A record number of Americans were looking to leave the United States, with 26 per cent of those polled last year who would like to move looking to Canada as their country of choice. That’s up from 12 per cent in 2016, according to a Gallup survey conducted last month.
These statistics are consistent with what we are seeing in our practice. Over the past few years, we’ve seen a significant increase in the number of Americans interested in moving to Canada and in Canadians living in the United States who want to return home.
Whether you are returning to Canada or moving here for the first time, it takes more than a warm winter coat to fully protect you from all the challenges – and to reap the benefits – of living in this country. There will be government-funded health care, lots of hockey and, most likely, higher taxes. Below is a primer on a few of the key issues that Americans moving to Canada should consider.
Higher tax rates
Although there are exceptions, tax rates are generally significantly higher in Canada than in the United States. For example, residents of Washington State and Florida pay a top marginal tax rate of 37 per cent while residents of Ontario and Quebec pay top marginal rates of nearly 54 per cent.
Also, couples in the United States can reduce their tax rate by filing joint returns. In Canada, income-splitting opportunities are fewer, and are limited to income from pensions and registered retirement income funds. One strategy U.S. citizen couples moving to Canada should consider is to gift income-producing assets from the higher-income spouse to the other spouse prior to the move. This strategy will allow them to achieve income-splitting in Canada and thereby lower their overall tax bill.
It is important to understand that the Internal Revenue Service will continue to tax U.S. citizens on their worldwide income after their move to Canada. In addition, Canada will also tax them on their worldwide income. This means that U.S. citizens living in Canada must file tax returns in two countries every year. Fortunately, in most situations, they will be able to rely on the Canada-U.S. tax treaty to avoid double taxation. However, some tax traps can cause major problems for U.S. citizens living in Canada, such as investing in tax-free savings accounts, registered education savings plans, and Canadian mutual funds or exchange-traded funds.
U.S. retirement accounts
Another key issue to analyze prior to moving is how to handle U.S. retirement accounts such as 401(k)s and individual retirement accounts (IRAs). Most Americans have been putting tax-deferred money away in these accounts for years, sometimes decades. Fortunately, the Canada Revenue Agency allows residents of Canada to continue to benefit from tax deferral while funds remain invested in U.S. retirement accounts. That doesn’t mean, however, that it’s best to simply leave funds in U.S. accounts after moving north of the border.
Other options include withdrawing funds before you move to Canada or converting U.S. retirement funds into what’s known as a Roth IRA to take advantage of lower U.S. tax brackets before moving. Another potential solution involves moving U.S. retirement funds into a registered retirement savings plan. Moving your U.S. retirement funds into an RRSP can be a tax-neutral event, but if done incorrectly or if certain conditions are not met, it can trigger significant double taxation of retirement funds.
Estate planning should also be considered whenever you change residency. Many Americans have transferred assets like their personal real estate and investment accounts into revocable trusts to avoid probate when they pass away. Under U.S. law, a revocable trust is a flow-through entity for tax purposes; however, the Canadian tax system takes a different view. Often, it makes sense to wind up these trusts prior to moving to Canada and to develop a new estate plan that considers both Canadian and U.S. issues.
U.S. business interests
Americans who have business interests must also be aware of another important issue before moving north of the border. Many Americans hold their business interests in hybrid entities such as limited liability companies (LLCs) or alternatively, what are known as S corporations. These structures allow taxpayers to pass through their business income to themselves personally. Since the Canadian taxman doesn’t recognize these hybrid entities, Americans who move to Canada and retain business interests via these entities will be subject to a cross-border taxation mismatch: The CRA will tax income from U.S. hybrid entities as corporate income while the IRS will continue to tax such income personally. Americans who hold these business interests and are considering moving to Canada should seek out professional cross-border advice to restructure their ownership in the optimal way before the move.
Matt Altro is the president and CEO of MCA Cross Border Advisors Inc. and a certified financial planner in Canada and the United States. David Altro is the managing partner of Altro LLP, which specializes in cross-border tax and estate planning, real estate and immigration and has offices in Canada and the United States.