[oob]

Does anyone have experience with tax exposure unregistered investments on moving to the U.S.?
As far I as understand, you're pay capital gains tax in Canada as if you had sold all your investments, and the price when you move is your new basis.
Does the same thing happen when you move back to Canada?

Also, I've heard that the TFSA is not recognized/disadvantaged in the U.S. Is the best course of action to fully liquidate/pull out investments?
What are the tax implications of starting an IRA and 401k then moving back to Canada?

 

[Guban]

The capital gains on departure sounds correct.

Holding Canadian investments while living in the US may be a problem. The TFSA wold be treated as a foreign trust, and not only would you have to pay taxes on gains, but you would face nasty reporting requirements. You would have to file form 3520 and 3520A. Not fun! Just get rid of your TFSA before you leave. You can always by them back, if you end up returning to Canada. This assumes that you don't become a US citizen or green card holder.

Most Canadian mutual funds are also unfavourable to hold for a US person. They are considered Passive Foreign Investment Corporations. As such you may face punitive taxes on unrealized capital gains. Look up PFIC and see the reporting and taxation that the IRS requires filers suffer.

 

[james4beach]

I'm in the US too (for work). First thing you should carefully consider is whether you've actually become a resident of the US. For example I'm still a resident of Canada, with a permanent home in Canada, and nothing has changed with my Canadian nonregistered investments. TFSA, RRSP etc continue as normal. When I file US taxes next year, it will be a 1040NR as a non-resident alien.

If you don't have a home in Canada any more then yeah, you're probably on your way to becoming a US resident for tax purposes although this is a grey area. Things like your "intentions" are important for determining where you should be a tax resident. If you really expect you'll be back in Canada in a couple years, then you should probably maintain your Canadian tax residency. Because of the income tax treaty between these countries, it's not just a matter of where you are physically residing. You can spend the whole calendar year in the USA and still be a resident for tax purposes in Canada, if your ties are closer to Canada and you have a home there.

When Guban says "holding Canadian investments while living in the US may be a problem" he means they're a problem if you're now filing taxes as a US resident. Yes, if you're a US tax resident then you really should sell all your cdn mutual funds and ETFs since the IRS considers these exotic, and also close your TFSA.

Myself, I really don't want to do that which is another reason I am maintaining Canada as my permanent residency, and where I file primary taxes.

For the 401k, there's a penalty if you remove it from the USA. You will have to forfeit 10% of the 401k.

 

[james4beach]

I'll also reiterate Guban's point about citizenship and green card: try to avoid those things if you can.

Americans have some of the most ridiculous tax burdens in the world. If you become a US citizen, you're going to have life long pain with taxes even if you move countries (e.g. if you move back to Canada). This is what US citizens living in Canada suffer from, for example people who moved here as kids and now suddenly discover that they're facing tens of thousands $ in IRS penalties.

My coworker is a US citizen who has lived in several countries. Everywhere he goes, he has never-ending pain trying to get the right documentation to report back to the IRS. It's expensive and stressful and you can face tremendous fines if you screw up. The USA is one of the most aggressive tax jurisdictions in the world and once you're a US citizen, the onerous reporting requirements will follow you around the globe.

 

[oob]

I'll also reiterate Guban's point about citizenship and green card: try to avoid those things if you can.

Americans have some of the most ridiculous tax burdens in the world. If you become a US citizen, you're going to have life long pain with taxes even if you move countries (e.g. if you move back to Canada). This is what US citizens living in Canada suffer from, for example people who moved here as kids and now suddenly discover that they're facing tens of thousands $ in IRS penalties.

My coworker is a US citizen who has lived in several countries. Everywhere he goes, he has never-ending pain trying to get the right documentation to report back to the IRS. It's expensive and stressful and you can face tremendous fines if you screw up. The USA is one of the most aggressive tax jurisdictions in the world and once you're a US citizen, the onerous reporting requirements will follow you around the globe.

Very helpful James. Thank you. I didn't realize that foreign income tax obligations were for Green Card holders as well as citizens.
On maintaining Canadian residency, I thought the determinant for residency was the substantial presence test?
As a non-resident alien, are you exempt from social security payments? They are seemingly much more onerous than CPP payments back home.

 

[james4beach]

By the way I'm not an expert here, in fact I plan on seeing a US/Canada tax expert this summer to update my knowledge, I advise you to do the same!

On maintaining Canadian residency, I thought the determinant for residency was the substantial presence test?

Somewhat true. But form 8833, invoking the Treaty and "tie-breaker" rule overrides the substantial presence test. So 1040NR with 8833 lets you maintain Canadian tax residency despite substantial presence test. To be able to invoke this override I think you need the following in Canada: a permanent home, center of vital interests, and citizenship

As a non-resident alien you will stay pay social security off your paycheque. I doubt you can opt out of it.

Remember that even if you're a non-resident alien, and even if Canada remains your tax home, you still must file timely returns to the US (you can't just ignore the paper work). You'll also have to file FBAR disclosure of foreign accounts which doesn't actually accompany your tax return.

 

[james4beach]

An additional note. Working in the US and maintaining Canadian tax residency may result in slightly higher total taxes beind paid. What I'm suggesting is not the way to absolutely minimize your taxes. Personally I still prefer to go this route because I don't know how long I'll be in the US and I didn't want to disrupt all of my investments in Canada... this lets me keep things as is, and later I can still switch to US tax residency if it seems better. In my case I think that keeping cdn tax residency offers the better tradeoff for hassle.

Also note:
Canadians are taxed based on residency, whereas Americans are taxed based on citizenship

 

[oob]

Thanks. This has been very informative. Certaintly a lot of moving parts to think about...
It sounds like I will probably end up maintaining Canadian residency as you did, since it's hard to tell exactly how long a move would be for.

