U.S. persons living in Canada could benefit from COVID-19 government relief packages on both sides of the border – and financial advisors can help these clients determine where they might be eligible for help.
Both the U.S. and Canadian governments have introduced a series of financial support measures to help working people, business owners and retirees cope with the economic fallout of the public health crisis including job losses, business closures and a steep drop in stock markets.
For U.S. persons in Canada, many of whom have been hit hard by changing tax measures under the Trump administration, it’s a unique circumstance in which they may benefit from both national programs, says Matt Altro, president and chief executive officer at MCA Cross Border Advisors Inc. in Montreal.
“U.S. citizens in Canada often have the worst of both worlds from a tax perspective. This is one time when they’re going to be able to benefit from payments in both countries,” Mr. Altro says.
The U.S. government has put forward three coronavirus-related economic relief packages to date under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act ), including non-taxable stimulus cheques for U.S. persons, including those living abroad, U.S. residents and green-card holders.
Individuals with a social security number will get US$1,200 if they made US$75,000 or less, while married couples will receive US$2,400 if they make less than $150,000 combined. Families will also receive US$500 for each dependent child under age 17. Payments will decrease by US$5 on every US$100 over the US$75,000 or US$150,000 thresholds up to US$99,000 or US$198,000 – at which point they’re phased out entirely.
U.S. persons don’t need to apply to receive the cheques, but must have filed a tax return for either the 2018 or 2019 taxation year to qualify, says Elena Hanson, managing director and founder of Hanson Crossborder Tax Inc. in Oakville, Ont.
They’re eligible if they received income of more than US$2,500 a year in 2018 or 2019 in any country from either employment, self-employment or through a pension.
“If you don’t have qualifying income, you may still be eligible for a stimulus cheque if you meet either the tax liability test or the gross income test,” Ms. Hanson says.
However, dependents with individual taxpayer identification numbers are not eligible for the program, she says.
U.S. persons working in Canada may also be eligible for the $2,000 monthly Canadian Emergency Response Benefit (CERB) payment offered by Ottawa, Ms. Hanson says.
And while U.S. persons won’t have to pay taxes on their U.S. stimulus cheques in the U.S., the funds will be treated as taxable in Canada, similar to the CERB. They will also be taxed for their CERB on their U.S. tax returns “because Americans are taxed on a worldwide basis, irrespective of where they reside, unless the income is statutory, regulatory or Treaty exempt,” Ms. Hanson says.
U.S. persons who haven’t filed their taxes in 2018 or 2019 aren’t eligible for the U.S. government cheques, which Mr. Altro says includes some living in Canada.
There could also be an issue for U.S. persons in Canada who filed their taxes in 2018 or 2019, but not in previous years. Although they’re required to complete a personal income tax return each year to report and pay U.S. taxes on their worldwide income, some don’t, Mr. Altro says.
Those who haven’t filed taxes in the past or reported their non-U.S. financial assets as required under the foreign bank account reporting laws could face stiff penalties, he says.
“If you submit just one year the [Internal Revenue Service] may ask, ‘Where are your returns for the other years?’” Mr. Altro says. "You have to make sure you do it the right way.”
Although the US$1,200 per person relief cheque might not seem like much, especially if past tax bills are a lot higher, Mr. Altro says getting compliant with past returns could be beneficial down the road if there are additional stimulus packages.
“[This] US$1,200 isn’t life-changing, but that could double or triple over the next few weeks or months,” he says. "The sooner [U.S. persons get updated on their taxes] the better if they want to be part of this payment.”
Terry Ritchie, director of cross-border wealth services at Cardinal Point Capital Management Inc. in Calgary, says there are also benefits for U.S. persons with retirement plans such as an individual retirement account (IRA) or 401k – including those living in Canada.
For example, he says U.S. persons under the age of 59.5 can take money out of their IRA or 401K this year without paying the 10-per-cent penalty that would otherwise apply – regardless of where they live. They will have up to three years to repay the distribution to the retirement account, or they can choose to spread the income from that distribution over three years or include it in their 2020 income, he says.
"While this benefit would be dealt with tax-effectively on the U.S. side, it's still unclear as to how the CRA [Canada Revenue Agency] would consider the distribution from a Canadian tax perspective," Mr. Ritchie says.
The U.S. CARES Act also removed the required minimum distribution (RMD) from IRAs and other retirement plans for 2020.
“This is a good tax result for the American-in-Canada taxpayer as they’ll be able to defer the income distribution for this tax year,” he says. “[It’s also] good because markets have tanked and you don’t want to take money out at a lower value if you don’t have to.”
Mr. Ritchie says the RMD benefit is more favourable than Ottawa’s move to reduce the mandatory withdrawal rate for registered retirement income funds distributions by 25 per cent for 2020.
U.S. persons who took out distributions from their IRA or other U.S. retirement plans this year will be allowed to return the money to their tax-deferred account if they choose. However, he notes that those who inherited IRAs and already took distributions aren’t eligible to return the money into the account.
Mr. Ritchie says advisors should review the relief programs closely with clients and watch for any further moves or amendments.
“The CARES Act is going to be pored over in detail in the coming weeks and months,” Mr. Ritchie wrote in a recent note to clients. “But for now, let’s hope that it provides some economic relief during one of the most difficult periods in our financial lives.”