When’s the right time to move to the U.S.? Part 1

If your family is dealing with mid-life career changes and cross-border moves, you’re not alone.

That’s why a symposium case study by the Institute of Advanced Financial Planners (IAFP) examined the potential cross-border tax, retirement and estate planning issues of a hypothetical family from Ottawa.

The father’s job is in jeopardy, and the mother is being asked to accept a work transfer to the U.S. Meanwhile, the couple has to amp up retirement saving, while also providing for their kids’ educations.

The case was based on a real family, says Peggy Cameron, an IAFP symposium committee member and founder of Cameron Leadership Development in Ottawa.

Case study details

Jim, 42, and Sarah, 40, live in Ottawa (in a $400,000 jointly owned home) and have three children, with ages ranging from 10 to 17. One was born with a heart condition, and has regular checkups at an Ottawa hospital.

The couple makes more than $295,000: Jim works with the federal public service and makes $95,000 a year, while Sarah is a computer engineer at Cisco who brings in $200,000 a year, plus a 35% annual bonus. The children go to private school for a total cost of $30,000 per year — that cost is expected to rise by 10% next year.

As for savings, Jim and Sarah each have an RRSP and TFSA invested in mutual funds, and they have a family RESP and a joint non-registered investment account, which are also invested in mutual funds.

They also have life and disability insurance. Additionally, Jim has a pension and Sarah has $600,000 in Cisco stock options.

The issues

Jim may lose his job due to downsizing. Meanwhile, Sarah’s company is consolidating in Austin, Tex., and she’ll likely lose her job if she doesn’t move.

The couple considers three options:

• They can stay in Ottawa and invest in a medical technology startup run by doctors from the Ottawa Heart Institute, with Jim staying in his current position (as long as it exists).
• They can move to Alberta, where Sarah can join another friend’s 7-year-old company, and Jim can request a lateral move.
• They can relocate to Texas, where the company will take care of the family’s green cards. Jim’s employment would be uncertain.

Sarah’s salary makes up more than half the household income. In comparison, her starting salary at the Ottawa company would be $80,000 (with staged increases). Her Alberta pay and benefits haven’t yet been determined.

At first blush, moving to Texas makes the most sense, especially because there are no personal income taxes in that state. There are federal taxes, however, says Shawn Brayman, CEO of PlanPlus in Lindsay, Ont.

Based on their current finances and employment, he finds they’d save nearly $50,000 on taxes by moving to the U.S., since they wouldn’t have to pay personal income taxes, and their marginal household tax rate would fall from 43.97%, or $126,191, to 33.22%, or US$80,501 (about CDN$83,000).

This analysis assumes Sarah’s salary remains the same and Jim finds a new job that offers a salary of US$95,000. If he lost that salary or had to accept reduced pay, the family would have to reevaluate their tax situation.

On the upside, sales taxes are lower in Texas (8.25% compared to 13% in Ontario), and land taxes (between 1.9% and 3.1% in Austin) are tax deductible, says Terry Ritchie, director of cross-border wealth services at Cardinal Point Wealth in Calgary. The family could also buy a home for significantly less than the price of their Ottawa home. If they move, Sarah must ensure she negotiates a favourable compensation package, as well as find out how her stock options might be affected. In particular, she should ask for benefits that would help cover their daughter’s medical needs, says Brayman.

Case study details

Here are Jim and Sarah’s finances:

Assets

› Jim’s RRSP has $11,000 (mutual funds) › Sarah’s RRSP has $200,000 (mutual funds) › Family RESP has $100,000 (mutual funds) › Jim’s TFSA has $10,000 (mutual funds) › Sarah’s TFSA has $15,000 (mutual funds) › Joint account, open investments, worth $18,000 (mutual funds) › Joint savings, everyday operations, has $6,000 › Sarah has vested stock options with her company worth $200,000, as well as unvested options worth $400,000 that will be unlocked in 2017 › Jim has a severance package worth 21 weeks of pay that he can claim now or when he retires › Jim also has a pension that’s currently worth $325,000. He can transfer it to an RRSP or gain access to it via a deferred annuity at age 60 › Sarah receives $800 a month in child support payments for her son, which are expected to last until he finishes post-secondary school › Jim has group life insurance with the federal government that’s worth twice his annual salary (that value diminishes starting at age 65) › Sarah has universal life insurance worth $300,000 (it has a cash value of $5,500, and her annual premiums are $3,500) › She also has short-term disability insurance worth 66% of her present salary for two years, and long-term disability coverage worth 40% of her salary until she’s 65 years old › Jim is settling his parent’s $500,000 estate, and he’s entitled to half

Liabilities

› They owe $4,500 on their line of credit › They have a fixed-rate mortgage of $100,000, which is coming due in six months.

Family issues

Sarah’s son Jonathan is from her first marriage. Since she stands to receive child support payments for the next eight years, Sarah would need to know if she’d still receive the funds if the family moves. Also, her ex-husband will need to accept any moves. She’ll have to speak to a lawyer. Further, Jim and Sarah’s daughter has a heart condition and may require major surgery when she’s older, so Sarah and Jim must consider how they’ll pay those costs if they move to Texas.

Read more about Jim and Sarah’s decision in Part 2.