As the North American economy continues to evolve, American corporations will continue to expand into Canada, and Canadian corporations will continue to expand into the U.S.
Employees relocating between Canada and the U.S. are faced with many cross border tax implications, regardless of whether they are relocated temporarily or on a permanent basis.
The most pertinent tax planning issue for relocating employees is that the Canada Revenue Agency taxes all Canadian residents on their worldwide income, and the U.S. Internal Revenue Service (IRS) taxes all U.S. citizens on their worldwide income as well, regardless of the fact that such citizens may live and work outside U.S. borders. This situation can lead to double taxation and other tax, estate planning and investment planning traps, just to name a few.
If you are a Canadian relocating to the U.S. to work for an American outpost of a Canadian corporation, or if you are an American relocating to Canada to work for the Canadian arm of a U.S. organization, ideally, you should plan in advance of your relocation in order to avoid common cross border pitfalls and to capitalize on the financial planning opportunities that result from cross border relocation.
Please see below to learn more about your situation and how we can be of service to you.
American Employees Relocating to Canada
Although Canadian income tax rates are generally higher than U.S. rates and there are foreign tax credits available through the Canada-U.S. Tax Treaty, American employees working in Canada may still be subject to unexpected cross border tax traps. For example, U.S. citizens may have put certain estate planning structures in place in the U.S. before they relocate to Canada, such as a revocable trust; revocable trusts may not have any income tax consequences in the U.S., but they do have Canadian tax consequences that can’t be minimized with foreign tax credits.
Other income tax traps exist where income is not taxed in Canada but is taxed in the U.S. TFSAs, RESPs, Canadian mutual funds and ETFs, and income earned inside Canadian universal life insurance policies may be advantageous savings and investment tools for Canadian citizens, but they may not be so advantageous for Canadian residents who are U.S. citizens. Burdensome tax reporting requirements may also exist for Americans living and working in Canada who own Canadian accounts with an aggregate value of more than $10,000.
U.S. citizens who become non-U.S. residents by relocating to Canada may also run into issues with respect to their investment advisor services, as not all U.S. advisors can manage non-resident investment accounts.
As cross border financial planners, we help American employees moving to Canada by analyzing your current U.S. assets and ensuring that you only create and maintain Canadian accounts and investment and retirement vehicles that will be advantageous on both sides of the border.
Our pre-departure cross border analysis service reviews an employee’s complete financial situation, which is key to minimizing the impact of potential tax traps. We establish cross border investment advisory services as needed and create comprehensive, customized financial plans to ensure that your Canadian residency is a positive thing for both your career growth and your financial health.
Those employees permanently relocating from the U.S. to Canada benefit from engaging in cross border financial planning at least 6-12 months prior to relocation. That way, our planners have enough time to analyze an employee’s situation, suggest effective financial, tax, and estate planning solutions in a customized cross border plan, and assist with implementation. To meet with our team, please request a consultation.
Canadian Employees Relocating to the U.S.
Canadian employees who are only temporarily working in the U.S. may nonetheless become U.S. tax residents if they pass the U.S. substantial presence test. If this occurs, the Canadian employee may be exposed to double taxation on certain income, such as income earned inside TSFAs, RESPs, Canadian mutual funds and ETFs, and income earned inside certain Canadian universal life insurance policies. Canadian employees working in the U.S. may even be exposed to Canadian departure tax. Exposure to U.S. estate tax is also an issue for Canadians temporarily relocating to the U.S.
Luckily, there are rules under the Canada-U.S. Tax Treaty that are used to determine a person’s tax residency if they are otherwise in danger of being exposed to double taxation by being deemed a tax resident of both Canada and the U.S. at the same time.
To avoid departure tax as well as the application of U.S. estate tax to worldwide assets, it may be best for a relocated employee’s tax residency to remain in Canada. On the other hand, lower U.S. income tax rates might encourage a clean tax exit from Canada.
As cross border advisors, we engage in pre-departure planning so that treaty rules are applied in such a way that you, the employee, is deemed to be a tax resident of the more tax-advantageous country.
Through the process of creating a cross border financial plan, we help you answer such complex questions as what to do with your Canadian real estate, TFSAs, RRSPs, Canadian mutual funds & exchange-traded funds, Canadian trusts & corporations, Canadian wills, RESPs, and life insurance policies while you are working south of the border.
We calculate your exposure to both Canadian departure tax and U.S. estate tax and work with you to craft structures that assuage the impact of these taxes.
We can also help you establish U.S. investment, estate planning and retirement vehicles if needed.
Many Canadians who relocate to the U.S. are also concerned about health care. One of our most important objectives as your cross border team is to work with your employer to ensure that you have adequate insurance coverage while you work in the U.S. Our goal is to provide you with peace of mind regarding both your physical and financial health.
Those employees permanently relocating from Canada to the U.S. benefit from cross border financial planning at least 6-12 months prior to relocation. That way, our planners have enough time to analyze an employee’s situation and suggest effective financial, tax, and estate planning solutions in a customized cross border plan. To meet with our team, please request a consultation.