Should I move to the US and what are the pros and cons?
We have Canadians telling us all of the time that they would like to spend more than six months a year in the US, but they are concerned that they can’t for a number of reasons. We want to discuss the most common concerns and why becoming a US resident (Canadian nonresident) is typically a good thing for Canadians.
The first thing we want to explain is what moving to the US and becoming a resident means. People frequently think that when they move to the US they have to live full-time in the US. I guess that depends on what someone believes full-time means, but what it means from a tax point of view is that a person must generally live in the US at least 183 days each year; that person can live in Canada the other 182 days of the year if they wish.
The person should also consider giving up other social, provincial and residential ties to Canada as evidence that the person’s intent is to no longer reside in Canada. Those ties can include changing the car registration and driver’s license from Canada to the US, notifying Canadian financial and government institutions that you are a nonresident of Canada and a resident of the US, obtaining US health insurance, and joining and participating in US social and/or religious clubs and organizations.
Becoming a US resident means that you are no longer a Canadian resident, which means primarily three things; 1) you will lose your provincial health care (and need to purchase US health care), 2) you will be subject to a deemed disposition of your assets (an exit tax), and 3) you will no longer be subject to Canadian tax on your worldwide income. We will address each of these separately.
Loss of Provincial health care
As everyone knows, the cost of provincial health care is paid for through tax dollars. Once you exit Canada and are no longer paying Canadian taxes, you will no longer be eligible for Canadian health care; that only makes sense. In case you have not heard, some Canadians have been prosecuted for using the provincial health benefits after they have exited Canada.
There have been many horror stories about the high cost of US health insurance. The problem comes in part from exaggerated stories of the high cost of US health care and in part from the false perspective that Canadian health insurance is free. The cost of buying US health insurance can vary substantially depending on a number of factors such as where the person lives, your age and your health, but a person can expect to pay on average US$700 to US$1,000 per month. The Affordable Care Act (aka Obamacare) requires that every person in the US to have health insurance. You can visit the website for more information at www.healthcare.gov. Note, that you can get health insurance even if you are 65 or older.
On the other side, a person can expect to save, as a rule of thumb, one-third on his or her annual tax bill, as well as other potential savings. One of those areas for savings is the fact that Old Age Security (OAS) will not be clawed back as a resident of the US, regardless of a person’s earnings. As of July 1, 2016, the maximum monthly OAS benefit is C$573.37 and the income level for clawback is C$119,512, according to Service Canada. For the most up to date amounts, go to Service Canada. Once the person is eligible for US Medicare, the premiums are US$411 per month for part A and between US$104.90 and US$389.80 per month for Part B (2016). Note that in most cases, if you do not sign up for Part B when you are first eligible, you will have to pay a late enrollment penalty for as long as you have Part B.
Canadian Deemed Disposition
Upon exiting Canadian, a person is required to file and pay a final income tax on income accrued up to the date of exit, and capital gains on the person’s assets, with generally three exceptions, 1) principle residence, 2) Canadian real estate, and 3) Canadian retirement accounts. Two things that should be kept in mind are that this is not an additional tax, it is simply an acceleration of the tax that would be due at death and with proper planning the tax burden can be reduced substantially. Not all planning strategies are available in all circumstances and not all strategies are appropriate in all circumstances, however in many cases the tax burden on exit can be half or less than without planning.
No Longer Subject to Canadian Tax
Most countries impose their tax system only on its residents and not on its citizens abroad, like the US does. That means when a person is no longer a resident of Canada they are generally no longer subject to Canadian tax. The person will still be subject to nonresident withholding on income derived from Canada such as pensions, dividends and rental income. It is this fact that provides a window of tax planning opportunity for those moving from Canada to the US.
Pros and Cons of moving to the US
– Spend more time in the US
– Easier travel between countries
– Tax savings in most cases
– Generally lower cost of living
– Additional hassle in the beginning
– Cost of immigration attorney/fees
– Upfront expenses of planning, moving, etc.
The professionals at KeatsConnelly have written a number of books on the subject of moving to and living in the US. Go to www.crossborderbooks.net to read more about why the US is Canada’s best tax haven. You can also visit the KeatsConnelly website at www.keatsconnelly.com.
Specific book titles are:
To discuss your individual circumstances, you can email us at email@example.com or call us toll-free at 800-678-5007.
Who is your competition?
