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.