Just to confirm, if I maintain say QC tax residency and work in NY, then I would have to pay the incremental taxes to the QC gov.
If I maintain AB tax residency and work in California or NY, them the positive difference doesn't come back to me, correct?

 

[james4beach]

Quebec might be a special case so I don't want to guess about them.

The way foreign tax credits work (I think) is that you're supposed to get a tax refund from the US when you file your 1040NR, if you've over-paid.

Canada won't pay you back for excess taxes you've paid to the US. I don't fully understand this either, can anyone help answer this? Yeah what happens if you're paying a ton of taxes to California but your tax residence is in Alberta?

How does one balance that out to avoid overpaying taxes?

 

[kcowan]

I think you should read the tax treaty. As I understand it, you get a credit on your federal tax for overpaying in the US. There are no other loopholes. And this is federal tax only.

 

[Guban]

If you file a 1040NR plus the corresponding state return, if applicable, you will settle up with the applicable governments and collect your refund(s) or pay any extra taxes outstanding. Your US income is included in your worldwide income when you file your Canadian T1 General. The final tax bill (not taxes withheld) are used to calculate the foreign tax credit. The FTC is used against federal taxes first and if there is any left, against provincial taxes. Any unused FTCs are wasted. Note that there is a sequence that the non refundable credits are used, and you may be forced to use up things like tuition/education amounts before applying the FTCs. Also, check out the timing. One or two US returns must be done before the Canadian can be completed. As oob pointed out, there are a lot of moving parts.

Like James, I am describing all provinces other than Quebec, as I have no experience with them, and the other provinces seem to be more consistent in their tax rules.

Keith, if you overpay US taxes, you must get it from the US and/or the state. Canada won't and should not reduce our taxes because of an overpayment to a foreign country.

 

[Guban]

The Canadian FTC form is T2209, and the provincial one is the T2036.

 

[kcowan]

Keith, if you overpay US taxes, you must get it from the US and/or the state. Canada won't and should not reduce our taxes because of an overpayment to a foreign country.

Agreed. But they will credit the US 15% tax withheld toward your Canadian balance due. This is not overpaying. It is covered by the treaty.

 

[Eclectic12]

... One or two US returns must be done before the Canadian can be completed...

I'm not sure I'm understanding this correctly (unless the process has changed?) ... when I had to file two returns while working for a company, the company had tax folks to do the returns.

Best I can recall, the tax folks had me do my Canadian return as I would normally but instead of submitting it, I handed it over to them.
They then tweaked the Canadian return and filled out a US return. I signed both and sent them off, the same day.


Cheers

 

[Guban]

If you filed a 1040, then there are numbers that are transferred both ways, and the US and Canadian returns should be prepared at the same time. For the 1040NR, only the foreign tax credits would have to be finalized on the T1. Maybe this is what you are referring to as tweaking.

 

[Eclectic12]

It sounds more like a 1040 as they talked about needing the certain numbers on both ... but since it was only one year and it's been a while ... so I'm not sure.



Cheers

 

[BC Eddie]

I think you really should consult with an expert in this area because I believe some of the advise in this thread may not be correct and it could make a big difference in what is the best tactic to use.

For example, I lived and worked in the US for 6+ years. All during this time I continued to own (and rent out) our home in Toronto. I still had RRSPs and non-registered investments. I paid US taxes as a US resident and at a rate that, at that time, was significantly lower than Canada (this was the main reason to file as US resident). However, we did sell and re-buy RRSP stocks to establish their worth at time. We had to make sure to rent our home with a two year lease so we could not easily move back in. The key is to reduce as many ties to Canada as possible (cancel Canada credit cards, memberships, etc.) so that Revenue Canada does not see you as a Canadian resident.

 

[AltaRed]

I think you really should consult with an expert in this area because I believe some of the advise in this thread may not be correct and it could make a big difference in what is the best tactic to use.

For example, I lived and worked in the US for 6+ years. All during this time I continued to own (and rent out) our home in Toronto. I still had RRSPs and non-registered investments. I paid US taxes as a US resident and at a rate that, at that time, was significantly lower than Canada (this was the main reason to file as US resident). However, we did sell and re-buy RRSP stocks to establish their worth at time. We had to make sure to rent our home with a two year lease so we could not easily move back in. The key is to reduce as many ties to Canada as possible (cancel Canada credit cards, memberships, etc.) so that Revenue Canada does not see you as a Canadian resident.

i quibble with only one point in your post....

I paid US taxes as a US resident and at a rate that, at that time, was significantly lower than Canada (this was the main reason to file as US resident).

You do not have a choice in that matter. The tax treaty determines which country you are a tax resident of.... and in your case, it would have been the USA anyway. The exceptions are when the various tie breakers would keep you a tax resident of Canada, e.g. working single status and leaving family in Canada, etc.

 

[james4beach]

It's not cut and dry based on the treaty. Depending on circumstances, it can very much be a grey area.

There have been countless court cases over such border-line cases and if you look over the rulings, there's a very wide variety of criteria that they consider when determine which jurisdiction someone should have been considered a tax resident in.

The past rulings offer some guidance about the important factors (according to the courts) that point them one way or the other. Things like home, family, and location of most of your interests (business, investment, even personal circles) seem to be the big ones.

 

[BC Eddie]

i quibble with only one point in your post....
You do not have a choice in that matter. The tax treaty determines which country you are a tax resident of.... and in your case, it would have been the USA anyway. The exceptions are when the various tie breakers would keep you a tax resident of Canada, e.g. working single status and leaving family in Canada, etc.

Understood - I did not mean to imply I could choose to file as US resident. In our case we did everything out International tax accountant advised in order to be considered as a US resident, for tax purposes, and not a Canadian resident.