A Comparison of Account Types in Canada and the US

by | Mar 28, 2019 | Investment Planning, Tax Filing Requirements, Tax Planning

In this day and age of 24/7 integrated and electronic global markets, capital is generally mobile and easily flows around the world as investors seek higher investment returns. Of course, human constructs such as political borders, capital controls, national regulations, and differences in account characteristics can affect such flows between countries.

An earlier blog entry, found here, addressed some of the regulatory issues associated with portfolio management between Canada and the US. This blog entry outlines the various account types in Canada and the US and how they correspond or transition to a similar account type in the other country, thereby providing additional guidance for clients looking to move between Canada and the US.

Note, however, that each client’s specific situation will likely involve more complex considerations than simply moving capital across borders, so this entry outlining account transition possibilities is solely intended for educational purposes only.

Canadian Residents Looking to Move to the US

Taxable/Non-Registered to Taxable/Non-Qualified Accounts

Assets in Canadian non-registered accounts can be transitioned to US non-registered accounts. While there won’t be a change to the taxable nature of the assets. There may be changes in the adjusted cost base (ACB) with a move between borders.

Investors holding Canadian mutual funds, ETFs, and Real Estate Income Trusts (REITs) should be aware that these investments are typically classified as Passive Foreign Investment Companies (PFICs) by the IRS, with extremely punitive tax consequences for US tax filers. Typically, these assets should be liquidated prior to moving to the US.

RRSP/RIF/LIRA/LIF Accounts

These retirement accounts are creations of the Canadian government and subject to the Canadian tax regime; the US analogue is an Individual Retirement Account (IRA). While the US government recognizes the tax-deferred nature of assets within Canadian retirement accounts, such assets cannot be transferred to US IRAs.  Most clients leave their Canadian retirement assets in Canada.

PFICs are not an issue within Canadian retirement accounts, so investors can continue to hold Canadian mutual funds, ETFs, and REITs within their RSP and RIF accounts.

Registered Education Savings Plan (RESP) Accounts

These savings accounts for college and university are creations of the Canadian government and subject to the Canadian tax regime; the US analogue is a 529 account.

The US government unfortunately does not recognize the tax-deferred nature of assets within Canadian education savings accounts, and taxes US persons on any earnings within a RESP annually.  In addition, the RESP may be treated as a foreign trust for US tax purposes, resulting in extra costs, complications, and filings.

With RESPs, there are additional tax complications that need to be considered based on the specific client situation and discussing these complications is outside the scope of this blog entry.

Tax-Free Savings Accounts

The TSFA is another creation of the Canadian government that is subject to the Canadian tax regime. The closest US analogue to the TFSA is the Roth IRA. TFSA assets, however, cannot be transitioned to Roth accounts; rather, the assets need to be liquidated prior to moving south of the border. They can then be combined with one’s taxable/non-registered assets.

US Residents Looking to Move to Canada

Taxable/Non-Qualified to Taxable/Non-Registered Accounts

Assets in US non-registered/non-qualified accounts can be transitioned to Canadian non-registered accounts. There may be changes in the adjusted cost base (ACB) with a move between borders; however, there won’t be a change to the taxable nature of the assets.

Investors holding US mutual funds should be aware that these investments are meant only for US residents, so these assets should be sold to cash prior to moving to Canada

Investors holding US municipal bonds should be aware that there is no further tax advantage to doing so once they have exited the US. MCA generally recommends liquidating this component of the portfolio upon a client’s exit.

IRA Accounts

While it is possible to (indirectly) transfer assets from a US IRA to a Canadian RSP account, there are additional tax complications that need to be considered based on the specific client situation and discussing these complications is outside the scope of this blog entry. Note, though, that in general (and in practice) it is typically easier to leave the IRA assets in the US to be managed by (a) properly licensed investment firm(s).

Roth Accounts

Assets in a Roth account cannot be transitioned to Canadian TFSAs. Luckily, under the Canada/US Tax Treaty, the tax-free status of the Roth account can be maintained if there are no further contributions to the account after moving to Canada. A one-time election needs to be made with the Canada Revenue Agency on the tax return for the year of the move in order to maintain this tax-free status.

401K/403B Accounts

In general, these assets can be rolled over on a tax-free basis to an individual IRA account. As indicated above, it is typically easier to leave these assets in the US.

529 Accounts

A Qualified Tuition Program or 529 plan is a tax-advantaged savings plan in the US sponsored by states, state agencies, or educational institutions; the Canadian analogue is the RESP.

The Canadian government unfortunately does not recognize the tax-deferred nature of assets within 529 plans.  When the contributor to the plan is a Canadian resident, the plan is potentially considered a deemed resident trust for Canadian tax purposes, with annual income for the plan taxable in Canada.  It is typically more optimal for contributions to the 529 plan be made by US residents.

 

MCA Cross Border Advisors Inc. has extensive experience and expertise in transitioning accounts and portfolios between Canada and the US.  With expertise in portfolio construction, manager search and selection, tax strategy, and financial planning, our team of experts can help create and structure a Canada/US cross-border optimized portfolio that remains aligned with your investment objectives and risk tolerance.

Edwin Wong

Edwin Wong

Vice-President – Family Office Investment Services

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MCA Cross Border Advisors, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.>