Cross Border Financial Planning: Americans Moving to Canada

There are numerous reasons why Americans are choosing to move to Canada, whether personal, political, employment-related, or otherwise. However, the process of financial planning for a move to Canada is complex and demands thorough preparation and strategic decision-making. Ideally, this planning should begin well before the intended departure date to ensure a smooth transition. The financial systems and tax laws in both countries differ significantly, and failing to plan properly could lead to unexpected tax implications or missed opportunities.

This summary offers a broad overview of some key factors to consider before relocating, helping you better understand the financial and regulatory implications of your move. However, every individual’s circumstances are unique, and cross border financial planning is inherently complex. To ensure you make informed decisions that align with your specific financial goals, tax obligations, and legal requirements, it is highly recommended that you seek personalized advice from professionals with expertise in cross border issues.

Trusted Cross-Border Advice, Tailored to You

About Objective Financial Partners: We have been providing flat-fee and hourly fee-only, advice-only financial planning advice to clients worldwide since 2012. We specialize in retirement planning, tax planning, and estate services, with a team that includes Certified Financial Planners (CFPs), Chartered Professional Accountants (CPAs), and paralegals. The company’s managing director, Jason Heath, is one of Canada’s best-known fee-only financial planners and a long-time personal finance columnist for the Financial Post and MoneySense.

Immigration

Canada offers multiple immigration pathways designed to attract skilled workers, entrepreneurs, students, and families seeking new opportunities. Whether through the Express Entry system for skilled workers, Provincial Nominee Programs, or family sponsorship route, there are diverse options to become a permanent resident. When planning for your move to Canada, you should ensure you understand if your immigration status supports a path to permanent residency as well as your options in the event your situation changes.

For many Americans considering a move to Canada, the decision to settle permanently can raise complex questions about citizenship and immigration status. Some may contemplate the drastic step of renouncing U.S. citizenship or surrendering their green card to avoid the complexities of dual taxation and simplify their financial situation.

However, renouncing U.S. citizenship or surrendering a green card involves significant legal, financial, and personal considerations which make it crucial to fully understand the implications before making such a commitment. U.S. citizens and individuals who have held a green card for more than 8 years should evaluate whether they would be subject to covered expatriate tax, which involves the imposition of capital gains tax on worldwide assets at the time of expatriation.

Tax Residency

The U.S. and Canada operate under fundamentally different tax systems, particularly in how they determine tax residency. The U.S. follows a citizenship-based taxation system, meaning that U.S. citizens and green card holders are required to report their worldwide income to the IRS regardless of where they live. In contrast, Canada uses a residency-based taxation system, which taxes individuals based on their residency status rather than citizenship.

As a result, U.S. citizens and green card holders moving to Canada must report their income to both the IRS and Canada Revenue Agency (CRA) each year. However, there are mechanisms in place to prevent double taxation, helping to alleviate the financial burden of complying with both tax systems.

One such method is the Foreign Earned Income Exclusion (FEIE), which allows U.S. taxpayers working in Canada to exclude up to $130,000 USD in 2025 (approximately $185,000 CAD at current exchange rates) of their earned income from U.S. taxation. While this can be a straightforward and effective way to avoid double taxation, it is important to note that the FEIE only applies to earned income from services provided outside the U.S. It does not apply to passive income such as dividends, interest, capital gains, pension or annuity income, or government benefits like Social Security, Canada Pension Plan (CPP), or Old Age Security (OAS).

Alternatively, the Canada-U.S. Tax Treaty offers a Foreign Tax Credit (FTC), which enables U.S. citizens and green card holders to offset their U.S. taxes with the taxes paid to Canada on the same income. This is particularly useful for individuals receiving investment income or pension income, as the FTC can be claimed on these types of income, unlike the FEIE. By utilizing the FTC, taxpayers can reduce their U.S. tax liability, ensuring they do not pay taxes twice on the same earnings.

Under Section 128.1(1) of the Canadian Income Tax Act, when an individual becomes a tax resident of Canada, they are generally deemed to have disposed of and immediately reacquired their capital property at its fair market value on the date of residency. This means the new cost basis of the property for Canadian tax purposes is its fair market value on the date of entry.

