Coming to Canada

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.

The new Canada Child Benefit

Family support payments overhauled

Being a parent is the quintessential labour of love, though every parent knows that raising a child is costly.

And every government knows it too, which is why the provision of support to young families has long been a feature of public finance. But opinions on the manner of providing that support vary from time to time, from person to person and from one political party to the next.

This debate was front and centre in last year’s federal election campaign, so it was no surprise that the Liberals took action to change things up in their very first Budget. The new Canada Child Benefit (CCB) makes the first of its monthly payments on July 20, 2016.

Programs being terminated

To fully appreciate the changeover, parents and their advisors need to know what’s going away as much as what’s coming. This is not merely an exercise in purging acronyms from the lexicon; it helps in understanding who is affected, why (from the governing party’s perspective), and how much it will impact household budgets. In this last respect, it should inform the family’s monthly budgeting and longer term financial planning, including establishing adequate education savings.

The CCB directly replaces the following support programs that will make their final payments in June, 2016:

Canada child tax benefit (CCTB)
National child benefit supplement (NCBS)
Universal child care benefit (UCCB)

Introduction of the CCB will also have an impact at tax filing time:

The family tax cut (the income splitting tax credit worth up to $2,000) is eliminated after 2015,
The education tax credit and textbook tax credit are eliminated after 2016, and
The children’s fitness and arts credits are halved for 2016, and eliminated after 2016.

Rationale for the CCB

Taken together, the CCTB, NCBS and UCCB included taxable and non-taxable amounts, some of which were income-tested and others not. In addition to it being relevant who received the payments, this required consciousness of latent tax obligations, coordination with other benefits and catering to particular family circumstances. For example, at tax filing time a single parent would have to decide whether to report UCCB income personally, as income of the child for whom the UCCB was received, or as income of any eligible dependant.

Vis-à-vis the programs it replaces, the CCB is positioned as being simpler, better-targeted to those in need, and more generous to those most in need.

All CCB payments are tax-free, neutralizing income reporting complications. With income and expenses denominated in the same way – i.e., both after-tax – there is no mystery whether or how much tax will be due the next April, and no need to keep a reserve for the purpose. Accordingly, assembling a household budget becomes a more manageable exercise, and again the family’s financial advisor can play an important role in pulling that together.

Income-testing applies to all potential CCB recipients. According to the government’s calculations, families with income under $150,000 will receive more through the CCB as compared to the current system, on average receiving $2,300 more.

Table – Canada child benefit phase-out and adjusted family net income thresholds

What families can expect

Of course no family is average, whether talking CCB or otherwise. What is relevant for an actual family is the number of children, their ages, and the total household income – or technically “adjusted family net income” (AFNI).

The full entitlement is $6,400 per child under the age of 6 and $5,400 per child for those aged 6 through 17. These amounts are reduced by the percentages shown in the table, as AFNI crosses the $30,000 and $65,000 income thresholds. To recognize the additional costs of caring for a child with a severe disability, there is an additional amount of up to $2,730 per child eligible for the disability tax credit. The phase-out of this additional amount begins at the $65,000 income level.

To illustrate how this operates, assume that a family has two children ages 4 and 7, and AFNI of $90,000. Their base entitlement is $6,400 + $5,400 = $11,800. The 13.5% clawback applies to the income from $30,000-$65,000 and 5.7% to the excess $25,000. That’s a total reduction of ($4,725 + $1,425) = $6,150, leaving them with $5,650.

Fortunately, the family does not have to do the calculation themselves. The entitlement is calculated by the government based on the information in parents’ tax returns filed each April. Allowing for tabulation time, the program cycle runs from the following July to June of the next year. In the meanwhile, parents can get a rough idea by using the CCB Calculator http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html that was launched when the Budget was tabled in March.

Estate and capacity planning for vacation properties across borders

When I was a boy, we had a modest cottage a couple of hours out of the city. Just getting there was an adventure, as my parents piled six kids and a dog into a Datsun 510 — with no air conditioning.

These days, it is not uncommon to have a vacation property in another province or outside the country altogether. Whether that’s a family getaway, a snowbird retreat, or a new Canadian continuing to hold property ‘back home’, our society lives across borders like never before.

With this modern mode of living comes complexity, particularly when it comes to estate and capacity planning.

Wills and estate transfers

Generally a Canadian Will is effective to deal with a person’s real property (real estate) in the home province, and personal property wherever it may be. In order to deal with real estate elsewhere, the Will would have be proven to the satisfaction of the courts/law in that other jurisdiction. While this is not an impossible task, it presents some additional cost, time and potential uncertainty.

With that in mind, it may be desirable to plan ahead by executing a second Will in that other jurisdiction. In so doing, it is crucial that the second Will doesn’t inadvertently revoke the person’s main Will, or otherwise alter distribution. Accordingly, there must be an open dialogue between the lawyers in the two jurisdictions.

Discussions with the foreign lawyer should include gaining an understanding of tax obligations (currently and for the estate), and legal responsibilities of the executor. This may necessitate adjustments in the home Will, or at least some informal guidance. Alternatively, it could lead to naming a distinct second executor, with appropriate allocation of powers and constraints between the two. This knowledge may even affect the owner’s longer term intentions for the property.

Incapacity while owning or being abroad

Arguably, the estate transfer is the easy situation as compared to having to respond to a crisis while an owner is living. While an estate transfer is a property matter, there are both property and personal issues that can come up while a person is living, with attendant greater urgency.

Powers of attorney (POAs) and powers of attorney for personal care (PAPCs) have been a recommended part of the estate planning process for decades now. And while it is usually intended that the power may be exercised wherever the grantor or property may be, challenges can crop up when foreign jurisdictions are involved.

Some jurisdictions require these documents to be executed in a prescribed form, include specific language or otherwise be constrained in some manner that may be at odds with the home jurisdiction’s rules. Even if there are no such formal impediments, there can be delays (and associated costs) as individuals, health care workers and businesses assure themselves of their obligations — perhaps even requiring them to seek their own legal advice before being able to take instructions.

As with Wills, it may be desirable to have parallel documents drawn up in the foreign jurisdiction in order to expedite action at critical times. In addition to the provisos about guarding against revocation and having open communications, some further questions should be canvassed:

Can the same person be named in both jurisdictions? Are there practical/logistical/linguistic concerns that may lean toward naming a different person in the foreign jurisdiction?
What events may cause an appointment to be revoked (eg., marriage, separation, bankruptcy)? If such rules differ between the jurisdictions, how will that be reconciled?
What is the scope of the attorney’s activity for each of the jurisdictions? Where there is a gap, how will this be handled?
If it is intended that the home jurisdiction attorney have ‘final say’, is this possible under the foreign jurisdiction’s rules? How can an attorney be removed?
Is compensation allowed/required/prohibited, and do the planning documents together guard against double compensation?
What checks are there to assure appropriate accounting and accountability for each attorney’s actions?

Cross-border developments

These concerns have been attracting greater interest in recent years, with two major developments worth noting.

In the summer of 2015, the Uniform Law Conference of Canada tentatively approved a uniform law on cross-border recognition of powers of attorney for both property and health care, health care instructions and similar documents. The Uniform Law Commission in the United States approved its draft in 2014. Provinces and states that incorporate the recommendations into their domestic law will enable their residents’ documents to be effective in all reciprocating jurisdictions.

In the area of estates, as of August 17, 2015, a new cross-border succession regulation is in force in the European Union (except Denmark, the U.K. and Ireland). It affects European citizens and residents, and European property held by non-residents. Canadians should consult with their lawyer whether any action is required on their part.