With all the issues that arise for US citizens living in Canada, the idea of renouncing US citizenship is a common one. Perhaps these individuals came to Canada as young children, and are only now learning about their neglected US tax obligations. Others may have moved here as adults and are fed up with ever expanding compliance obligations.
All US citizens have the right to renounce their citizenship through a formal process at a US consulate. Generally, two appointments are required, during which the Consular official is required to confirm that renunciation is being done voluntarily and with a clear understanding of the implications of doing so.
In addition, the Immigration and Nationality Act specifies conduct that can result in a loss of citizenship. Such conduct is broadly worded in the law to include swearing an oath of allegiance to another country, serving in a foreign military and accepting high-level employment in a foreign government. However, the US Supreme Court has imposed a requirement that such acts be done with the present intention of relinquishing citizenship. Consequently, the US Department of State will presume that retention of citizenship was intended when, for example, a US citizen becomes naturalized as a Canadian citizen. The burden of proving intention to relinquish citizenship rests with the party alleging that citizenship was lost.
Since 2008, a special tax applies to US expatriates who meet certain criteria including a net worth of greater than $2 million, or an inability to certify tax compliance for the previous 5 years. So-called “covered expatriates” must pay a “mark-to-market” capital gains tax as though all assets were sold at fair market value immediately prior to losing their citizenship. Additional tax applies any time a covered expatriate makes a gift or bequest to a US person after renouncing.
As a consequence of the tax impacts of expatriation, careful planning is advisable to ensure that the benefits of doing so outweigh the costs. Attorneys at Altro LLP can assist in this analysis and develop pre-expatriation plans to minimize the consequences.
AMERICAN RESIDENTS MOVING TO CANADA
Whether an American citizen is moving to Canada or a Canadian citizen who is resident in the US is moving back to Canada, there are many factors that necessitate careful planning and consideration.
Our expert financial planners at Altro LLP’s affiliated entity MCA Cross Border Advisors have expertise is helping clients make a smooth and effective transfer to Canada. Special care is required in planning for the transition and once the move is made further expertise is required to ensure the US citizen in Canada stays compliant with the far-reaching grasp of the Internal Revenue Service (IRS). The US is one of only two countries in the world that taxes its non-resident citizens on worldwide income, at the same rates and in the same manner as its residents. This means that even after a successful transition to Canada, the US citizen must still file a US non-resident tax return and maintain other often-complex filing requirements. The asymmetric nature of the differing tax jurisdiction requires expert planning both prior to and once the move is made cross border. Many questions need to be answered as one prepares to move. Should I keep my current residence? Can I transfer my 401k and IRA plans? What happens to my social security benefits? Will I be eligible for Canadian pension benefits? Will I be eligible for a permanent residence card?
The US citizen in Canada faces unique challenges and working with MCA Cross Border Advisors we can help ensure a smooth transition and we can also help you structure your situation to ensure a less complex existence in your new country of residence. Some specific strategies and plans available to Canadian residents are not optimal for the US citizen resident in Canada. For example, the US does not recognize the tax-exempt nature of the TFSA. Therefore, while the American in Canada would not have to pay tax to the Canada Revenue Agency (CRA) on holdings within a TFSA, when they file their US taxes the IRS will consider any income taxable. In addition, because of the nature of the account, further onerous reporting is required. The US also has special rules regarding Passive Foreign Investment Corporations (PFICs) and these rules increase the need for special planning surrounding the types of investments that Americans in Canada should be holding in order to minimize prohibitive tax and reporting requirements.
Whether our clients are considering a move to Canada or are already living in Canada and wanting to ensure compliance with applicable laws, the teams at Altro LLP and MCA Cross Border Advisors along with our external partners, work with clients to help avoid pitfalls and plan for opportunities.
With the possibility of assets on both sides of the border, our professionals work with clients to ensure the implementation of an integrated estate plan that considers all of the cross border factors. Our experts will create a plan that analyzes all of the relevant factors and formulates recommendations to optimize the cross border estate. Special trust vehicles may be available to ensure assets pass outside an individual’s probate estate and could carry other benefits beyond probate avoidance. These same trusts may also help eliminate estate tax that could be owing.
Our clients who are moving to Canada are concerned with the efficient transfer of their estate to the intended beneficiaries and understand there are further complexities when adding a cross border move. Working with Altro LLP and our team of experts gives them peace of mind knowing their estate planning goals can be reached even when considering their unique situation.
A cross border financial plan creates a roadmap for clients as they embark on a cross-border move, starting with recommended steps to mitigate adverse and often unintended tax consequences that can arise. In addition, our experts are able to recommend strategies and structures that can optimize our clients’ situation as they transition to their new country of residence.
There are certainly many similarities between these two great countries; unfortunately this can often mislead people into feeling their personal situation is simple. However, dealing with two very different tax jurisdictions leads to even the most seemingly simple situation being embedded with many complexities that require thorough analysis. Our clients have many questions and concerns. Are there tax consequences of keeping my investments or other property in the US? How will they be taxed in Canada? Will I be required to file US tax returns? Are there other reporting requirements? Are there forms I need to file with the Internal Revenue Service (IRS) before I leave? Should I use a pre-entry trust prior to departure?
A cross border financial plan can help answer these and other pertinent questions, it will also identify other tax planning opportunities that may be available in order to optimize each individual’s situa
Our experts have gained experience in advising clients on the optimal strategies in regards to their different retirement accounts. 401k, 403b, SIMPLE IRA, IRA, Roth IRA, these are an example of the different retirement savings plans that Americans may hold and require strategic planning for in order to optimize their situation. While Canada does offer plans with similar features, there are many considerations that require special attention and careful planning in order to avoid costly mistakes.
Canada’s Income Tax Act does allow the transfer of benefits of some US retirement accounts. Depending on the plan holder’s age and the rules governing the US plan, the plan can be collapsed and a lump sum transfer be made to a Canadian RRSP. Under the tax code, only funds that are individual contributions are eligible for transfer. Meaning, there are no provisions in the tax code to allow a tax deferral for employer contributed funds within a US plan. While the opportunity to transfer to an RRSP and continue deferral may exist, with a pending move to the higher taxed Canada, a liquidation strategy prior to departure may be an option to explore.
Our professionals analyze the facts specific to each client’s situation in order to recommend and implement a plan that will address these concerns and maximize available planning opportunities.
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