Tax Implications for US Citizens/Residents Moving to & Living in Canada

(1)

March 20, 2014

TAX

Tax Implications for US

Citizens/Residents Moving

to & Living in Canada

(2)

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Topics to Discuss

• Moving to Canada & Overview of Canadian &

US Tax Systems

• US Filing Requirements for US Citizens

• Additional Reporting Requirements

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Moving to Canada:

Overview of the US Tax System

• The United States taxes the following individuals on

their worldwide income:

US Citizens

US Permanent Residents (Greencard holders)

US Residents

• Citizens are taxed on their worldwide income even if not

physically present or resident in the US

• Entitled to foreign tax credits for non-US source income

• File a 1040 Tax Return

(4)

Moving to Canada:

Overview of the Canadian Tax System

• Canada’s tax system is based on residency alone

Resident of Canada

Taxed on worldwide income from all sources

Entitled to foreign tax credits for non-Canadian source

income

Files a T1 Individual Tax Return

Non-Resident of Canada

Taxed on Canadian source income

Entitled to utilize provisions of Canada – United States

Income Tax Convention (1980) to determine Canadian

income tax liability

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Moving to Canada:

Residency

1. Deemed full-time residency

sojourned in Canada for 183 or more days

2. Full-time residency

continuing relationship with Canada based on facts

3. Part-time residency

severing or creating ties to Canada in departure or

arrival

4. Non-resident

Not resident under 1 – 3 above

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Moving to Canada:

Overview of Income Types

• Employment income

Taxed upon receipt, therefore potential timing issues could arise

If an individual earns employment income outside of Canada while a

non-resident, but the income is not paid until the individual becomes a Canadian

resident, then that income will be taxable in Canada

• Dividend Income

Two types of dividend income: eligible and ineligible

Eligible dividends are only from Canadian corporations and taxed at

preferential rates (29.5% vs. 32.6% on non-eligible dividends)

• Interest Income & Foreign Investment Income

Taxed at regular rates

• Capital Gains

50% inclusion rate

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Moving to Canada:

Other Considerations

• Moving expenses

Moving expenses are not deductible for moves between Canada and

the US (or another country)

• Deemed acquisition rules

Canada only taxes a resident on appreciation/depreciation on property

held during the period of residency

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Americans in Canada:

General Filing Requirements

• All US citizens/greencard holders are required to file

Form 1040 annually

Form 1040 is due on April 15

th

_{but an automatic extension is}

granted to June 15

th

_{for Americans who live abroad}

Extension does not extend the time to pay but late payment

penalties are not imposed until after June 15

th

• US citizens/greencard holders are taxed on worldwide

income, regardless of their country of residence

Therefore US citizens living in Canada must file a Canadian return

reporting their worldwide income and a US return reporting their

worldwide income

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Relief from Double Taxation:

Foreign Earned Income Exclusion

• Qualified individuals may elect to exclude up to

$97,600 US of foreign earned income from taxable

income

Reported on Form 2555

• Income is reported on the return and then the

exclusion is reported as a subtraction from gross

income

• Business income can also qualify for the foreign

earned income exclusion

• Foreign taxes paid on excluded income do not

qualify for the foreign tax credit

Therefore proration of taxes required

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Relief from Double Taxation:

Foreign Earned Income Exclusion

• An individual generally qualifies for the exclusion if

his tax home is in a foreign country and one of the

following tests are met:

Bona Fide Residence Test – must be a resident of

the foreign country for an uninterrupted period that

includes an entire tax year

Physical Presence Test – must be physically

present in a foreign country for 330 full days during

a period of 12 consecutive months

• If an individual qualifies under either test for only

part of the year, exclusion is reduced on a daily

basis

(11)

Relief from Double Taxation:

Foreign Tax Credit

• Foreign tax credit may be claimed for foreign taxes paid on

foreign source income

• Separate “baskets” for sources of income

Passive Basket: generally includes interest, dividends, rents,

royalties and capital gains

General Limitation Basket: all other types of income

• Foreign taxes eligible for credit include Canadian income

taxes, EI premiums and Canadian/other foreign withholding

taxes paid

Note that the top Canadian tax rate is 49.53% vs. top US federal rate of

39.6% therefore the FTC usually eliminates all US tax on Canadian

source income

• Note that Canada also allows a FTC for US taxes paid on US

source income taxable in Canada

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Americans in Canada:

Other Filing Requirements

• Registered Retirement Savings Plans (RRSP)

IRS treats RRSPs the same as regular investment accounts therefore

there is no deferral of income tax

Income earned in RRSPs is not taxed in Canada until withdrawn from

plan

Canada-US Tax Treaty allows for a resident of the US to defer inclusion

of income currently earned in an RRSP until such time that the income

is taxed in Canada

• Must disclose Treaty election on Form 8891

Separate Form 8891 required for each RRSP

• This election cannot be made on a late filed return

(13)

Americans in Canada:

Other Filing Requirements

• Registered Education Savings Plans (RESP)

Plan allows for individuals to make contributions for the

future post-secondary education of beneficiaries

Contributions cannot exceed $50,000 per beneficiary

Earnings are not taxable in Canada until received by the

beneficiaries

US treats RESP account as a grantor trust

Income in the account must be included on the

taxpayer’s US return annually

(14)

Americans in Canada:

Other Filing Requirements

• Tax Free Savings Account (TFSA)

Plan allows for individuals to earn investment

income in Canada tax-free

Contributions cannot exceed $5,500 per year

US treats TFSA account as a grantor trust

Income in the account must be included on the

taxpayer’s US return annually

Must be reported to the US on Form 3520/3520A

(15)

Americans in Canada:

Other Filing Requirements

• Reporting may be required for investments in non-US

entities:

5471 “Information Return of US Persons with Respect to Certain

Foreign Corporation”

Disclosure form for all US persons who have investments in certain foreign

corporations (includes investments in Canadian corporations)

Special reporting rules when foreign corporation is a considered a controlled

foreign corporation (CFC)

Potential for deemed income inclusions in the US which could result in a

timing difference in income/taxes between Canada and the US

Most common deemed income inclusions are for passive income and

shareholder loans, as well as personal services income

Form 8865 – Required to report investments in certain foreign

partnerships

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Americans in Canada:

Other Filing Requirements

• Form FinCEN 114, “Report of Foreign Bank and

Financial Accounts (FBAR)”

Separate filing from the tax return

US persons who have a financial interest in or signature

authority over foreign bank, securities, or other financial

accounts, both business and personal, whose total value

exceeds $10,000 are required to file annually

Must disclose details of each account held, including the

highest monthly balance of the account in the year

Due date is June 30

th

_{of each year}

Significant penalties for failure to file can be imposed

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Form 8938: Statement of Foreign Financial Assets

• Any individual that holds in aggregate more than

$400K (MFJ residents of Canada) in reportable

financial assets must report information about these

interests on their return

Does not replace FBAR requirement

• Specified foreign assets that must be disclosed on

the return include:

Foreign financial accounts

Foreign brokerage accounts

Interests in foreign entities

Foreign pensions, retirement plans, etc

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New for 2013: Net Investment Income Tax (NIIT)

• NIIT applies at a rate of 3.8% to certain net

investment income of individuals, estates, and

trusts

• Applicable to taxpayers who exceed certain

modified adjusted gross income threshold

$250,000 for MFJ, $200,000 for single

• NIIT is 3.8% times the lesser of

Net investment income; or

Modified adjusted gross income less threshold

• NIIT paid on the US return is not eligible for FTC

on the Canadian return

(19)

Americans Should Avoid Canadian Mutual Funds

• US considers foreign mutual fund to be a passive

foreign investment company (“PFIC”)

Highest tax rate on excess distribution and gains

Interest charged on deemed deferred tax amount

No problem if held by RRSP if election made

• Also be cautious if investing in Canadian Income

Funds

Distributions may not qualify for reduced US tax rate

on dividends

Return of capital for US purposes is likely different

from Canadian return of capital

(20)

New for 2013: PFIC Reporting Rules

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• New stringent reporting requirements for