Any gains accrued prior to becoming a Canadian resident are not taxable in Canada upon future disposition. However, the U.S. does not provide a similar step-up in basis upon expatriation. This means U.S. citizens and green card holders moving to Canada will still use the original purchase price when calculating U.S. capital gains tax in the future.

In addition to the differing definitions of tax residency, it is important to understand that Canada’s tax system is based on individual income taxation – there is no joint filing or married tax brackets like in the U.S. As a result, for a couple where one spouse earns significantly more than the other, they cannot automatically reduce their tax burden by shifting income, except in limited cases. Since Canada taxes each individual separately, transferring income-generating assets to a lower-income spouse before becoming a Canadian tax resident can help ensure that future investment income (such as interest, dividends, and capital gains) is taxed at the lower-income spouse’s rate. Without this strategy, all income from these assets would remain taxable to the higher-earning spouse, leading to a greater overall tax burden. Careful planning is essential to avoid potential U.S. gift tax implications or Canadian attribution rules, which could negate the benefits of income shifting.

U.S. Account Options

When preparing to move from the U.S. to Canada, one of the most important financial considerations is how to manage your qualified and nonqualified investment accounts. These accounts – such as 401k, 403b, 457, IRA, Roth IRA, brokerage accounts, and other investment vehicles – are subject to different tax treatments in the U.S. and Canada. The strategies you choose for managing these accounts can have significant implications for your tax obligations and investment growth after your move. Below are some key considerations for a few common accounts:

401k / 403b / 457b Plans

Fortunately, employer-sponsored retirement plans such as 401k, 403b, and 457b plans are recognized under the Canada-U.S. Tax Treaty, allowing for tax deferral on contributions and earnings until funds are withdrawn. This means that, even as a resident of Canada, you will not be subject to Canadian taxation on these accounts until you take distributions. This provision makes keeping these accounts in the U.S. after relocating to Canada a viable strategy, especially considering that many of these plans offer a variety of low-cost, diversified investment options that can keep you disciplined and enhance long-term growth potential.

Rolling a 401k, 403b, or 457b plan into a Rollover IRA is a non-taxable event that can offer several advantages for Americans moving to Canada, including expanded investment options and more control over your portfolio. However, this decision requires careful consideration. It is important to recognize that investment managers have an incentive to encourage rollovers to IRAs because they can manage these accounts and charge management fees. Before proceeding, it is crucial to assess whether the benefits of the IRA outweigh the potential costs and lost features of the employer-sponsored plan.

One notable advantage of keeping your 401k, 403b, or 457b plan is that withdrawals from these plans are eligible for income splitting in Canada, which can be beneficial for reducing your overall tax burden if you have a spouse with a lower income. This option is not available for IRA distributions. Additionally, 457b plans offer the unique benefit of being exempt from the 10% early withdrawal penalty that applies to IRAs if funds are withdrawn before age 59½, providing greater flexibility if you withdraw funds before retirement.

Roth IRA

Roth IRAs receive favourable tax treatment under the Canada-U.S. Tax Treaty, preserving their tax-free status on both sides of the border – provided certain conditions are met.

Article XVIII(3)(b) of the Treaty specifically classifies a Roth IRA as a pension, ensuring that pension payments from the U.S. to a Canadian resident are taxable in Canada only to the extent that they would be taxable in the U.S. Since qualified Roth IRA withdrawals (those made after age 59½ and from an account held for at least five years) are exempt from U.S. tax, they are also exempt from Canadian tax. This means that, if properly structured, a Roth IRA can provide tax-free growth and withdrawals in both countries.

The Roth IRA is particularly valuable for Americans moving to Canada because it has no direct Canadian equivalent. The closest Canadian counterpart is the Tax-Free Savings Account (TFSA). However, there are key distinctions that make the TFSA less advantageous for U.S. citizens.

• TFSAs are not covered under the Canada-U.S. Tax Treaty, meaning they do not receive tax-exempt treatment in the U.S.
• U.S. citizens with a TFSA must report all interest, dividends, and capital gains earned in the account annually on their U.S. tax return.
• Roth IRAs offer better estate planning benefits. Upon the original account holder’s passing, beneficiaries of a Roth IRA can receive an additional 10 years of tax-free growth – even if residing in Canada. The TFSA does not offer a similar benefit.

