Canadian Marrying an American
Many of our Canadian clients plan a move to the US after meeting an American partner whom they plan to marry. Perhaps their soon-to-be American spouse lives in a warm part of the US, such as Florida, California, or Arizona; or perhaps, as a Canadian, moving to the US is an appealing life choice due to the often
favourable tax breaks and myriad employment opportunities.
Regardless of the specific reason, Canadians who plan to move to the US after marrying Americans typically have similar concerns. Often, questions arise regarding the immigration process and path to citizenship, how to obtain adequate health care, how social security payments will be affected, and what to do with RRSPs and Canadian assets such as homes and cottages.
As the above questions illustrate, making the decision to move to the US necessitates careful pre-departure tax, estate, retirement, investment, and immigration planning. Canadians relocating to the US after marrying an American must also be familiar with the US
health care system, as well as potential cross-border tax filing requirements.
Keep reading for more information about these cross-border financial planning topics as they apply to a Canadian who is marrying an American and moving to the US. Please note that the topics covered below require detailed, comprehensive analysis before specific recommendations can be made to an individual client, which is the purpose of creating a cross-border financial plan prior to departure.
- Tax Planning
- Estate Planning
- Retirement Planning
- Investment Planning
- Health Coverage & Insurance
- Tax Filing Requirements
Canadians moving to the US may have to pay departure tax upon exiting Canada. Departure tax is not a penalty for leaving Canada and moving to the US. Rather, upon departure, a snowbird is deemed to have disposed of their assets at fair market value even though an actual sale does not occur; this deemed disposition may lead to capital gains tax (commonly known as “departure tax”).
Some assets are exempt from departure tax (such as RRSPs and Canadian real estate), but others (such as non-registered investment portfolios and shares of private corporations) are not. However, departure tax can be deferred, mitigated or even eliminated.
As such, a comprehensive plan for handling departure tax should be established prior to moving to ensure that snowbirds are aware of what to do with each asset before exiting Canada and to ensure that they benefit from available tax planning opportunities.
Situs Wills, Trusts, and Power of Attorney Documents
Ideally, estate plans should be made in the jurisdiction where one’s assets are located. Some Canadians moving to the US plan to retain certain Canadian assets, such as a cottage. Such clients should therefore have a Canadian estate plan that covers Canadian assets retained post-move and a US estate plan for all assets that will be held in the US. It is also prudent to create power of attorney documents for all jurisdictions in which one plans to retain assets and spend time.
It is likely that Canadian moving to the US have already drawn up Canadian wills and incapacity documents, such as powers of attorney for property and health care. US estate planning documents such as a will and/or trust, as well as incapacity documents such as powers of attorney for property and health care, must also be drafted.
We assist our clients by reviewing their estate planning needs and determining the optimal course of action based on their assets; for example, it may be clear that it is more prudent to prepare a US revocable trust in addition to or instead of a US-situs will to avoid or minimize state-levied probate fees and the time-consuming probate process. Establishing pre-entry dynasty trusts and/or charitable trusts may also be helpful for Canadians moving to the US.
Preparing comprehensive cross-border estate plans provides peace of mind. Establishing power of attorney documents on both sides of the border guarantees that the substitute decision-maker of one’s choice will be able to act in both the US and Canada with respect to not only property, but health care decisions as well. It is also important that one’s estate plan considers domestic laws on both sides of the border to ensure the proper distribution of assets to heirs.
Not only can a cross-border estate plan provide peace of mind in this manner, but it can save money in terms of probate fees (as mentioned) and by considering the US estate and gift tax regime.
US Gift and Estate Tax
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.
Blended families are becoming increasingly more common. When a Canadian marries an American, one or both newlyweds may have been married previously. If the newlyweds have children from these previous marriages, a cross-border blended family is created once the wedding ceremony is complete.
Living in a blended family creates new estate planning considerations as spouses may shift intentions: newlyweds often want to provide for their surviving spouse’s well-being after they each pass away while ensuring that children from their previous marriage will be similarly provided for as beneficiaries of their estate.
The considerations for Canadian blended families mirror the considerations that blended cross-border families must reflect upon. As mentioned, protecting children from a previous marriage becomes paramount after cross-border spouses tie the knot, as does preventing one’s ex-spouse from being able to lay claim to one’s estate.
The complications of the Canadian spouse retaining property in Canada post-marriage and/or having children who live in Canada makes cross-border estate planning particularly important, as all plans created in the US post-move must consider the beneficiaries that may still be living in Canada. Wills and trusts must be properly drafted to reflect intentions on both sides of the border while considering cross-border tax law and other rules that vary by jurisdiction, such as probate. We are happy to assist our Canadian clients with the process of determining the best course of action for their estate plans after marrying an American who already has children.
