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By Guest Blogger Ryan Lewenza
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From physics we know that for every action, there is an equal and opposite reaction. Well, one of the reactions to Trump’s tariff policies and deeply insulting ‘51st’ state comments is that Canadian expats (and American citizens) are deciding to pack their backs, load up the moving truck and return home to Canada.
Recently, I had a very interesting and informative call with a new client that is strongly considering moving back to Canada, in part due to what they are witnessing down south.
During our call, I was joined by our senior Financial Planner, our in-house cross-border tax specialist, and our new clients. We began by addressing the significant unrealized capital gains in their investment portfolio. However, the conversation quickly expanded into a comprehensive review of the various considerations and tax implications involved with their potential move back to Canada. As I diligently noted the key points, I realized the multitude of factors that must be carefully planned for and addressed for such a significant transition.
Today I’ll summarize the talking points from the call and outline the key considerations that Canadians need to address when returning home.
Due to the sizeable capital gain that will be triggered for US tax purposes either over time or on their potential exit from the U.S. tax system, our first step was determining if our clients are considered ‘covered expatriates’. A covered expatriate is a designation under US tax law for individuals who renounce their US citizenship or give up their green card status, and who meet specific income and asset thresholds. If deemed a ‘covered expatriate’, they are subject to a US exit tax upon their renunciation which can create a significant tax liability.
US permanent residents and green card holders for 8 or more years out of the last 15 are considered former long-term residents (FLTR). US citizens and FLTRs will be considered covered expatriates for US expatriation exit tax purposes if they meet any of these three tests:
- Net Worth Test – Client’s net worth is US$2,000,000 or more (on an individual basis)
- Average Income Tax Test – Client’s average tax liability in the previous five years was above US$206,000
- Certification Test – Client fails to certify that they satisfied all applicable US tax obligations for the five years before expatriation
Thankfully, while our clients are considered FLTR’s, our clients fall below these thresholds and are therefore not considered covered expatriates so will not be subject to expatriation tax. We will need to monitor this on an annual basis to ensure they remain below these thresholds.
Next, we discussed their long-term goals and objectives to consider which US status option was most likely for their long-term planning, as well as considerations for each:
- Keep green card
- Surrender green card
- Apply for US citizenship
Keeping their green cards would keep the doors open if one decided to move back and work in the US at a future date. However, this would require our clients to file annual federal income tax returns and information returns such as Reports for Foreign Bank and Financial Accounts (FBAR) for foreign asset disclosure with the IRS. These filings are complex and time consuming and would be better prepared by a cross-border tax accountant, which of course would trigger additional fees.
Keeping their green card would also highly restrict their investment options and accounts. Any investment made in tax-sheltered vehicles such as TFSAs, RESPs and FHSAs would need to be reported as worldwide income on their annual federal US tax returns. They would also be subject to punitive tax rules for any investment made in Passive Foreign Investment Corporations also known as PFICs (Canadian ETFs or mutual funds). This comes with added reporting obligations and fees for each individual PFIC holding.
Abandoning the USA – there are benefits
While surrendering your green card would restrict your ability to live and work in the US in the future, it has many potential upside opportunities that should be considered:
- Opens the door to unlimited investment options for your portfolio – maximize TFSA, RESPs and FHSAs with no need to limit PFIC investments
- Alleviates you from your ongoing and complex US tax reporting obligations (and accounting fees)
- Has the potential to save thousands in US tax on unrealized capital gains if you are not considered a covered expatriate when giving up your green card
- The CRA allows a ‘step up’ in your portfolio cost base on entry into Canada which effectively resets your cost to the current market value for Canadian tax purposes. You could therefore avoid paying capital gains tax in both countries!
In addition to the above, if an individual were to keep their green card and spend a significant amount of time outside of the US, they could be at risk of losing their green card status, which may result in them being considered a covered expatriate with negative US tax consequences.
Having dual citizenship would provide our clients with the most flexibility in that they can easily move back and forth to the US as tax residents of Canada while continuing to work for their existing US employers. While this is quite attractive and would meet their objectives and goals, it would also add ongoing onerous tax reporting and disclosure obligations that would require the help of a cross-border tax accountant.
On the investment end, similar to keeping their green card status, they would either have to absorb the expensive accounting costs in meeting their filing requirements of form 8621 for each individual PFIC holdings or be limited in their investment options.
While the focus of our call was on their US status, tax implications and their investment portfolio, we also discussed other critical factors like his future employment options, housing and the outlook for the Canadian dollar (FX is an important financial factor when coming back to Canada).
If our client gives up his US status, then he may have to terminate his employment with his US employer. We advised our client to speak with his employer to see if he can work remotely from Canada. If not, then he’ll need to find a job in Canada or decide to retire.
Finally, housing will be an important consideration for when they return to Canada. Given the high costs of Toronto real estate they are considering living in a smaller town outside of the ‘big smoke’. We discussed the outlook for interest rates and housing, how much they will have to draw from their investment portfolio to fund the purchase and whether they would be able to secure a mortgage.
That’s a high-level summary of the important considerations when returning to Canada. When considering a move from the US to Canada, it is imperative you review all these considerations and engage a qualified cross border tax professional to consider the tax implications of potentially being considered a covered expatriate.
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.