How to advise Americans who want to cross the northern border for good
Donald Trump has recently been sworn in as the 45th President of the United States. For some Americans, that prospect may have been too much to bear, as increased traffic volume crashed the Citizenship and Immigration Canada website on election night.
Politics aside, there has long been a regular flow of people across the Canada–U.S. border in both directions, both temporarily and permanently. Regardless of their politics and motivations, all Americans residing in Canada require informed professional assistance with their wealth matters, both before and after the big leap. Here are some key issues to consider.
Renouncing U.S. citizenship?
Also known as expatriation, this is obviously an extreme measure, so all implications for personal liberty and financial wellbeing should be fully understood. While it is not within the licensing of a financial advisor to provide legal advice, an important item to bring to the potential expatriate’s attention is the U.S. expatriation tax.
This tax is invoked if the person is a “covered expatriate,” which may apply if their net worth is more than $2 million (all figures are in U.S. dollars), if their average income over the last five years is more than $160,000 (2015 figure, indexed annually), or their federal tax filing obligations have not been met for the last five years. If any of these apply, all assets are deemed disposed at fair market value the year of departure, forcing tax on realization of gains.
Ongoing tax filing
Assuming the person remains a U.S. citizen, annual tax return filing is required, regardless of residence. And if that person has more than $200,000 in non-U.S. financial assets (including RRSPs, RRIFs or pensions), Form 8938, which discloses details of those holdings, must be included. The annual deadline is April 15, or the next business day if that lands on a weekend or holiday.
There is a separate filing obligation for U.S. citizens holding more than $10,000 in foreign bank accounts. This online form, FinCen Report 114 , the Report of Foreign Bank and Financial Accounts (FBAR), is due by June 30 each year (with no mention of any “business-day” extension in the FBAR guide).
Constraints on investment accounts
An American who has earned income in Canada will be entitled to make RRSP contributions beginning the following year. Prior to 2014, a Form 8891 was required to protect RRSP growth from taxation in the U.S., but the U.S. Internal Revenue Service has eliminated that requirement. However, the aforementioned Form 8938 may still be required if minimum asset thresholds have been reached. Also, note that RRSP contributions are not generally deductible in the U.S., though a U.S. tax advisor may be consulted to determine whether a limited deduction using Form 8833 may be possible.
Many other common Canadian registered plans are not accorded tax-sheltered treatment by the U.S. These include the Tax Free Savings Account (TFSA), Registered Education Savings Plan (RESP), and Registered Disability Savings Plan (RDSP). Not only will the account holder be subject to tax on income and growth (and likely government grants for the latter two), but the information filing requirements can be onerous, and there are associated additional compliance costs.
In terms of non-registered investments, Americans holding Canadian mutual funds may be subject to the punitive passive foreign investment corporation (PFIC) rules. Some of this harm can be alleviated if the fund company provides customized income data (prepared under U.S. tax rules) to be filed with the investor’s U.S. tax return. Even with that, tax counsel with expertise from both sides of the border should be consulted to advise on dealing with non-registered investments.
Pension issues
A U.S. pension is not deemed disposed just because a person takes up residence in Canada, nor even on expatriation. However, a “covered expatriate” may be subject to a higher withholding tax when payments are made in the future, so those rules should be reviewed in this context.
If instead, that new Canadian resident wishes to bring the U.S. pension money to Canada, it can’t be transferred directly, but there is a two-step procedure to obtain RRSP room when a foreign pension is collapsed. (For more detail, see “Come from Away” in our April 2016 issue.)
U.S. gift tax and estate tax
The U.S. gift and estate taxes continue to apply to U.S. citizens who reside in Canada. The gift tax can apply on per-person gifts of more than $14,000 in a year, though many exceptions apply.
The U.S. estate tax may apply to a U.S. citizen who is a resident in Canada on death, though only if the worldwide estate is more than $5.49 million (2017 figure, indexed annually). It’s worth noting that during the election campaign Mr. Trump vowed to repeal this tax, so stay tuned.
Generally, there is no problem advising a Canadian resident with respect to Canadian accounts, within the scope of a financial advisor’s licensing. For assets that remain with a U.S. institution, a discussion with compliance counsel is in order to determine if you have the business capacity and regulatory clearance to proceed.