When’s the right time to move to the U.S.? Part 2

In Part 1, you met Jim and Sarah, who are considering a move to Texas.

Trouble with registered accounts

If they move, they must deal with their RRSPs. Such plans aren’t sheltered in the U.S., but Shawn Brayman, CEO of PlanPlus in Lindsay, Ont., and Terry Ritchie, director of cross-border wealth services at Cardinal Point Wealth in Calgary, suggest the couple keep their accounts if they move. They’d face high withholding taxes if they withdrew their RRSP funds prior to moving, and they’d have to pay extra taxes at filing time, since their marginal tax rates exceed the withholding rates.

Also, they’ll need their registered accounts if they ever move back to Canada, because their RRSPs make up a significant portion of their planned retirement income.

If they chose to keep their RRSPs, they’d likely need to notify the IRS on their join U.S. tax return. That would protect them from paying tax on any RRSP income, adds Brayman. The only potential downside of keeping their accounts, he adds, is they won’t be able to manage their investments as easily from the U.S. However, U.S. investment rules allow accredited American brokers to manage clients’ RRSPs and RRIFs.

If the couple makes withdrawals while in the U.S., Ritchie says, the IRS will tax only the income portion of the funds used based on the level of “accrued income [generated] since the point of U.S. residency.” To avoid high U.S. taxes, they could “resell all their [appreciated] RRSP assets to up the capital portions of their accounts, and thus lower the income portions,” says Ritchie. “This creates a new capital base for the [purposes of] U.S. taxes.” But Jim and Sarah would still be subject to Canadian withholding tax of up to 25%.

“There are two levels of withholding that can be imposed. First, there’s the option of 15% tax if the withdrawal is defined as a periodic distribution that is lower than 10% of the RRSP value, or lower than two times the tabled RRIF distribution amount,” says Ritchie.

If withdrawals exceed those levels, or are lump sums, you’re hit with the 25% tax rate. On the bright side, the couple could get a foreign credit on Canadian taxes by filing Form 1116 with the IRS. That form can be used by international mutual fund investors.

Unrecognized registered assets

Unfortunately, TFSAs and RESPs can’t be sheltered when you move to the U.S., because they aren’t part of the Canada-U.S. tax treaty. As a result, Jim and Sarah should withdraw the money from their TFSAs if they move to Texas, says Ritchie. He often advises clients to put the funds toward other costs, such as moving expenses or new homes, for example, or suggests they transfer the money to other accounts.

Unfortunately, the couple’s RESP couldn’t be collapsed easily. So, the family’s $100,000 plan would likely stay intact and would be taxed the entire time they lived in the U.S. Ritchie adds Jim and Sarah would be required to file extra forms during their stay since the IRS considers RESPs as foreign trusts.

Their 17-year-old son would be the first to pay tax on withdrawals, but he can search for U.S. tax credits. U.S. schooling would cost more than $20,000 per year, says Brayman.

The couple would also need to continue saving for the other kids. You can contribute to 529 plans in the U.S., which are managed by each state. These don’t offer access to grants like RESPs, however, says Ritchie, and few people use them. Brayman suggests the family would benefit from reduced spending, especially if Jim has trouble finding a job after moving. They could send their two youngest to public school, for example, and put the money they used for private school toward post-secondary expenses.

Lastly, Jim and Sarah must consider how their $18,000 non-registered account would be treated if they leave Canada, says Ritchie. “When you leave, any non-registered accounts are deemed sold at fair market value, and there would be capital gains tax.”

Company savings

Since Cisco is consolidating in Texas, Sarah’s company stock options are likely U.S.-based. But whether or not she relocates, she’ll need to file Canadian tax returns if she exercises her options because they “were granted while she was living in Canada,” says Ritchie.

But she could get a foreign tax credit in the U.S. for any Canadian taxes paid on her gains. Brayman adds her advisor would have to consider the strike price and terms of her stock options when planning how they fit into her overall portfolio. Before Jim moves, he could transfer his $325,000 government pension to a locked-in RRSP or a deferred annuity that he’d receive starting at age 60.

There would be no immediate tax consequences to choosing an annuity. If the funds are moved into an RRSP, though, Ritchie says they should be invested in U.S. assets so the family has access to U.S. dollars while living in Texas. They’ll need to defer taxes on that RRSP as well, he adds, and the account would have to be included in the family’s U.S. foreign bank account report.

Ritchie favours the locked-in RRSP over the annuity because then Jim can invest the funds as desired and determine how he’ll stream his retirement income.

Jim’s severance pay (worth 21 weeks’ salary) would be treated much the same way; he may be able to leave it with the government and take it when he retires, or he could drop it into his RRSP.

Returning to Canada

If Jim and Sarah move to Texas, they’ll likely build U.S. savings through IRAs and 401(k) plans.

Luckily for them, Canada allows people to roll funds from these accounts into RRSPs whether or not contribution room is available. “But clients have to pay 15% withholding tax,” says Ritchie, and you should roll funds over only if you don’t plan to return to the U.S. This is especially the case for those who have held green cards rather than work visas. “If [people have] held green cards for more than eight years, they have to pay up to 30% income tax on deferred compensation when giving their cards up and transferring funds from U.S. registered accounts. That’s due to expatriate tax laws,” says Ritchie. They would apply if, upon departure, someone’s net worth exceeds US$2 million, or if her five-year average income tax liability exceeds $161,000. (This number is indexed for inflation, so find the latest here.)

You are also treated as if all your assets have been liquidated. It’d be best for Jim and Sarah to keep their green cards, since they’d avoid substantial taxation upon return and keep their U.S. options open. This way, they could choose to reside in the U.S. again, and their kids could choose to stay. Holders must return to the States at least once a year, or they risk being accused of abandoning their cards. Under proposed immigration laws, they could then be barred from living or working in the U.S., says Ritchie.

If Jim and Sarah keep their cards and U.S. accounts after returning to Canada, they’d need to file Form T1135 with CRA each year to disclose their foreign income.

Updated August 2016.