Given that Canada has higher income tax rates than the U.S., converting pre-tax retirement accounts (such as IRAs or 401k accounts) to a Roth IRA before moving to Canada can be very lucrative. By converting before becoming a Canadian tax resident, individuals can lock in lower U.S. tax rates, ensure all future withdrawals remain tax-free in both countries, and avoid Canadian tax on Roth earnings if conditions are met.

Executing a Roth conversion before moving to Canada requires careful planning due to potential pitfalls:

• To preserve the Roth IRA’s tax-free status in Canada, a special election must be filed with the CRA in the year of your move. Failing to do so could result in future investment income and capital gains being taxed in Canada.
• Any new contributions to a Roth IRA while living in Canada are considered contaminated by the CRA, meaning future investment income and capital gains would become taxable in Canada.
• If a conversion is done after becoming a Canadian resident, the CRA may immediately tax the full conversion amount as foreign income, even though the U.S. would not impose such tax.

Other Considerations

In addition to immigration, tax residency and account options, there are many challenges and opportunities for Americans moving to Canada in the areas of personal and corporate tax, retirement, investment, estate, insurance, and education planning. A few common examples include:

• Americans currently doing business through a Limited Liability Company (LLC) should be aware of cross border tax issues. In the U.S., an LLC is a pass-through entity by default, meaning it does not pay corporate tax. Instead, the income flows directly to the owner(s), who report it on their personal tax returns. In Canada, the CRA treats an LLC as a foreign corporation. As a result, any income earned inside the LLC is not immediately taxable to you in Canada. However, when you take money out of the LLC, Canada treats it as a foreign dividend, which does not qualify for the Canada-U.S. Tax Treaty’s foreign tax credit because the IRS does not tax LLC distributions as dividends.

  This can result in double taxation in the U.S. as business income and again in Canada when you receive the funds. To avoid double taxation and other inefficiencies, Americans may want to consider a Canadian corporation with a U.S. branch, a U.S. C-Corporation, a Limited Partnership (LP), or an Unlimited Liability Company (ULC).

• Revocable trusts are a common estate planning tool in the U.S. but are rarely used in Canada. In the U.S., a revocable trust is considered a ‘grantor trust’, meaning the person who created the trust is still taxed on the income as if they personally own the assets. In Canada, a revocable trust is treated as a separate taxable entity and does not provide the same tax deferral benefits.

  If the Canadian taxpayer is a trustee or has authority over a U.S. revocable trust, they may need to file both a T3 Trust Income Return with CRA as well as Form 3520 with the IRS on an annual basis. Adding an additional layer of complexity is the fact that Canadian tax law applies a 21-year deemed disposition rule, meaning the trust is considered to have sold all its assets every 21 years, potentially triggering a large capital gains tax bill.

• Unlike 401k plans, 529 plans are not recognized under the Canada-U.S. Tax Treaty. As a result, all capital gains, interest, and dividends earned within a 529 plan are taxable in Canada as foreign investment income, even if the funds are used for education expenses. Similarly, Canada’s equivalent – the Registered Education Savings Plan (RESP) – is also not covered by the Treaty. This means that U.S. citizens and green card holders must report all interest, dividends, and capital gains, as well as government grants deposited to the RESP, as income on their U.S. tax return each year.

• Americans eligible for Medicare – including U.S. citizens, green card holders who have lived in the U.S. for at least five years, and individuals with at least 40 Social Security credits – are granted an Initial Enrollment Period (IEP) starting three months before their 65th Even as Canadian residents, those eligible should enroll in Medicare Part A as it is free and remains effective during visits to the U.S. Medicare Part B, however, is not free and may or may not be beneficial, depending on your lifestyle and the frequency and duration of your U.S. visits. Notably, Medicare Parts C and D are not available to Canadian residents.

Conclusion

This article has highlighted only a few of the numerous financial factors that Americans should consider when planning a move to Canada. From tax implications and investment adjustments to healthcare coverage and retirement planning, relocating across the border presents a mix of complexities, challenges, and opportunities. Differences in taxation, currency exchange, and legal structures can significantly impact your financial well-being if not properly addressed.

To navigate these complexities, it is crucial to seek guidance from a qualified cross-border financial planner who can help you optimize your financial strategy, avoid costly mistakes, and ensure a smooth transition. Whether you are moving for work, retirement, or personal reasons, proactive financial planning will provide peace of mind and set you up for long-term success in your new home.