Important Issues to Consider When Clients Move to, Invest in or Retire in Canada

Americans immigrating to Canada for the first time, whether for employment or retirement, need to consider the following:

? Once they move to Canada, U.S. citizens must continue to file U.S. income tax returns, as well as Canadian tax returns, even though all of their income may eventually be coming from Canadian sources. They will receive credits for taxes paid to the U.S. on their Canadian return, but they still must file tax returns, as per usual, with the IRS to be able to claim the credits and avoid double taxation on their income.

? U.S. citizens heading to Canada with IRAs, 401(k) plans or other qualified plans will, on average, need to pay significantly more income tax when they withdraw income from these plans. The Canada/U.S. Tax Treaty provides very good benefits if these IRAs and qualified plans are rolled over to a Roth IRA before a move to Canada.

? Income tax on investment portfolios can increase dramatically when the U.S. taxpayer becomes a Canadian taxpayer. Investment income that was tax-free or tax-deferred in the U.S. will become fully taxable when in Canada. Capital gains in most Canadian provinces are taxed at slightly higher rates than in the U.S. One must also watch out for potential double tax situations that can arise when living in one country and disposing of a capital asset located in another country.

? U.S. residents immigrating to Canada with bonuses, severance payments, vacation pay and/or deferred compensation earned in the U.S., but not yet collected, should delay immigration and collect this income while still a U.S. taxpayer to avoid paying higher Canadian rates on this income.

? Americans immigrating to Canada will continue to qualify for U.S. Social Security and Medicare at 65 (or will continue to receive benefits if they are already receiving them) while they are in Canada, providing they are qualified under U.S. rules before leaving the United States. Under the Canada/U.S. Tax Treaty, when individuals collect U.S. Social Security benefits in Canada, 15% of the benefit will be tax-free and the balance is taxed at Canadian rates. In most cases the tax paid on Social Security income will be higher in Canada than if a person remained in the U.S.

? American citizens working in Canada and participating in IRA/401(k)-type deferred income plans such as Registered Retirement Savings Plans (RRSPs) or employee sponsored pension plans cannot assume they will receive a U.S. deduction or are exempt from paying tax on income earned in these plans. The Canada/U.S. Tax Treaty has complex rules that Americans working in Canada need to follow to get a U.S. tax deduction for contributions made to a Canadian retirement plan. The deduction is only available for the first five years of employment in Canada.

? If clients continue to own U.S. life insurance policies that accumulated cash values after they move to Canada they need to be aware of how the Canadian Revenue Agency (CRA) will tax these plans. The CRA will only allow the tax-deferred accumulation of income in a Canadian-exempt insurance policy.

The CRA requires Canadian residents to report annually and pay taxes on the growth of any U.S. insurance policy under the foreign investment entity rules, using the mark-to-market approach. This means they will pay income tax annually on income earned inside the U.S. insurance policy. Consequently, if your clients are still insurable at reasonable rates, they may want to consider replacing their U.S. life insurance policies with Canadian insurance policies, as needed, once they are a Canadian resident.

? A similar problem to the life insurance policies noted above occurs when Americans move to Canada with a variable or fixed annuity. The CRA requires Americans to annually pay tax on interest, dividends or realized capital gains earned inside an annuity. This will create a potential double tax problem for many Americans owning these plans unless they cash them out or convert them to a monthly annuity before they move to Canada.

? Americans wishing to give up U.S. citizenship when immigrating to Canada need to follow complex IRS rules before the expatriation occurs.

Americans investing in Canada to purchase a retirement cottage or other real estate need to consult with a cross-border financial planner or an attorney to ensure they meet all Canadian requirements and that their estate plan is duly modified to accommodate all of the foreign jurisdictional issues created by owning foreign real estate.

Getting Help

To assist clients moving to Canada, U.S. planners should consult publications that offer guidance on this topic. And they should consult with a professional experienced in the movement of people and assets back-and-forth across the U.S./Canadian border. Things can get very complex very quickly.

Bob Keats, CFP, MSFP, RFP, is president of Keats, Connelly and Associates, LLC, Phoenix, Ariz. He is also author of "The Border Guide: A Guide to Living, Working and Investing Across the Border." You may e-mail him at Bobk@keatsconnelly.com.