Canadians have from time to time considered making a permanent move to the United States, whether for a business or career opportunity, or to retire in a warmer climate. However, before taking this important step, it is important to understand what tax implications may arise from such a move.
It is critical to determine an individual’s residence for both Canadian and US tax purposes. The Canadian Income Tax Act does not define “residence” and therefore the analysis will depend on tax treaties, jurisprudence, and the interpretations given by the Canada Revenue Agency (CRA).
In Canada, residence is usually determined on the basis of primary ties, which includes location of permanent home, and location of spouse and other family members. Secondary ties are also considered, and includes personal property like automobiles, furniture etc. located in Canada, and other economic and social interests of the individual in Canada. A useful guide for this is the Form NR73 – Determination of Residency Status (Leaving Canada).
Canadian deemed disposition on departure
Any person who emigrates from Canada will be expected to have disposed of all of his/her property at fair market value. This deemed disposition can provide large unexpected capital gains. If there are any resulting tax from this sale, then that becomes due by April 30 of the following year.
Some types of property are excluded from this rule:
- Certain stock options
- Canadian real estate
- Life insurance policies in Canada
- Capital property or inventory used in a business in Canada
- RRSPs, RRIFs and other pension plans
- Property owned when an individual last became a resident of Canada provided the individual was a resident of Canada for five years or less during the 10 years preceding emigration.
The above types of property will continue to be subject to Canadian income tax in some form or the other.
If the individual gets capital gains on the deemed disposition, they can defer payment of the resulting tax by submitting acceptable security to the CRA along with the applicable election form. Thereafter the tax may be deferred till either the asset is sold, or the taxpayer re-establishes Canadian residency, or the taxpayer dies. An acceptable security can be a bank’s letter of guarantee, a bond issued by Government of Canada, or a letter of credit. Shares of public or private corporations or valuable personal property may also be considered acceptable security, provided they are approved by the CRA. Security is required only on tax arising on the first $100,000 of capital gains, which means no physical security is required when the total gains are below $100,000.
Canadian-controlled private corporations (CCPCs)
Any individual who owns or runs a CCPC will be deemed to dispose of the shares at fair market value prior to emigration. This may result in considerable tax along with other negative consequences. For instance, the corporation will no longer qualify as a CCPC, which would imply loss of access to the preferential Canadian corporate tax rates and other tax benefits. The corporation may also be seen as a “controlled foreign corporation” or a “passive foreign investment company” by the US and this can result in adverse US tax consequences.
US tax compliance
A US resident needs to file an individual income tax return annually – Form 1040. If the individual has maintained interests in Canadian RRSPs or other tax-deferred Canadian investment vehicles, then these need to be declared in additional forms and included in the US personal tax filing. Similarly, if the individual maintains shareholdings in a private Canadian corporation, then another layer of costs and complexity will be added to the annual return.
It is important that any Canadian considering a permanent emigration to the US must evaluate the financial and tax implications of such a move. In many cases, the tax and compliance costs will play a big role in the final decision. There are several tax planning and optimization strategies available that can help the individual to manage these tax matters, but this needs to be planned before taking the decision to move.