Professional Athlete
Relocating to the US

US residents who are domiciled in the US, and citizens are all exposed to the US gift and estate tax regime in the same manner. Exposure to this regime, which is different than the Canadian system, requires the execution of tax planning strategies that can be achieved through careful estate planning.

One strategy involves planning for exposure to US gift tax. Gift tax applies at graduated rates of up to 40% on gifts of property with some exceptions for gifts made under a certain amount per year. There is also a lifetime gift tax exclusion amount that is adjusted for inflation each year. However, the unlimited gift tax exemption for gifts made between US citizen spouses does not apply to US domiciles and permanent residents, which necessitates planning prior to departure.

When US domiciliaries and US citizens pass away, federal estate tax is applied to their gross worldwide estate (including some life insurance proceeds) at the same rate as gift tax: up to 40%. (State-levied estate tax may also apply, depending on one’s state of residence.) The federal estate tax exemption is tied to the gift tax exemption such that depleting one’s gift tax exemption during life reduces the portion of a deceased’s gross estate that can be exempt from estate tax upon death.

If estate planning is done effectively, estate tax can be mitigated or even avoided by holding assets in certain vehicles. Rules surrounding the calculation of the value of a deceased’s worldwide estate can be complex, so establishing the correct structures in which to hold assets is important.

Moreover, the unlimited marital deduction that US citizen spouses enjoy, which effectively allows the tax-free transfer of assets from first-to-die to surviving spouse, is not available to non-US citizens. The need to counterbalance this lack of marital credit also necessitates sophisticated cross-border estate planning for high net worth Canadians moving to the US.

When we analyze our clients’ current estate plans, we recommend strategies that they can implement prior to departure. Our primary intention is to help clients protect their assets from estate tax on both the federal and state-wide levels so their estates will be as robust as possible for future generations inheriting wealth.

Unlike RRSP contributions, Canadian Pension Plan (“CPP”) contributions are mandatory payments that are made throughout one’s career in Canada. Our clients are sometimes concerned that they will not be eligible to collect CPP if they are living in the US at the time when they would like to begin receiving payments. Clients have similar concerns about their eligibility to receive Old Age Security (“OAS”) payments from the Canadian government after they become US residents.

Fortunately, non-residents of Canada typically remain eligible for CPP and OAS payments. (It should be noted, though, that in order to receive OAS payments, Canadians living in the US must have lived in Canada for at least 20 years after turning 18.)

Also, our US-resident clients can take comfort in two facts.

First, the IRS treats CPP income more favourably than the CRA does. US residents who receive CPP benefits get a tax break from the IRS: they are taxed on only 85% of the amount received at a lower federal rate than the CRA imposes on Canadian residents, who are taxed on 100% of their CPP income.

Second, Canadian IT professionals who move to the US and work for US companies may make US Social Security contributions; as such, once they retire, Canadian IT professionals may be eligible to receive Social Security payments from the US government.

There are, however, potential cross-border pension payment limitations that may affect Canadian IT professionals who move to the US to continue their careers south of the border. Due to the Windfall Elimination Provision, a US domestic law that allows the US government to claw back Social Security payments of US residents and citizens who earn CPP income, Canadians may not be able to collect the full amount of their US Social Security payments.

We work with our clients to balance the competing cross-border pension rules that may exist in Canada and the US and, moreover, to advise on planning opportunities.

We assist our clients in determining both their short and long-term health insurance needs.

In the short term, Canadian athletes who move to the US are in the fortunate position of being able to join the health insurance plan offered by their employer, the professional sports organization for which they play. However, in order to position themselves to be eligible for Medicare, Canadian athletes hoping to move to the US on a permanent basis need to do some long-term planning centering around immigration.

Eligibility for Medicare begins at age 65 for US citizens and permanent residents/Green Card holders who have been living in the US for at least five years. Athletes who initially move to the US under a P-1 or O-1 visa, two typical pathways to the US for Canadian professional athletes, are not automatically eligible to become permanent residents. It is therefore important for Canadian athletes who move to the US under a temporary work visa like the P-1 or O-1 embark on the path to permanent residency as soon as possible. Setting out on this path will ensure that Canadian athletes moving to the US are eligible for Medicare upon retirement.

Medicare is important because it provides a cost-effective solution to health insurance coverage later in life. If Medicare-eligible US residents have also earned enough credits to be eligible for US Social Security payments (typically achieved by working in the US for 10 years or by being married to a spouse who has earned enough credits), then they will not have to pay premiums for Part A Medicare benefits, which cover inpatient care at hospitals.

There are also Part B and Part D Medicare premiums. Part B premiums cover outpatient care, such as doctor visits and lab tests, and Part D premiums cover prescription costs. Medigap coverage is also available to supplement Part A coverage. Medigap can be used to cover Medicare deductibles and co-payments and to purchase coverage in addition to Medicare, such as travel insurance.

Since most Canadians have life insurance policies in place before they move to the US, it is important for us to review such policies prior to departure to confirm that they reflect our clients’ current, desired beneficiaries and to ensure that they will not create any cross-border tax traps.

One of the most common cross-border tax traps associated with life insurance policies is that certain Canadian whole life and universal life policies may not be tax-exempt in the US as they are in Canada. This issue can lead to Canadians having to pay tax to the IRS on income earned inside the investment component of Canadian policies. Another issue is these policies’ potential for triggering the egregious Passive Foreign Investment Company (“PFIC”) rules.

We advise our clients on the potential tax liability of their Canadian life insurance policies, and we suggest tax-advantageous ways of surrendering these policies prior to moving stateside, if necessary.

We also advise clients on the tax filing requirements associated with retaining these policies as US residents, should they choose to keep them, particularly the Foreign Account Tax Compliance Act (“FATCA”) requirements, which is the legislation that governs US persons’ reporting requirements for foreign accounts and other financial assets located outside the US.

For US life insurance policies purchased after moving stateside, we highlight potential estate tax liabilities and recommend estate planning solutions that can mitigate tax exposure, such as the irrevocable life insurance trust (ILIT).