Registered Retirement Savings Plan (“RRSP”)
Many Canadians contribute to RRSPs throughout their lifetime because of the myriad tax savings they receive; tax deductions on gross income coupled with tax deferrals on income earned inside RRSPs make these plans wonderful retirement saving vehicles for Canadians living in Canada. But what about Canadians who move to the US?
While the answer varies from client to client, generally, it is important to keep in mind that RRSPs can provide tax-saving opportunities for Canadians moving to the US. While a Canadian resident withdrawing their RRSP upon retirement in Canada may have to pay tax at the top marginal rate of over 53% to the CRA, US residents can withdraw their RRSPs in a lump sum at a Canadian federal tax rate of 25%. With pre-departure cross-border financial planning in place, our snowbird clients who become US tax residents may be able to reduce this tax to only 15%, providing a significant tax savings.
Another advantage of a US resident paying tax to the CRA on an RRSP withdrawal is that tax paid to Canada generates foreign tax credits in the US. These credits create additional cross-border tax planning opportunities.
US Social Security
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.)
Our clients can also take comfort in two facts: i) at 62, even if they have never worked in the US, they will be eligible to receive spousal Social Security payments if their US spouse is receiving benefits; and ii) 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.
There are, however, potential cross-border pension payment limitations that may affect Canadians who marry Americans, move to the US, and go on to continue their careers south of the border. Such individuals may work for enough years in the US (typically ten years of full-time work) to be able to earn their own US Social Security income in addition to CPP payments.
Due to the Windfall Elimination Provision, though, a US domestic law that allows the US government to claw back Social Security payments of US residents and citizens who earn CPP income, some Canadians who marry Americans and move to the US mid-career may not be able to collect US Social Security payments stemming from their own earnings later in life.
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.
Canadians looking to permanently move to the US should be aware of the following investment planning and portfolio management issues.
Passive Foreign Investment Companies
Within a taxable or non-registered account, Canadian mutual funds, exchange-traded funds (“ETFs”), and real estate investment trusts (“REITs”) are classified as passive foreign investment companies (“PFICs”) by the IRS, with extremely punitive tax treatment. Any taxable or non-registered accounts holding these securities should be “cleansed” or “purified” prior to becoming classified as a US person for IRS purposes.
Within tax-deferred or registered accounts (such as “RSPs” and “RIFs”), Canadian mutual funds, ETFs, and REIT holdings are not subject to the PFIC classification.
We can help build, maintain, and oversee a holistic and optimized cross-border investment portfolio that remains aligned with your strategic investment objectives, risk tolerance, and time horizon, and complements other aspects of your cross-border financial plan while remaining compliant with Canadian and US tax authorities.
For investment professionals, the relevant regulatory bodies in Canada are the Investment Industry Regulatory Organization of Canada (“IIROC”) and the provincial securities commissions. The relevant regulatory body in the US is the Securities and Exchange Commission (“SEC”).
While there are recognition and reciprocity of investment credentials on both sides of the border, investment professionals who are licensed only in one country need to formally apply for registration with the relevant regulatory entity in the other country so that their education, training, and work experience is recognized.
Owing to the additional legal complexity, heightened business risk, and regulatory reporting workload associated with operating in another country, most firms are unwilling to embark on the registration process because of their focus on domestic or regional clients.
Once you officially exit Canada and become a tax resident of the US, it is very likely that your current investment professionals will no longer be able to continue to work with you due to regulatory and compliance restrictions.
In such cases, we can help build, transition, and oversee an optimized and compliant cross-border investment portfolio that remains aligned with your strategic investment objectives, risk tolerance, and time horizon, and complements other aspects of your cross-border financial plan. We work with each client to independently determine the most suitable investment portfolio for your particular situation.
Foreign Source Income (“FSI”)
As a US resident, you will receive Foreign Tax Credits (“FTCs”) for any tax paid to Canada. However, you will only be able to use these credits on your US tax return to offset other foreign passive income. Where it makes investment sense, it can be beneficial to re-structure your portfolio and investments to take advantage of these FTCs by ensuring that your investments generate an adequate percentage of FSI, thereby potentially reducing your US federal tax liability.
The most effective source of FSI is generated from foreign (outside of US) bonds and other interest-bearing securities. Investment in such vehicles should be considered to the extent that the fixed income allocation remains consistent with your overall investment objectives, risk tolerance, and time horizon.
Manager Selection and Oversight
Portfolio management is a daunting process for many individuals in general and is compounded by the additional complexities within a cross-border context. Your advisory team should be knowledgeable about investing on both sides of the border; ideally, they will have a comprehensive understanding of the cross-border tax, financial planning, and regulatory issues that can arise.
Having an investment manager who understands your situation and needs and who works seamlessly with tax experts, lawyers, and financial planners is crucial to your financial well-being.
