Canadians looking to move to the United States must consider a number of tax issues as some significant differences, noted below, must be properly planned for to avoid paying significantly higher cumulative taxes.
Income Tax Residency: U.S. persons, which includes citizens and resident aliens, are subject to tax in the United States on their worldwide income. A resident alien is a person who (1) is lawfully admitted for permanent residence; (2) meets the substantial presence test; or (3) satisfies the requirements and makes an election to be treated as a resident. Many Canadians moving to the U.S. are likely to be taxed on their worldwide income.
RRSP: Periodic withdrawals will be subject to 15% Canadian withholding tax but the cost amount of the RRSP investments as calculated on the day Canadians take up residence in the U.S. can be withdrawn tax free.
TFSA: Emigrants can continue to hold a TFSA and pay no Canadian tax on TFSA income. There is tax in the U.S. on any income earned each year in the TFSA as the tax treaty does not protect a TFSA as it does an RRSP.
RESP: Although emigrants can continue to be the subscribers on the plan after they move to the U.S, the annual income earned in the RESP plus any grant or bond money received annually would be taxable in their hands in the U.S. since the RESP is considered to be a foreign trust for U.S. tax purposes.
Capital Dividends: Under U.S. law, dividends follow a certain order of distributions so Canadian capital dividend may become taxable in the U.S.
Canadian Estate Freezes: A typical Canadian estate freeze is exchanging common stock for fixed value preferred stock to freeze the current value of the company for the founder, and pass future growth to the subscriber of new common shares. This technique may not work in the U.S. because preferred stocks are not considered stock in these transactions. The exchange will be taxable in the U.S.
Capital Gain Exemption: The U.S. does not recognize the capital gain exemption.
Allowable Business Investment Losses (ABIL): An ABIL remains a capital loss for U.S. tax purposes.
Principal Residence Exemption: Property must have been used as the principal residence for at least 2 years in the 5 year period ending on the date of sale. The exemption is only up to $250,000.
Stock Options: Benefits from an employee stock-option are taxed at different time in Canada and U.S. Double taxation may occur due to a potential mismatch of foreign taxes for foreign tax-credit purposes.
Flow-through shares: In Canada, flow-through shares allow for the “flow-through” of exploration expenses from resource companies to individual investors. The U.S does not recognize the flow through characteristic of these shares and will disallow the deduction of resource expense.
Pension Income Splitting: Canadian residents can elect to split eligible pension between spouses to reduce total taxes but the U.S. does not recognize the deduction for pension split.
Lottery winning and gambling: Lottery and gambling winnings are taxable in the U.S. Losses, however, may be deductible subject to certain limits.
The taxation of residents moving between Canada and the United States is a complex area, and is likely to remain so. Negative tax consequences can be alleviated (at least to some degree) with proper planning. If you have any questions, please contact our office.
If you have questions regarding provincial residency, please contact us and visit us on the web: http://www.rmtcpa.ca
Rosenswig McRae Thorpe LLP