by Naomi Gerbatsch and Jeff Piha
With the topic’s recent popularity, we thought it would be interesting to take a look at the tax implications of moving to Canada.
First, it’s important to understand the basics: It is almost impossible to avoid US taxation, even if you move away from the United States. What that means is that the US taxes all US citizens and permanent residents on their worldwide income, regardless of their location. The good news is there are measures you can take to mitigate double taxation.
Some basic things to know:
- Canada is a foreign country – do not assume anything you know about taxation is correct the second you cross the border. Talk to a Canadian tax expert.
- Check your due dates. Canadian tax returns are due by April 30th for the year prior or any portion of it from January 1st to December 31st and there are no extensions!
- Moving to Canada will require more forms in the US- which means that your tax return will be more complicated and most likely MUCH more expensive.
- In Canada you’ll be taxed differently depending on whether you become a resident. Non-Residents living in Canada are taxed on their Canadian source of income only. Residents are taxed on all worldwide income but are potentially entitled to foreign tax credits for non-Canadian source income.
- Using the Foreign Earned Income Exclusion, a US person can claim a credit on the Canadian income taxes imposed on Canadian-sourced income on their US return. Under this exclusion:
- A US citizen or resident alien who lives and works abroad may be able to exclude all or part of their Canadian salary, along with compensation for their personal services or certain Canadian housing costs when filing their US federal tax return.
- There are requirements necessary to meet in order to qualify for this exclusion. The taxpayer must have a tax home in Canada and earned income received for working outside the US. The taxpayer must also meet a residency test.
- The amount of income available for consideration in this exclusion is adjusted annually for inflation. In 2016, the maximum exclusion is $101,300 of earned income per U.S. taxpayer. Couples filing married filing jointly could benefit from two exclusions if each spouse has earned income.
- Tax Credits may be available…but only if you file a Canadian tax return, even if you have no income to report. There are a litany of credits available to Canadians that can only be claimed on an income tax return.
- Many experts recommend avoiding Canadian Mutual Funds and Canadian Income Funds due to high tax rates on excess gains, interest rates and differences in return of capital for US vs. Canada.
For a complete listing of Canadian federal and provincial/territorial tax rates visit http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html
Things to Consider before you move:
- Tax status and immigration status do not go hand in hand. Do your research. Canadian tax is based on residency- so the date you chose to become a Canadian tax resident is of importance.
- While most of the time this date is determined by residency, there are other factors that can affect it including: your spouse/common-law partner’s residency, where your Health Insurance is located, and where your personal property is registered among others.
- As a Canadian resident, you will be taxed on your worldwide income. This can really increase your costs, as tax rates are higher in Canada than most countries in the world.
- If you do not give up your US citizenship (and it is hard to expatriate for tax purposes), you will still be subject to all the tax requirements imposed by the IRS. What this means is that you could be subject to a litany of tax requirements that are exceedingly costly from both a tax perspective and a compliance perspective (i.e. your tax return will double or triple in preparation costs!)
- The biggest, most common items to avoid are non-U.S. mutual funds and Canadian Tax Free Savings Accounts and Registered Education Savings Plans. Speak to an expert before making any investments outside the U.S.
- Plan Carefully. You will want to avoid Canadian taxation on any payments received after you become a resident. It will most likely benefit you to receive all income coming to you before establishing residency- as you may be able to claim a foreign tax credit (though you will be subject to Canadian tax rates.)
- Canadian tax rules may affect any foreign stock, equity compensation plans, foreign pension plans, and social security systems to which you continue to contribute. These pitfalls can be avoided by good tax planning and expert advice.
- Carefully consider your investment portfolio before making the transition. There are both US and Canadian implications on investments. A cross-border tax specialist can help you determine whether it is best to sell investments before you take on residency.
*The contents of this article are generalizations taken from a number of sources. We recommend that you consult with a tax professional before making any financial decisions. Sweeney Conrad has international tax experts in house who would be happy to discuss your international tax concerns.