Because our parent company, Keats, Connelly and Associates (KeatsConnelly), is the largest wealth management firm in North America specializing in assisting Canadians and Americans in realizing their dreams of a cross-border lifestyle, we feel that no single firm can match our range of services and expertise. There are firms that may be able to address some of the concerns such as taxes or immigration, but few, if any, other firms can address your overall situation with specialists in so many areas. When moving across the border, it may be possible to go to specialists for advice in each area but there will be no one to coordinate the process, which can cause serious problems. Doing the right things in the wrong order can be just as bad, or worse, than not doing them in the first place; you need a plan and KeatsConnelly can help.
What services do you offer?
While Cross Border Tax & Accounting offers only US and Canadian tax planning and preparation; through KeatsConnelly, we offer cross-border financial planning, investment management in the US and investment management in Canada.
KeatsConnelly offers professional investment management and cross-border consulting/financial planning in four areas; 1) Canadians looking to move to the US, 2) Canadians already living in the US, 3) Americans looking to move to Canada, and 4) Americans already living in Canada. Client assets typically range from US$2 million to US$100 million. On a limited basis, we may take on smaller one-time projects that would be billed on an hourly basis or on a fixed fee project basis.
Cross Border Tax & Accounting (CBTA) is limited to Canada-US tax planning and preparation. CBTA can prepare all US and Canadian tax returns. When time allows, we also consult on various tax planning issues such as expanding your business across the border, Canadians buying real estate in the US, the transfer of employees across the border. All of these services are based on our hourly professional rates, with the minimum consultation fee being US$350, for a half-hour consultation. If you feel your question is easy and you do not need a consultation you can purchase Buying Real Estate in the US: The Concise Guide for Canadians.
Can I become a dual citizen of Canada and the US?
The US State Department says this about the subject. “The concept of dual nationality means that a person is a citizen of two countries at the same time.” Each country has its own citizenship laws based on its own policy. Persons may have dual nationality by automatic operation of different laws rather than by choice. For example, a child born in a foreign country to US citizen parents may be both a US citizen and a citizen of the country of birth. Here is a link to the US Embassy in Canada.
A US citizen may acquire foreign citizenship by marriage, or a person naturalized as a US citizen may not lose the citizenship of the country of birth. US law does not mention dual nationality or require a person to choose one citizenship or another. Also, a person who is automatically granted another citizenship does not risk losing US citizenship. However, a person who acquires a foreign citizenship by applying for it may lose US citizenship. In order to lose US citizenship, the law requires that the person must apply for the foreign citizenship voluntarily, by free choice, and with the intention to give up US citizenship.”
I have a large and complicated financial situation. My Canadian advisers tell me that I can’t afford to leave Canada; is that true?
On the contrary, those with high incomes and large estates are the people that would benefit the most from moving to the US. What your advisers are most likely referring to is the deemed disposition tax that must be paid upon death and leaving Canada permanently. Upon exiting Canada, Canada Revenue Agency requires that you report all of your gains and losses realized but not reported (unrealized capital gains), up to the date of your exit, on your final Canadian tax return. There are two exceptions to the reporting of unrealized gains when leaving Canada; they are; gains in Canadian real estate and the assets in your registered accounts (referred to as “taxable Canadian property”). Keep in mind that paying the deemed disposition tax upon exiting Canada, is not an additional tax, you are simply prepaying the taxes you would have paid throughout your life and at your death.
So while you will have to pay a deemed disposition tax when you leave Canada, the amount of the tax can, in many situations, be deferred and/or reduced through proper planning. That is where we come in. Strategies for reducing the deemed disposition tax run the gambit, from the very simple to the very complex. We will work with you to determine the best solution for your situation.
Robert (Bob) Keats talks about this issue in his book, A Canadian’s Best Tax Haven: The US.
How does US tax filing differ from Canada?
There are a couple of ways that filing in the US is different than in Canada. The one that is most notable is that in the US, married couples can, and usually do, file one joint return. Another big difference is the number of deductions that can be taken in the US. Gross income and taxable income are much closer together in Canada than it is in the US. The last big difference is that the filing deadline is April 15th, rather than April 30th. However, the US allows you to file for an extension of time to file until October 15th. You will have to file Form 4868 to ask for the extension, but the extension is automatic. The only catch is that you will have to pay the amount of tax owing by April 15th whether you file for extension or not. It is an extension of time to file, not an extension of time to pay.
The US also has many special elections that can be made that apply to Canadians moving to or living in the US. These elections are many times obscure and complicated. You should have a professional that is accustomed to working with Canadians prepare your return so that your Canadian income is reported correctly and the proper elections are made.