Americans who hold PFICs on Form 8621

• A U.S. person that is a direct or indirect

shareholder of a PFIC or qualified electing

fund (QEF) files this form:

• When they receive certain direct or indirect distributions

from a PFIC,

• Recognize a gain on a direct or indirect disposition of PFIC

stock, or

(21)

Consulting/Business Income

• Tax treatment the same if treated as business income

earned personally

Taxable on both the Canadian and US return

Eligible for FTC

• Corporations

Can be a CFC if a Canadian corporation or a controlled foreign

affiliate if a US corporation

Therefore additional filing requirements exist

• LLC or S-Corps are not recommended since the tax

treatment differs in Canada and the US

Canada does not provide for the flow through of income to the

shareholder

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Expatriation Provisions

• Imposed on certain individuals who renounce US citizenship or

relinquish a greencard

• New rules involve a deemed disposition of all property held by

the taxpayer at expatriation

The covered expatriate is deemed to have sold nearly all his worldwide

assets at FMV on the day before the expatriation and is taxed on the accrued

gains above the threshold amount ($663,000 for 2013).

The exclusion amount must be allocated pro-rata to each gain asset

Gain is taxed as ordinary income

• Covered Expatriates are those taxpayers who meet any one of

the following:

Average net income tax for the previous 5 years exceeds $155,000

Net worth exceeds $2M at the time of expatriation

Fails to certify under penalty of perjury that he/she has met the requirements

of the US tax code for the 5 preceding tax years

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Canadian Tax Treatment of US Pension Plans

• ITA 56(1)(a)(i) requires a taxpayer to include in income amounts

received from a foreign retirement arrangement (FRA)

Payments out of a FRA are not taxable in Canada to the extent that they

would not be taxable in the other country to a resident of that country

FRA definition includes an IRA

• Intention of FRA designation is to provide matching for

Canadian residents with IRA plans

• No Canadian tax if no US tax

• Allows payments to be transferred from one IRA to another

without triggering Canadian tax

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Canadian Tax Treatment: Roth IRA

• A Roth IRA is not a FRA

Therefore a Roth IRA is not treated the same way as a traditional IRA

• Treaty discusses the treatment of Roth IRA plans and includes

Roth IRA in the definition of pension

• Under 3(b) of Article XVIII a Roth IRA will be treated as a pension

as long as no contributions are made to the Roth IRA after

December 31, 2008 while the taxpayer is resident of Canada

Therefore income can accrue in the plan without being subject to US tax.

Distributions are not taxable in the US; therefore they should not be taxable

in Canada

• Contributions do not include rollover contributions from a different

Roth IRA or Roth 401(k) but do include a conversion from an

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Roth IRA as “Pension”

• If a contribution is not made into the Roth IRA the taxpayer can

elect to defer Canadian taxation with respect to the income

accrued in the Roth IRA

• Under paragraph 1, pension income arising in one country and

paid to a resident of the other country may be taxable in the

other country but if the pension income would be excluded

from income in the first country, income cannot be taxed in the

other country

(26)

Transfer of Plans to Canada

• Lump-sum payments out of a IRA would be taxable in Canada

(because it would be taxable in the US)

Therefore US tax applies to transfers of IRA plans to Canada

• Eligible for contribution to a RPP or RRSP plan if derived from

contributions made to the IRA by the Canadian taxpayer

The transfer must be made within 60 days following the end of the year

in which the payment from the IRA is received

(27)

FATCA: Foreign Account Tax Compliance Act

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• Effective July 1, 2014

• IRS concerned over non-compliance of US persons with respect to

foreign financial assets and associated income

• Intent of FATCA is to prevent US persons from hiding income and

assets overseas

• CRA responsible for collecting data and information about US

reportable accounts from Canadian institutions and will submit the

info to the IRS

• Canadian financial institutions may be required to do background

searches of account holders to determine if they are US persons

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Questions?

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Contact Information

Julia Klann, CPA, CA | CPA (Illinois)

(519) 747-8295

jklann@kpmg.ca

Domeny Wu, MAcc

(519) 747-8865

dwu1@kpmg.ca