What to know about US investments before you move to Canada
Moving to Canada from the U.S. can be a daunting task, and not understanding the tax and financial implications for your U.S. investments can be dangerous. In this article, we'll examine what you need to know about your investments before you move to Canada.
Your revocable trust might need to be wound up
Revocable trusts are often used in the U.S. to help transfer assets to the next generation and to avoid U.S. estate tax. Under U.S. tax rules, these trusts are often set up as disregarded entities, and any income earned within the trust is automatically taxed to the contributor of the trust.
However, Canadian tax rules for trusts are quite different. When an American moves to Canada with a revocable trust, this trust will likely have to be taxed as a separate entity and will require expensive and complex tax filings. In some cases, maintaining the trust could be an option. However, in most cases, the trust provides no real advantages going forward.
Given the estate tax exemption is quite high currently, Americans would be wise to consider winding up their U.S. revocable trusts before moving to Canada to ensure unnecessary tax complications do not arise.
Try to avoid complex T1135 reporting
Similar to U.S. FBAR reporting, Canada also has foreign asset and income reporting requirements. Under Canadian tax law, if a Canadian tax resident owns non-Canadian investments with a cost basis in excess of $100,000 CAD, they are required to file T1135 forms with the CRA.
T1135 form requirements don't have to be terribly complex to complete, however, if your investments are held outside of Canada, the requirements become significant.
If you hold your U.S. investments within a Canadian investment account, you'll be eligible for the simplified method of reporting.
However, if you live in Canada and maintain your U.S. investments in a U.S. brokerage account, your T1135 filing requirements become exceedingly complex.
For investments in a U.S. brokerage account, you won't be able to report the accounts in aggregate. Rather, each individual position needs to be reported. Not only does each position need to be reported, but you'll be required to track specific cost amounts for each investment that are often not available from your broker.
Moving your U.S. investments to Canada with a Canadian cross-border wealth manager will allow you to avoid this unnecessary complexity.
Many U.S. investments will not work well in Canada
Canadian and U.S. portfolios are often structured quite differently depending heavily on the tax treatment of individual income items. For instance, in the U.S. investments like muni-bonds are popular because of their preferential tax-free nature. However, for Canadian tax purposes, these investments are fully taxable. Another example includes capital gains distributions from U.S. funds that are considered fully taxable distributions for Canadian purposes that do not allow for more preferential capital gain treatment.
Reviewing U.S. investments from both a U.S. and Canadian tax planning perspective is key in order to ensure your portfolio is properly optimized.
ROTH IRA conversion can save significant tax before you move
Americans moving to Canada with investments will often also hold traditional IRA accounts. In the year(s) before you move to Canada, you may be a great candidate for a ROTH IRA conversion. If you find yourself in a situation where your U.S. tax rate in the year(s) before you move to Canada is less than your eventual tax rate in Canada, an IRA conversion can save a significant amount of tax.
For example, converting a $100,000 IRA to a ROTH IRA before moving to Canada at a 15 per cent tax rate and then continuing to allow the ROTH IRA to growth while in Canada (let's assume a tax rate of 25 per cent) will not only allow you to save $10,000 in tax on the original $100,000 conversion, but all the growth in the account after moving to Canada will compound tax free.
We often underestimate the power of future tax savings because the reality of compounding is so significant. If you assume the $100,000 ROTH will grow compounded at seven per cent for 20 years, that's almost $300,000 of additional growth earned tax-free for both Canadian and U.S. purposes. As you can see, some strategic cross-border investment planning before moving to Canada can yield amazing results.
As you can see from the list above, the complexities between both the Canadian and U.S. tax system can result in some inefficient tax situations if not properly planned for. If you have U.S. investments or are planning on moving to Canada, please reach out to our team for your complementary cross-border tax and investment review. Alternatively, you can reach me directly at email@example.com.