Canada: Moving To The United States: Tax Consequences And Planning Opportunities

Last Updated: June 20 2008
Article by Brian Kearl

Moving to the United States may raise all sorts of concerns for individuals resident in Canada, not the least of which are the potential tax consequences to such a move. There are, however, significant planning opportunities available to potentially mitigate such tax consequences and even provide further tax relief in the future.

Tax Consequences of Migration

When an individual taxpayer ceases to be resident in Canada, paragraphs 128.1(4)(b) and (c) of the Income Tax Act (Canada) (the "Act") deem the taxpayer to have disposed of and then reacquired certain of his or her property immediately before the cessation of residence. The purpose of this provision is to create a "departure tax" for the taxpayer. This departure tax ensures that Canada has the ability to tax taxpayers on property gains that have accrued while they were resident in Canada.

Property excluded from this departure tax includes Canadian real property, Canadian resource property, timber resource property, certain property used in a Canadian business, certain property owned by short-term Canadian residents, and other miscellaneous properties. Individual taxpayers may, however, elect to have the departure tax apply to certain of his or her Canadian real property, Canadian resource property, timber resource property and Canadian business property. One of the reasons migrating taxpayers may elect to trigger these additional capital gains on cessation of residency is where the taxpayer has unused capital losses or an available capital gains deduction to shelter such gains.

Pursuant to the Canada-United States Tax Convention (the "Treaty"), taxpayers, in certain circumstances and in respect of certain property that was subject to the departure tax, may be able to get a step up in tax basis for US purposes. The purpose of this tax basis step up is to ensure that the United States would not tax the pre-immigration gains of migrating Canadian residents. These provisions1 in the current Treaty are limited and will not provide complete relief in all cases. The new Treaty Protocol, agreed to between Canada and the United States on September 21, 2007, expands considerably the scope of these provisions2. Unfortunately, to date the Treaty Protocol has not been ratified by the U.S. Congress, and as such is not yet enforceable.

Tax Planning Opportunities

Taxpayers may defer the departure tax by posting adequate security with the Canada Revenue Agency ("CRA") pursuant to subsection 220(4.5) of the Act. Consider the example of a taxpayer subject to a departure tax of $100,000 on ceasing to reside in Canada. By the taxpayer's filing deadline for the year in which he or she ceased to reside in Canada, the taxpayer would ordinarily be required to pay a $100,000 departure tax. If, however, the taxpayer posted with CRA acceptable security in the amount of $100,000 before this time, the taxpayer's departure tax would be deferred until the earlier of the date of the sale of the property that was subject to the departure tax, or until security was no longer posted. While the absolute tax savings in posting security are nil, the real tax savings, when the time value of money is considered, can be significant.

Another planning opportunity for taxpayers are certain types of property, defined as an "excluded right or interest" in subsection 128.1(10) of the Act, that are excluded from the departure tax. Excluded rights or interest include interests in personal trusts, registered retirement savings plans ("RRSPs"), registered retirement income funds ("RRIFs") and retirement compensation arrangements ("RCAs").

Where a taxpayer's property is held through a personal trust the taxpayer will not be subject to the departure tax on such property. The reason for this is twofold. First, because the taxpayer does not actually own the trust property, on migration there is no deemed disposition and reacquisition of the property attributable to the taxpayer. Second, the taxpayer's interest in the trust is specifically excluded from the types of property subject to the departure tax. Whether the fair market value of a beneficial interest in a fully discretionary trust can be determined is another limitation as well.

Care must be taken however, to avoid the application of paragraph 104(4)(a.3) of the Act, which may result in a deemed disposition to a personal trust of all of its property where the property was contributed to the trust on a tax-deferred rollover basis in anticipation of the migration of the taxpayer beneficiary. To avoid the application of this provision the personal trust should be set up well in advance of a taxpayer's migration, perhaps as much as two years. Furthermore, the main purpose for the setting up of the personal trust should not be to save or reduce taxes, but rather estate planning, asset protection or some other business, investment or family planning purpose.

RCAs may also provide significant tax savings when organized properly. While Canadian residents can expect to pay as much as 40-50% tax on their employment income, payments from RCAs to non-resident beneficiaries are only subject to a 25% withholding tax. Care must be taken when setting up these arrangements, as CRA has stated publicly that they will look at RCAs set up for non-residents to ensure they were not designed merely to reduce taxes.

The same reduced tax rates available to RCAs are also available to RRSPs and RRIFs. Furthermore, the applicable withholding tax rate may be reduced even further, from 25% to 15%, where funds in the RRSP or RRIF are taken out over a 10 year period, rather than as a lump sum, while the beneficiary is resident in the US. Consequently, a taxpayer, with contribution room in his or her RRSP, planning on moving to the US, should consider whether to make such contributions before emigrating to the US.

Other more sophisticated tax planning techniques may be available to taxpayers under certain circumstances. Through the use of personal trusts and corporations, taxpayers may be able to arrange their affairs to not only reduce their departure tax significantly, but also to access the taxes they paid in Canada as foreign tax credits once living in the US.

While this article is not the place to outline such tax planning opportunities, taxpayers should always involve tax professionals in their estate, investment, business and, of course, migration planning.

Footnotes

1.See Article XIII, sections 6 and 7 of the Treaty.

2.In particular, See Article XIII, section 7 of the Treaty, which provides for an election to achieve this step up in tax basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
19 Sep 2019, Seminar, Birmingham, UK

Providing GCs, Heads of Legal and senior in-house lawyers with timely, topical and practical legal advice on a variety of topics.

26 Sep 2019, Seminar, London, UK

Providing GCs, Heads of Legal and senior in-house lawyers with timely, topical and practical legal advice on a variety of topics.

8 Oct 2019, Seminar, Birmingham, UK

Supporting the development of paralegals, trainees and lawyers of up to five years' PQE by providing valuable knowledge and guidance together with practical tips.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions