Question

Hi Phil

My husband and I are part of your Facebook group for Americans in Canada. We have been following the group for some time and are planning our move back to Canada in the coming year.

We both moved down to California 20 years ago for work and are planning to retire full time in Canada when we get everything straight. From my reading on your blog it sounds like you suggest people plan well ahead of their move and that’s why I’m reaching out.

We have significant investments in the US which include trad IRA and ROTH IRA. A house we are going to try and sell before moving and some miscellaneous household assets. From my research on your site it seems like planning for the investments is important before we move.

Our current stock broker says that she can’t continue to help us with our investments if we move to Canada but she did suggest she might be able to help if we could put a US address on the account. We are both not comfortable with that option also considering we will be in Canada full time going forward it makes sense to move everything up. We will also have a significant amount of cash from the house sale, should we convert that to Canadian before moving up or keep some in USD for taxes?

thanks

XXXXXX

Answer

Hi XXXXXX

Thanks for the email and for being part of the Facebook group. The group still seems to be growing nicely.

Yes, you are correct, planning for your investments before you move back to Canada is a very smart move. Some of the tax saving strategies such as ROTH IRA conversions will cease to become available once you become a Canadian tax resident.

I’ve outlined some thoughts below, however we’ll want to book a proper cross-border planning consult to better flush out all the issues:

Conversion of ROTH IRA

Depending on your tax rate and size of the ROTH IRA in the year you move to Canada there could be a significant tax savings by converting the full amount or partial amount of the IRA to a ROTH IRA. When you move to Canada your future IRA distributions will be also be taxed in Canada.

Here’s an example to illustrate the possible savings:

Now, this only really works well if you’re US income tax rate in the year you move is low compared to your future Canadian tax rate. Let’s assume that your US tax rate is 10% before you move. And also assume that your Canadian tax rate going forward will be 20%.

For illustration purposes let’s say you convert $100,000 traditional IRA to a ROTH IRA before you move to Canada. You’ll pay $10,000 (or 10%) in tax on the transfer. Then, subsequent to moving you’ll file an article XVIII election with the Canadian government to elect for the tax-free growth and withdrawal of the plan. Any future distributions from the ROTH will be tax-free for both Canadian and US purposes.

If the IRA was brought over to Canada without converting you would have paid 20% tax on the withdrawal resulting in a pure tax savings of 10% or $10,000 by converting it to a ROTH before entering Canada.

T1135 reporting

Reviewing T1135 reporting before you enter Canada is extremely important. In some cases the cost to prepare a complex T1135 form can be more than the cost of the actual tax return.

I won’t go into the specifics of the T1135 in this post, however you can read everything you need to know about T1135s here.

In short, if you own non-Canadian investments that are not held in a Canadian investment account you’ll be required to report your foreign investments using the “complex method”. As mentioned above this can be a very tedious process as each investment needs to be recorded on the T1135 individually. Not only that, you need to calculate the highest and year end cost for each asset. This information is rarely even available and has to be prepared manually.

This is why I always advise that the US investments be moved up to Canada as soon as possible to avoid any complicated T1135 filing requirements. If possible moving them up before you become a tax resident of Canada is ideal.

Some are under the assumption that you have a first year exemption for filing the T1135, however that rule only applies to those that were never tax residents of Canada. In your case it looks like you were tax residents of Canada previously.

Sale of US house

If possible you’ll want to try to sell the principal residence before you move to Canada. If not, you’ll need to ensure to properly track the cost basis when you enter. Also, you’ll certainly want to ensure you sell the property within 2 years to claim the $500,000 principal residence exclusion on the house sale.

Other issues

You mentioned a few other issues above that I would like to address. First, putting an incorrect name on an account to “fake” being a US resident is not only a bad idea but actually could get you and your US investment advisor in lots of trouble. If they don’t have proper licensing to manage Canadian resident accounts you should find someone in Canada to help transfer up the assets (I know some advisors that can help).

I also wouldn’t rush to convert USD to CAD until you work out a plan for the investments. Considering the amount of USD you will be converting you’ll want to ensure you get a good rate of exchange. Often regular banks are terrible at providing competitive exchange rates. Once again, I know some advisors that can help with this.

I hope the information above was helpful. Please don’t hesitate to reach out again via email to phil@philhogan.com or text or call to 250-661-9417.

Cheers

Phil