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Americans Living in Canada: How the IRS impacts your Investment Strategy

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So you are one of the invisible aliens living in Canada – you walk and talk like a Canadian;  you enjoy watching hockey, maybe have joined a curling club, and the word “eh” has crept into your vocabulary no matter how much you try to stop it.   Maybe you are a permanent resident, maybe you are even a Canadian citizen; however as long as you are a US citizen or possess a US green card, the IRS continues to have an impact on your financial choices.
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Most Americans living in Canada file an annual 1040 with the IRS and feel like they have complied with the reporting requirements.   Because tax rates in Canada are higher than those in the USA, filing the tax return probably didn’t cost you any additional taxes because the foreign (Canadian based) tax credit offset anything you owed to the IRS. So you’ve done your job, big check on the IRS box, right?

Not quite. Here are a few ways that the IRS and their filing requirements affect your investment strategy in Canada:

  1. TFSA (Tax Free Savings Accounts) – one of the new and popular tools in Canada which allows you to invest after tax dollars and earn income (whether interest, dividends or capital gains) tax free in Canada.   However, the TFSA was introduced after the last US/Canada Tax Treaty was signed; so it was not covered under the treaty.   Instead they are treated as “grantor trusts” in the USA, requiring extra reporting and subject to US taxes.
  2. Foreign (ie., Canadian) Mutual Funds and ETFs are considered Passive Foreign Investment Corporations (PFIC) by the IRS.   When held outside of an RRSP, they are subject to a tax and interest regime.   This extra regime applies when a distribution or gain is 125% of the average distribution for the prior three years.  There are options requiring extra tax filing that may overcome this issue, however the extra paperwork can be onerous and the tax consequences severe depending on the situation.  It is typically not in your best interest to invest in foreign (ie., Canadian) mutual funds or ETFs.    One way to avoid the issue:   invest directly in the stocks and bonds rather than in funds.
  3. Foreign (ie., Canadian) bank account reporting of your Canadian bank accounts has become increasingly complex.   You are required to submit both a FBAR to the US Treasury (if your aggregate value exceeds $10,000), and a Form 8938 to the IRS (if your balance was greater than $200,000 on the last day of the year or greater than $300,000 at anytime during the year).
  4. Dividend, Interest Income or Capital Gains – Investment income is treated differently between the two countries (eligible dividends vs ineligible dividends; ordinary dividends vs qualified dividends, short-term vs long-term capital gains, tax-free interest income vs taxable income).   Your investment strategy needs to consider the tax consequences in both countries to ensure you do not end up with unexpected tax costs.

 

This is just an introductory review of how the IRS impacts your investment strategy.   There are many strategies that can be employed to minimize your taxes in Canada and the USA depending on your circumstances.   Please consult with a tax accountant specializing in US taxes to help address your particular needs.   And please consult with a financial advisor you trust and who is experienced in the complexities for Americans investing in Canada.

Gail Cosman, after living 8 years in Connecticut, returned to Canada in 2006.  Her husband is both an American citizen and a Canadian permanent residence.   For the last 7 years they have dealt with the increasingly complex tax and reporting requirements from the USA.   They have learned from personal experience the impact the IRS has on investment strategies.    Gail works with Americans in Canada to reflect the tax consequences of both US and Canada in their investment strategies.

Lorne Zeiler
Written By:
Gail Cosman
Senior Wealth Advisor
Gail can be reached by email at gail@tridelta.ca or by phone at
(905) 399-2035

Welcome Home!

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Are you a Canuck residing in the US, but planning to return to Canada?

We have had many inquiries recently from Canadian citizens living in the US, who are considering moving back to Canada, wanting to know their options.  There are many things to consider before returning home.

While Canada offers many wonderful things to those returning home, such as safety, great public services, freedom, being close to family, seeing old friends and a system you can trust. It is also a move back to the land of taxes, rules and regulations, rain and snow. Whatever your reasons for returning, there are many things to understand before making this move.

The biggest question is Why do you want to move back to Canada?  The answer to this involves learning about what is important to you – what you want life to offer you and what changes you are willing to make and what costs you’re likely to incur if moving to Canada is the right choice for you.

Once you have answers to the following questions, you will be able to make a more informed decision:

Where do you plan to settle in Canada. Different provinces offer different amenities, services, and taxes. Will you buy or rent. Did you know that only Canadian sources of income are considered for a Canadian mortgage.

Understand the changes to your tax situation. How will your income be taxed, do you need to file  tax returns in both Canada and the US and for how long? Understand when you are deemed a resident and the tax consequences of this. Have you done a before and after tax comparison. How will a move affect your estate plan.

Prepare your finances. Prepare a summary of Lifestyle expenses. What costs more, what costs less and determine if you can afford the move and changes. Did you know you may be able to combine US Social Security and the OAS payments. Is this the right option for you. How does this fit with your capital preservation goals.   Are assets joint for estate purposes. If you have a foreign Pension, can it be paid into a Canadian account. How will you access these funds.15882723_s

Do you have a US green card? Should you keep it and what are the implications of this.

Do you have insurance i.e. life, disability and/or long term care? If so, is it good for services in Canada, or only within the USA.

Will you keep funds outside of Canada? What are the implications of this.

Do you have pets?  Understand what is required to bring these into Canada.

Do you have a drivers Licence and vehicle? Can you  “convert” your current licence to a driver’s license in the province you will be living in. Can you bring your car with you. You can only import cars from the U.S. and only under certain conditions.

Understand Health Care in Canada. Know the rules in different provinces. There is no coverage for the first 3 months if you move to British Columbia, Ontario, Quebec, or New Brunswick. Other provinces do not require a waiting period. You may need to buy 3 months of health insurance in Canada or go three months without health insurance. You assume the risk and potential costs of any health issues that come up within that time period.

Research the availability of medical services. What are the services and availability of a family doctor in the area where you want to live. Some doctors in are not taking on new patients. Some services have a 3 to 6 m delay.

Friends?  If you have made deep friendships in the U.S., you will have to make new friendships or renew old ones in Canada. The older you get the harder it is to make significant friendships. Is it worth coming back to Canada?

Quality of Life. Will your quality of life and bottom line improve by moving to Canada vs. the US. What are you are giving up. Some feel Canada is expensive, cold, and dark in the winter. Some things do cost more , such as taxes, gas and groceries, however other things may cancel that out, such as not having to pay for costly health insurance premiums and deductibles and at 65, receiving minimally costing drugs.  Only you can determine your cash flow and what makes sense for you.

As long as you have weighed your options and know what the bottom line looks like, the next step is to make the decision about returning home.

Regardless of your choice, TriDelta Financial can assist you in managing your assets on both sides of the border and connect you with a team of mortgage, tax, investment and legal specialists to assist you in making your transition smoother.

Heather can be contacted by email at heather@tridelta.ca and by phone at (416) 527-2553.

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