Canadians are making a run for the border like never before, a migration that's triggering a rash of financial planning issues for investors with dual citizenship.
"The Canadian currency is near all-time highs, there's depressed real estate (in the U.S.), especially in the Sun Belt, and Baby Boomers are starting to retire," says Dale Walters, CEO of Keats, Connelly and Associates, a Phoenix-based wealth management firm specializing in cross-border moves.
From a financial point of view, most people with a reasonable net worth would save a considerable amount of money by locating south of the 49th parallel, Walters says. First, income taxes in the U.S. are two-thirds those of Canada. Second, Old Age Security is clawed back in Canada, but it's not in the U.S. Finally, cashing in your registered retirement savings plans (RRSPs), the Canadian equivalent to 401(k) plans, can result in considerable savings in the U.S.
Taking the money out of the RRSP in one fell swoop would trigger a maximum 25% tax hit but if it's done gradually, the tax falls to 15%. In Alberta, Canada's fastest-growing province, that rate could be more than 40%, Walters says.
"You'd save tons of money (in the U.S.). Canadians have most of their savings in RRSPs. Withdrawing them in the U.S. could save them hundreds of thousands of dollars, depending on the (starting) amount," he says.
Cross-border financial planning is increasingly showing up on the radar screen of Canada's dominant financial services players, led by the brokerages owned by the Big Six banks--RBC Royal Bank, BMO Bank of Montreal, Scotiabank, CIBC, Toronto Dominion Bank, and National Bank. Also with a significant share of wallet are mutual fund giants like Investors Group, which has its own proprietary sales force, and AIM Funds Management Inc., which is sold through third-party salespeople.
There is also a small but growing segment of boutique brokerages which focus almost exclusively on high-net-worth investors.
Pick Your Tax Poison
Tannis Dawson, senior specialist of tax and estate planning at Winnipeg-based Investors Group, says that while you can have dual citizenship, you can only be a resident of one country for tax purposes. For Canadian snowbirds, the threshold is 183 days in the sun--exactly one day more than half a year--before they'd have to file a U.S. tax return.
Even if they stay longer, they can still maintain Canadian residency by filling out a so-called "closer connection" form, Dawson says, which looks at where your family, automobile, and personal belongings are based, as well as where you can vote and the government that issued your drivers' license.
She says the easiest thing to do is maintain Canadian residency for tax purposes so you don't have to file a U.S. tax return. There can be serious consequences if you are required to file one but have neglected to do so, she says.
"If you try to cross the border, they can hold you there and require you to file the return. You could even go to jail," she says.
Moving to the U.S. also imposes restrictions on Canadian investment accounts, Dawson notes. You can sell securities and take money out of them but you can't buy any investments or transfer assets into the accounts.
"If one mutual fund (in your Canadian portfolio) is going down and you wanted to get out of it, you couldn't," she says.
Estate Planning Made Complicated
Canadians relocating permanently to the U.S. should also consider having their wills redone, Walters says.
"Some things are state-law specific. (Foreign wills) can be a mess that people don't want to deal with or pay for. You'll have more attorneys involved on both sides, which gets to be time consuming and expensive," he says.
With real estate values plunging in many areas of the U.S., Canadians, armed with dollars at par, are finding bargains like never before. They'll also, however, find themselves in an unprecedented sea of red tape. For example, there is a $60,000 exemption from U.S. estate taxes on vacation homes. On a $500,000 property, that leaves $440,000 subject to the tax.
Walters says many people attempt to reduce estate taxes by putting the ownership of their new property in the name of a Canadian corporation. Unfortunately, that means they have to file a foreign corporate tax return.
"You could be paying double the tax--income tax in the U.S. and corporate tax in Canada," he says.
The best way to avoid double taxation is to use a limited liability partnership, which is recognized on both sides of the border as a flow-through entity, he says.
Geoff Kirbyson is a reporter at the Winnipeg Free Press and an IA contributing editor, who has been following the financial services industry on both sides of the border for 12 years. He can be reached at firstname.lastname@example.org.