson Hamill CIM®, CRPC®, Associate Financial Advisor & Assistant Branch Manager & Dean Moro BComm, CIM®, Financial Advisor & Associate Portfolio Manager
If you're relocating to the United States, consider these five important topics before you depart:
- Departure Tax
Kenneth Keung from Moodys, speaking on the U.S. expat radio podcast, explained, “If you leave Canada, then you're no longer a resident of Canada for tax purposes. And if that's the case, you are no longer subject to Canadian tax on your worldwide income and you will only be subject to Canadian income tax on certain sources of Canadian income.”
When you leave Canada and give up residency for tax purposes, you’ll be deemed to have sold most assets when you depart, which could inflate your taxes on capital gains if those assets have appreciated in value. Certain assets are exempt from departure tax, including Canadian real estate, your registered plans (RRSP, TFSA, RESP, etc.), employee benefit or pension plans, stock option rights, and certain trust interests.
Finally, it is advisable to consult with a cross-border tax professional. When moving to the United States, it’s possible to avoid tax in the USA on the same capital gain you realize on departure from Canada (avoiding double-taxation) by making a special election under the Canada-U.S. tax treaty.
Depending on the U.S. state you move to and its adherence to the Canada-U.S. tax treaty, you can minimize tax on your RRSP by keeping it intact when you leave Canada. Withdrawing before you leave triggers a significant tax bill, so make withdrawals after becoming a U.S. resident. If you're moving to a state that does not adhere to the treaty, the RRSP account doesn’t work as it would in Canada. The account acts as a non-registered account and the income and growth is taxed. There may be a workaround when dealing with U.S. states such as California that don’t follow the tax treaty. A crystallization strategy recognizes the gains within the RRSP before the person establishes residency in the new state. It essentially resets the cost basis for U.S. state tax purposes. This proactive approach can prove beneficial especially if the RRSP assets show unrealized appreciation before the person becomes a resident of the given state. Planning such scenarios before the move is a prudent opportunity, so working with a cross-border tax professional is key.
As we know, when a person withdraws from their RRSPs or RRIFs in Canada, the entire amount, including the original contribution and subsequent growth, is taxable. For non-residents of Canada, withdrawing a lump sum from an RRSP results in a 25% withholding tax. However, keeping investments within the RRSP, converting to an RRIF, and making periodic distributions can lower the withholding tax to 15% under the Canada-U.S. tax treaty. To qualify for this reduced rate, annual withdrawals must meet specific criteria, such as ensuring that:
- Payments from the RRIF during the year are less than double the minimum annual payment requirement, or
- The withdrawals do not exceed 10% of the RRIF's Fair Market Value at the beginning of the year.
South of the border, RRSPs and RRIFs are also taxable in the year of withdrawal, and the taxable amount will depend on certain factors such as U.S. tax status at the time of the contributions. To alleviate double taxation, federal foreign tax credits should be available on the U.S. tax return. However, keep in mind that some states, such as California, don’t allow foreign tax credits.
- TFSA
It’s important to handle your TFSA correctly. While you can keep your TFSA after moving to the U.S., it won't be tax-free in Canada. You’ll face U.S. taxes on income and gains because the Canada-U.S. tax treaty doesn’t protect TFSA earnings. Consider liquidating your TFSA investments and withdrawing the proceeds before leaving Canada to avoid Canadian tax and increase your TFSA contribution room, allowing for re-contribution if you return to Canada.
It's a smart move to appoint a new subscriber, also known as the account owner, for your RESP before moving to the U.S. Your beneficiaries can remain the same. Continuing as the subscriber after relocating to the U.S. makes RESP income and grants taxable in the U.S. since it's considered a foreign trust. Additionally, subsequent withdrawals will be taxed in Canada, resulting in double taxation. To avoid this, designate a Canadian resident, such as a family member or friend, as the RESP subscriber before you leave.
If you have a non-registered investment account, first find a cross-border financial advisor who can manage the account. Living in the U.S. imposes restrictions on maintaining a non-registered investment account in Canada. Ensure the account does not contain any mutual funds. Ideally, the account should be transferable in kind. However, Canadian mutual funds are typically not transferable, leading to taxable consequences due to liquidation.
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.
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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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