Canada and the US are similar in certain regards and drastically different in many ways. Canada lives and breathes ice hockey whereas football reigns supreme down south. They have sandy dry deserts, and we have the great White Tundra. On the flip side our love for Hollywood, Canada’s safe streets, Southern tropical beaches, and Canadian beer is what unites us all.
Unfortunately, our tax systems vastly differ and are quite complex. You don’t want to be stuck with unsuspecting tax bill because you were not aware.
Therefore, before you make any life altering move it always a recommended to consult with your cross-border accountant.
Here are 3 basic rules to be aware of before you pack your bags.
Residency rule
The general rule of thumb, you are deemed a resident of the country in which you spend 183 days or more (ie more than half the year) in a calendar year which is called a sojourner rule. It’s not that simple. What if during a calendar year you spend time in 4 different countries and all of them for a duration of less than 183 days, in which country would you be deemed a resident? The litmus test is in which country have you established your roots. Where is your employer located. Where is your business located? Where is your primary residence located? Where does your spouse reside? In which country is your local bank and investments? In which country do you have a drivers license? Of which country are you a citizen? It’s almost as if we were creating a balance sheet. The individual would be deemed resident of the country which had the “strongest & best” balance sheet to help justify of which country they were a resident. Come tax season you will have to report your worldwide income in the country (Canada or US) in which you are deemed resident. The country in which the individual is a non-resident will only pay taxes on the income earned in that country.
Departure Tax
If a Canadian resident for tax purposes becomes a non-resident for tax purposes, she will be subject to departure tax. The CRA views it as if you were selling your assets at fair market value. Let’s stop kidding ourselves and call a spade a spade, it’s a penalty because the government doesn’t want you spending Canadian dollars outside of Canada. It’s the CRA’s method of demotivating you from leaving. Your non-registered investments, your investment properties, summer cottage, collectibles are all subject to departure (capital gains) tax.
If you own share in a Canadian Controlled Private Corporation (CCPC) and you decide to relocate to the US, the calculations can get very tricky and very messy in short period of time. It is therefore recommended to speak with your accountant well in advance so that you can strategize your taxes effectively.
Yes, there are some tools to help defer the taxes but eventually the taxman will come to your door.
Passing away in the US
If you were a Canadian living in the US and die in the US, you will be subject to US estate taxes on certain U.S. assets (known as “U.S. situs assets”). These include personal property, cars, boats, shares of public and private U.S. corporations, and U.S. retirement plans. However, U.S. citizens and residents (i.e., those who are domiciled in the U.S.) are subject to U.S. estate tax on their death on their worldwide estate.
As a Canadian resident and non-U.S. citizen, you would be subject to U.S. estate tax on U.S. assets only. However, if you move to the U.S. permanently, you are likely to be considered a U.S. resident for estate tax purposes. In conclusion you would be subject to U.S. estate tax on your worldwide estate. In case you’re wondering the estate tax in the US ranges from 18% to 40%.
As you can see there are many moving pieces and many things to juggle. Most people find out the hard. Today’s lesson is don’t be reactive, be proactive. Oh ya, don’t forget to pack your sunscreen! Safe travels!
Manu Shandal CPA, CPA(US)