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Financial planning for Canadians moving to the U.S. is a complex process that requires careful 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 liabilities, penalties, 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.
Immigration
Many Canadians are aware they can generally enter the United States for visits of up to six months. However, those exploring longer stays require an appropriate visa, green card, or U.S. citizenship. When planning for your move to the U.S., you’ll want to ensure you understand the details of your visa and whether it supports a path to permanent residency as well as your options in the event your employment ends. TN visa holders, for example, typically only have a 60-day grace period to secure a new job to avoid loss of legal status. It will also be important to confirm whether your spouse and/or children will be eligible for employment in the U.S. under your visa, or if they would need to obtain their own.
A well-defined immigration plan is essential for making informed decisions about your stay in the U.S. It not only helps you determine the appropriate actions to take (and avoid), but also ensures compliance with visa regulations and long-term residency requirements. Additionally, a clear plan facilitates open communication with your employer, allowing you to align expectations, address any sponsorship or work authorization needs, and secure a stable path toward establishing permanent residency or citizenship. Proper planning can help you navigate legal complexities and set a strong foundation for your future in the U.S.
Healthcare
The health care systems in Canada and the U.S. differ significantly in structure, funding, and accessibility. While both countries provide high-quality medical care, their approaches to health coverage and costs set them apart. Where Canada’s health care costs are funded through taxes, the U.S. primarily relies on a private health care system with insurance coverage provided by employers, government programs (e.g. Medicare, the Affordable Care Act), or individual purchases. As a Canadian moving to the U.S., it can be surprising to learn there is no universal health care and unfortunately millions of Americans remain uninsured.
If you’re moving to the U.S. for employment, it’s likely that you’ll be eligible for an employer group health plan and, if so, it’s important to understand the inclusions and exclusions of your coverage and what your options are upon retirement or termination. If you’re not eligible for an employer plan, you still have several health insurance options available to you which depend on your income, age, and eligibility. In either case, you’ll want to ensure that you and your family have sufficient health insurance in place prior to becoming U.S. resident as your existing Canadian health insurance will no longer be effective.
Tax Residency
The U.S. and Canada have fundamentally different tax systems when it comes to determining who owes taxes. The U.S. uses a citizenship-based taxation system, while Canada follows a residency-based taxation system. This means Americans must file U.S. tax returns no matter where they live, while Canadians can avoid Canadian taxes if they sever residency ties. This can lead to significant tax savings as Canada is a relatively high-tax jurisdiction, with marginal tax rates exceeding those in the U.S.
Severing residency ties with Canada is easier said than done, with the Canada Revenue Agency (CRA) given the authority to determine your tax residency status based on your residential, social, and economic ties to Canada. Those who want to sever residency ties and stop being considered Canadian tax residents must take steps to clearly demonstrate that they have left Canada permanently, as well as file a final Canadian T1 tax return for the year of departure in which they state their exit date.
It is important to note that many Canadians inadvertently maintain their residency ties after relocating to the U.S., deeming them a resident of both countries for tax purposes. To address this issue and avoid complications such as double taxation, Article IV (2) of the Canada-U.S. Tax Treaty can be utilized to determine your tax residency as either Canadian or U.S. (but not both) through a series of sequential tiebreakers which consider:
- Where you own or rent a home;
- Your centres of vital interests like family and social relations, occupation, political/ cultural/other activities; and place of business; and
- Time spent in each country.
Canadians who have moved to the U.S. can request a Determination of Residency Status by completing Form NR73, in which the CRA will review your situation and confirm whether you are still considered a resident for tax purposes. That said, filing an NR73 is optional and could lead to increased scrutiny. Therefore, many tax advisors recommend avoiding it unless necessary.
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Departure Tax
Once your departure date is determined and stated on your final Canadian tax return, you may be subject to departure tax, which is a deemed disposition of your worldwide assets (similar in nature to the deemed disposition which occurs upon death in Canada).
Fortunately, many assets are exempt from departure tax and do not trigger a deemed disposition, including:
- Canadian real estate (primary residence as well as any rental properties, vacation homes, or even vacant land)
- Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs)
- Locked-In Retirement Accounts (LIRAs) and Locked-In Income Funds (LIFs)
- Tax-Free Savings Accounts (TFSAs)
- First Home Savings Accounts (FHSAs)
- Registered Education Savings Plans (RESPs)
- Deferred Profit-Sharing Plans (DPSPs)
- Personal use vehicles (unless they have significant value as a collectible)
- Employee stock options (although these may be taxed later when exercised)
On the other hand, assets that are subject to departure tax include:
- Taxable (non-registered) investment accounts
- Shares in private corporations
- Foreign real estate and investments
- Certain personal use property valued at over $10,000
Assets subject to departure tax are deemed to be sold at fair market value on the date of departure. The arising tax liability is due April 30th of the following year. If you are subject to departure tax when leaving Canada, you may be able to defer the payment by filing Form T1244 with CRA. This election allows you to postpone paying tax on deemed capital gains until you dispose of the asset or pass away, although CRA requires security in the form of a bank guarantee, letter of credit, or lien on property. This election is only available if the total departure tax liability exceeds $16,500.
