If you’re considering a move to the United States, one important loose end you must remember to tie is your investment situation, given the implications of the changing context in tax law. If you’re not careful, intricacies in tax policy can be much more of a drain than need be. Here are some helpful tips for saving the most in your switch to the US. Essentially, all of the advice follows a common theme: move your assets that are vulnerable to significant taxation into a more protected location.
One important factor to be aware of is the Foreign Investment Real Property Tax Act (FIRPTA). FIRPTA is an income tax that applies to foreign owners selling US real estate. If FIRPTA applies to your transaction, 10% of the gross income from the sale is withheld. Although it is a somewhat unsavory policy from the seller’s perspective, it is important to note that FIRPTA doesn’t apply to properties sold at $300,000 or less, as long as you or a family member has designated plans to reside at the property for at least 50% of the days it is in use. If you’re looking for a less expensive unit in America, FIRPTA most likely will not be a concern for you.
If you have a tax-free savings account (TFSA), it would be wise to liquidate that investment before moving. Earnings and withdrawals in Canada are, as the name states, tax free. If you leave the savings in the account, the US would be able to tax income earned on that account. Since the tax protection of a TFSA doesn’t apply in the States, the best move would be to liquefy those assets and reinvest them in the US, especially if the move is for long term.
Another item to manage is your retirement fund, manifested in you registered retirement savings plan (RRSP). With this account, it would be a mistake to withdraw all of your assets before leaving Canada. The CRA taxation on withdrawals made in Canada is 25%. Compared to the 15% you’d pay in the USA due to a joint country tax agreement. In the US, you’ll be able to periodically withdraw the cost value of your investments from your RRSP. Before you move, make sure to maximize the value of your investments by selling any assets that have appreciated, and reinvest them in securities.
Finally, if you are subscribed to an registered education savings plan (RESP) for future students in your family, keep in mind that if the account remains in your name, it will be doubly taxable by the time the assets are withdrawn. In the US, the IRS taxes the annual income on the account. When withdrawn, the CRA claims a tax on the withdrawals. In the event that you move to the US, the smart move would be to transfer the account to the name of a Canadian resident, so the income remains tax-free.
Disclaimer: This information is intended for general informational purposes only and does not represent tax advice to any individual or entity, either expressly or implied. Laws and regulations vary by jurisdiction and may change frequently. Compliance with such standards depends on one’s particular circumstances. Any reliance on this information is solely at the user’s own risk. Before making individual or business tax decisions, you are encouraged to seek professional tax advice.