There is a chapter in Taxation of Canadians in America that describes the US tax system and allows you to compare the two systems.
Should I leave my RRSP/RRIF/LIRA in Canada or bring it to the US?
There is no one right answer to the question of whether you should leave your registered accounts in Canada or not. However, you should consider the following things when deciding on what to do with your registered accounts:
- Currency fluctuations
- Additional tax preparation expenses
- Higher costs of investing in Canada verses the US
- Potential double taxation at death
There are strategies to reduce the tax on your registered accounts and to utilize the foreign tax credits generated when cashing them out.
Through KeatsConnelly we offer an RRSP analysis that is designed to compare the estimated after-tax value of your registered accounts in various scenarios such as cash them out immediately and bring the after-tax proceeds to the US, keeping the accounts in Canada as long as possible, taking the periodic withdrawals beginning immediately and a lump-sum at some time in the future. We also explain the tax implications and tax filing requirements. The fee for this analysis is US$3,500.
In the book, The Border Guide, Robert (Bob) Keats discusses RRSPs in some detail, including the pitfalls of leaving your RRSP in Canada.
Can I roll my RRSP over into an IRA or 401(k)?
The short answer is no. Just as in Canada, the US has specific rules that must be followed for its qualified (registered) plans. Canadian registered plans do not meet the requirements for a US qualified account; therefore money coming from a Canadian registered account cannot be directly invested (rolled over) into a US qualified account such as an IRA or 401(k).
I am an American citizen living in Canada; do I need to file US taxes?
Yes, US citizens must file US tax returns regardless of where they live or where the money is earned. The US is only one of two countries in the world that basis its taxation system on citizenship rather than residency.
Not to fear, too much. As a Canadian resident, you will normally pay more tax than in the US; therefore, filing and paying tax in the US will not increase your overall tax. Foreign tax credits will generally prevent you from paying double tax.
If you have been living in Canada as a US citizen and have not been filing US returns, the IRS may allow you to get caught up without the severe penalties that would normally apply through its Offshore Voluntary Disclosure Program. Because you have been living in Canada, you would normally not owe any US tax, so it would simply be a matter of filing the returns and continuing to file. If you are in this situation, we suggest that you get current as soon as possible. If the IRS discovers that you have not filed and comes after you, all bets are off; the IRS can impose all of the sanctions they have at their disposal, including jail time.
You may also be subject to additional tax filings such as Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts and Form 3520-A – Annual Information Return of Foreign Trust with a U.S. Owner. US Treasury form FinCEN 114 – Report of Foreign Bank and Financial Accounts must be filed electronically. These and other specialty forms may be required when filing your return. Some of them have different filing deadlines and are sent to different mailing addresses. The penalties for not filing these (and other similar forms) can be extremely severe. If you find yourself in a position where you have not filed these forms, do not attempt to handle this yourself, contact a professional with experience in international tax.
If I do not have a visa or green card, how long can I legally stay in the US?
The rules are different from an immigration and tax perspective; for example a Canadian on a visitor’s visa can stay in the US for up to a year, whereas from a tax perspective, you cannot be in the US for more than 182 days in any one year without begin subject to US taxes on your world income. Rather than confuse you with both sets of rules, the one set of rules you always have to keep in mind is the tax rules.
From a tax perspective a foreign national is presumed to be a nonresident alien unless he or she passes one of the two tests of being a resident alien. Those tests are:
- Lawful Permanent Resident Alien card, a.k.a. Green Card, or
- Substantial Presence Test – must be physically present in the US for at least:
- 31 days during the current year, and
- a total of 183 days over the last three days where:
- all of the days in the current year, plus
- one-third of the days in the preceding year, plus
- one-sixth of the days in the second preceding year
Example: Days in the US
2014 was 90, divided by 6 equals 15 days
2015 was 120, divided by 3 equals 40 days
2016 was 135, divided by 1 equals 135 days
The total number of days according to the formula is 190, which exceeds the 183 day threshold and generally means you were a resident for 2016.
In the above example, because you were not in the US for 183 days in 2013 (you passed part one of the test), but only failed part two of the test, you are able to claim a closer connection to Canada than to the US by filing IRS Form 8840, and avoid being a US resident. Remember, you must file Form 8840 every year and if you ever exceed 182 days in any one year, you are generally a US taxpayer and cannot use Form 8840.