Moving to Canada? Get Cross-Border Tax Advice Before You Move
Relocating from the U.S. to Canada involves significant tax considerations, particularly regarding U.S. assets and investments. Understanding how these are taxed and reported in Canada is essential for compliance and tax efficiency. We strongly recommend consulting a cross-border tax professional before your move to ensure proper planning and avoid unexpected tax liabilities.
1. Residency and Taxation of U.S. Assets
Canada taxes individuals based on residency, not citizenship. Determining Canadian tax residency is complex and requires reviewing both Canadian tax rules and the Canada-U.S. Tax Treaty.
Once you establish tax residency in Canada, you must report and pay tax on worldwide income, including income from U.S. assets and investments. Proper planning before your move can help mitigate tax liabilities and reporting obligations.
2. Reporting U.S. Investments and Retirement Accounts in Canada
Upon becoming a Canadian tax resident, you may be required report your U.S. investment and retirement accounts, including:
- 401(k) and Traditional IRA Accounts: Although these accounts remain in the U.S., withdrawals may be subject to taxation in both countries. The Canada-U.S. Tax Treaty provides tax deferral options to ensure the annual income growth is not taxed and allows tax credits to mitigate double taxation. If your tax rate is higher in Canada, there will be incremental Canadian tax owing on taxable pension withdrawals.
- Roth IRA Accounts: Roth IRA income and withdrawals are taxable in Canada unless an election is filed under the Canada-U.S. Tax Treaty. This election has strict requirements, so consulting a cross-border tax professional is essential to ensure tax-free treatment in Canada.
- U.S. Brokerage Accounts: Income from qualified dividends, exempt interest dividends, and municipal bonds, which receive preferential U.S. tax treatment, is fully taxable in Canada at ordinary tax rates. This often leads to higher Canadian tax liabilities.
- Investment Restrictions After Moving to Canada:
Many U.S. investment firms restrict trading and investing for Canadian residents, so we recommend speaking with your U.S. advisor prior to your move. Public securities and ETFs may qualify to be transferred “in kind” to a Canadian custodian, whereas other investments are not eligible to be held in Canada.
- US LLC Investments:
In the U.S., a LLC is treated as a flow-through (by default), so income flows through to the members. In Canada, a LLC is typically considered a corporation, meaning the investor is seen as a shareholder receiving dividends/distributions.
This mismatch in taxation can result in double taxation and challenges in claiming foreign tax credits resulting in overall tax as high as 70%.
LLC ownership may also trigger Canadian disclosure requirements, with penalties for non-compliance.
3. Sale and Tax Treatment of U.S. Real Estate
If you own U.S. real estate, understanding how its sale or rental income is taxed is crucial:
- Sale of U.S. Real Estate: U.S. capital gains tax may apply upon the sale of U.S. real estate, depending on whether the property was your primary home and qualifies for a tax exclusion. Additionally, once you become a Canadian tax resident, Canadian capital gains tax may also apply on the increase in value while you’ve been a Canadian tax resident. A Foreign Tax Credit for the U.S. tax liability can help offset double taxation in Canada.
- Rental Income from U.S. Properties: Rental income must be reported on both U.S. and Canadian tax returns and a State tax return may be required if the property is situated in a taxable State. A Foreign Tax Credit for the U.S. tax liability can help offset double taxation in Canada.
4. U.S. Revocable Living Trusts
A U.S. Revocable Living Trust is a popular estate planning tool south of the border. For U.S. tax purposes, it’s typically disregarded as a separate tax entity, meaning the grantor (i.e. the person who creates and funds the trust) reports all income and assets on their personal U.S. tax return.
In Canada, trusts are generally seen as separate taxpayers, distinct from the individuals who create or benefit from them. That means the CRA may view the Revocable Living Trust as a separate legal entity. This can give rise to additional filing requirements, compliance obligations, and potential tax liability in Canada.
Additionally, in Canada, most trusts face a 21-year deemed disposition rule, meaning that on the 21st anniversary of the trust’s creation, the trust is deemed to have sold and reacquired its assets at fair market value. This deemed disposition can result in capital gains in Canada and result in a mismatch in taxation between the two countries.
5. Foreign Account Reporting Obligations
Individuals relocating from the U.S. to Canada with assets on both sides of the border may be required to comply with the foreign asset reporting requirements:
- T1135 Foreign Income Verification Statement: If you hold U.S. assets with a total cost of more than $100,000 CAD, you must file this form annually with the Canada Revenue Agency (CRA). U.S. assets subject to the T1135 reporting may include bank accounts, brokerage accounts, private investments, debt to U.S. persons, interests in trusts and rental properties.
- T1134 Information Return Relating to Controlled and Non-Controlled Foreign Affiliates: A foreign affiliate is broadly defined as a non-Canadian corporation in which you hold, alone or together with related parties, at least 10% of the ownership. Since Canada typically views a U.S. LLC as a corporation, once your LLC ownership reaches that 10% threshold, the T1134 filing requirement is triggered. Furthermore, there is additional reporting if you (combined with related parties) have more than 50% control of the LLC, in which case it would be considered a Controlled Foreign Affiliate.
- U.S. FBAR: U.S. Citizens residing in Canada that have any financial interests or signature authority over non-U.S. financial accounts are required a U.S. FBAR if the aggregate maximum value of all foreign accounts exceeds USD 10,000 at any point in the calendar year. Failure to file or inaccurate reporting can lead to substantial civil penalties.
Final Thoughts
Relocating to Canada while holding U.S. assets and investments requires careful tax planning. By understanding how these assets are taxed and reported in Canada, you can make informed financial decisions and avoid compliance pitfalls.
Our team of cross-border tax experts at Smythe specialize in helping individuals navigate U.S.-Canada tax implications. Contact us today to ensure a smooth and tax-efficient relocation to Canada.