We favour a multi-manager approach to portfolio management – identifying and selecting top-tier managers for a particular asset class or investment mandate. Our independent oversight helps you determine which managers fit best with your investment objectives and risk tolerance. Moreover, we will coordinate total portfolio reporting, manager monitoring, optimized tax management, and comprehensive cross-border advice to help you avoid tax traps, penalties, and other issues. Where possible, we negotiate preferential pricing on investment management fees for our clients.
As an independent firm and investment fiduciaries, we can help build, transition, and oversee an optimized and compliant cross-border investment portfolio that remains aligned with your strategic investment objectives, risk tolerance, and time horizon, and complements other aspects of your cross-border financial plan.
The US Health Care System: An Introduction
The US health care system is different than the Canadian one. US residents generally have three options for obtaining US health insurance: i) via an employer; ii) via private purchase; or iii) via federal government programs such as Medicare, for retirees.
Eligibility for Medicare begins at age 65 for US citizens and permanent residents who have been legally living in the US for at least five years. 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.
Obtaining Health Insurance as the Spouse of an American
We assist our clients in determining their health insurance needs, the potential costs of insurance over time, and the optimal time to apply for Medicare coverage. Canadians who marry Americans are in the fortunate position of being able to join their US spouse’s group health insurance plan through work, if applicable, or, if aged 65 or over, they can tag onto their spouse’s Medicare coverage.
Medicare is immediately available to a Canadian who is aged 65 or older and has a green card for five years. If they are married to an American with the requisite number of Social Security credits they should be able to receive premium-free Part A coverage.
If needed to bridge the gap before Medicare becomes available, private insurance can provide coverage for a wide range of needs, from outpatient care to prescription drugs, emergency room visits to surgery, and everything in between. While private insurance can be expensive, there are ways to reduce or offset this cost.
With the proper guidance and knowledge, it is possible for Canadians marrying Americans to receive excellent, comprehensive medical coverage once they move to the US.
Life Insurance Issues
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).
Canada taxes only its residents on worldwide income. As such, after exiting Canada, Canadian citizens no longer pay taxes to the CRA on worldwide income.
Instead, as US tax residents, they must file US income tax returns, reporting their worldwide income to the IRS. However, such clients may still need to file Canadian income tax returns for Canadian-source income that they receive, paying any tax owing on that income to the CRA.
US residents will typically receive foreign tax credits for tax paid to Canada that can be used to offset tax owing to the US. If planned accordingly, foreign tax credits present exciting cross-border financial planning opportunities for our clients – opportunities that are ongoing and can be capitalized upon each year after implementing a cross-border financial plan.
Needing to file income tax returns in two countries necessitates organization and careful planning. Since US tax residents must report foreign bank accounts and financial assets that they retain offshore to the IRS, US tax filings can become complex, with several moving pieces.
Canadians who move south of the border and retain bank accounts and financial assets in Canada may have to meet FATCA filing requirements. Reportable financial assets under FATCA range from bank accounts to Canadian partnership interests and stocks and securities issued by non-US corporations. US residents with Canadian assets may also have to file FinCEN 114, the Report of Foreign Bank and Financial Accounts, commonly known as the FBAR.
US income tax filers must not only manage many moving pieces, but there are also different methods of filing in the US than there are in Canada. In Canada, all taxpayers file individually. In the US, taxpayers can choose whether they would like to file as individuals, as married filing jointly, as married filing separately, or as the head of their household.
Each type of filing status has advantages and disadvantages that affect our clients in unique ways, depending on the timing of their exit from Canada. We therefore assist our clients with selecting a US taxpayer filing status, as well as with organizing their filing obligations and planning for maximal foreign tax credit use.
A Canadian who marries a US Green Card holder (permanent resident) or US citizen is eligible to become a permanent resident. Such Canadians are in a fortunate position: once they receive their Green Cards, they no longer need to limit the number of days they spend in the US each year, and they are able to legally work in the US.
To begin the Green Card application process, Form I-130 must be filed with United States Citizenship and Immigration Services (“USCIS”), along with payment of a fee and a variety of documentation, including your marriage certificate.
Application for permanent residency can be made while you are inside or outside the US. However, there are good reasons to apply from within Canada: you may prolong the process and limit your ability to travel outside the US if you choose to file the I-130 application while stateside.
Once granted permanent residency, although you will be able to permanently live and work in the US, you will not be able to enjoy the same rights as US citizens, who can vote in elections and receive important tax and estate planning benefits.
As a US Green Card holder, you eventually have the option to become a US citizen via the naturalization process. Becoming a US citizen has cons as well as pros, though; we therefore recommend weighing all factors in a considered fashion before making the decision to become a US citizen.
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It is important to realize that every client situation is different, and we need to analyze your facts before making any specific recommendations. If you are considering a
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