Article XIII (7) of the Canada-US Tax Treaty provides an optional election that applies to all assets subject to Canadian departure tax. This election allows the deemed disposition value of these assets, determined at the time of departure from Canada, to become their cost basis for U.S. tax purposes. As a result, it effectively increases (or ‘steps up’) the cost basis of your assets without requiring an actual sale. This adjustment helps prevent double taxation by ensuring that the IRS does not tax the same portion of the gain that has already been taxed by the CRA.
Investment Options
Managing your investments on either side of the border has never been easier, thanks to modern technology and the wealth of resources available to individual investors. Both the U.S. and Canadian financial markets offer a wide variety of investment products, catering to investors with different risk tolerances and financial goals. Mutual funds and exchange traded funds (ETFs) are popular in both countries, with ETFs gaining more traction as investors increasingly shift towards evidence-based investing through low-cost, globally diversified index funds.
However, while Canadian mutual funds and ETFs may comprise the bulk of your current portfolio, these securities are deemed to be Passive Foreign Investment Companies (PFICs) by the IRS and come with both punitive tax treatment and complex filing requirements. Therefore, pre-exit portfolio repositioning is often recommended to avoid PFIC rules from applying. Fortunately, U.S. mutual funds and ETFs are not classified as PFICs and generally come with lower expense ratios than their Canadian equivalents. In fact, many American investors maintain diversified portfolios with expense ratios of less than 0.10%.
Investors seeking the assistance of a portfolio manager will be pleased to discover that asset under management (AUM) fees are generally lower in the U.S. than in Canada. For some individuals, particularly those who lack the confidence or capacity to manage their own investments, working with a professional can provide both convenience and additional guidance. However, it’s important to note that unlike in Canada, the ability to deduct investment management fees for taxable accounts was eliminated in the U.S. with the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, which may influence the overall cost-benefit analysis of professional investment management. There may be restrictions for portfolio managers who cannot work with residents of the other country, or for investors who cannot buy or trade while a non-resident. Some financial institutions may require a non-resident to close their accounts.
While investment options remain similar, account options do not. Eligibility, taxation, contribution limits, and withdrawal penalties for U.S. investment accounts such as 401k, IRA, Roth IRA, 529, etc. vary significantly from that of their Canadian counterparts. For instance, the Roth IRA is a popular retirement savings account in the U.S. that is comparable to the Canadian TFSA. However, unlike the TFSA, the Roth IRA has income limits that determine who is eligible to contribute and how much they can contribute. Additionally, if funds do not remain in the Roth IRA for a specified period, withdrawals can be subject to taxation and/or penalties.
Other Considerations
In addition to immigration, healthcare, tax residency and departure tax planning, there are many challenges and opportunities for Canadians moving to the U.S. in the areas of personal and corporate tax, retirement, investment, estate, insurance, and education planning. A few common examples include:
- Individuals who own shares in private Canadian corporations may want to consider a corporate reorganization before becoming U.S. residents to avoid the implications of Controlled Foreign Corporation (CFC) rules. A CFC is a foreign corporation in which U.S. shareholders (those who individually or collectively own more than 50% of the company’s voting power or stock value, either directly or indirectly) have control. The IRS classifies Canadian private corporations as CFCs if a U.S. person holds more than 50% of the voting power or total value. Proper planning can help mitigate potential U.S. tax consequences associated with this classification.
- Tax-Free Savings Accounts (TFSAs), Registered Education Savings Plans (RESPs), and First Home Savings Accounts (FHSAs) are not recognized by the IRS nor the Canada-US Tax Treaty. This means that these accounts are not tax-sheltered for U.S. tax purposes, and all interest, dividends, capital gains and/or government grants would need to be reported (in USD) annually on your U.S. 1040 income tax return.
- Some states, such as California, do not adhere to the Canada-U.S. Tax Treaty. This can lead to double taxation without the ability to leverage foreign tax credits. Additional planning, such as the pre-exit crystallization of all unrealized capital gains across registered and non-registered accounts, may be beneficial in these circumstances.
Conclusion
This article has highlighted only a few of the numerous financial factors Canadians should consider when planning a move to the U.S. 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.
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