Author Topic: US->Canada move tax implications?  (Read 593 times)

Greatoutdoors

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US->Canada move tax implications?
« on: November 06, 2018, 06:09:42 PM »
Hello.  I originally posted this in the Case study section but thought I'd perhaps get more response in the Canadian Tax section.  Below is my situation I'm interested in what people would in my shoes.

My situation

Me: 40, UK and Australian citizen
Wife: 38 Canadian & Australia citizen
Children: 2 & 4
We live and work in NY as US-tax residents having moved here a little over a year ago, previously lived in Australia.
 
Gross Salary per month $33.5k

Pre tax deductions  (monthly)

FSA Dependent Care  $417 max $5000k allowance
Healthcare  $429
HSA   $265 max for annual family allowance
$401k $2620 max for annual contribution
Total $3731

Net income  $15.5k/month

Expenses (monthly)

Child care   $3267 full time 5 day, 2 children
Property taxes $1220
Car lease+fuel $833 (two cars)
Vacation $500 (conservative budget $6k for annual vacation domestic and overseas)
Utilities $458 Gas, water electric
Groceries/Food $1380 includes eating out 2 month, lunch weekdays
Insurance $313
Other $700 (internet, TV subscription, gym, kids sports activities, clothes)
Total $8671

Net income after expenses (monthly) $6,829

Assets
House paid off  $950k
Cash    $110k
401k    $58k combined balance
Vanguard brokerage $31k
Company shares $93k
Real estate crowdfunding $44k
HSA    $1k
Subtotal $1.287m        

Overseas 401k $350k in Australia => can’t access till 65
Overseas Investment Property:    $1.75m (valuation), mortgage $800k, Cash in offset account $800k => no interested owed on mortgage, like a line of credit set up. 
Overseas sub-total    $2.1m

Net Rental income after all expenses $3400/month

Liabilities - None beyond the overseas mortgage

Some of you may look at this and think this guy is already into FIRE status and why is he here.  The expenses are ridiculously high, this is partly living in an expensive NY suburb due to my work location and clearly some luxury expenses.  We’ve always been savers and yes we have high paying jobs which has helped a lot.  My wife and I started from nothing literally, both from working class families and have built this up over 15 years. Clearly, luck has played a role with real estate appreciation along the way.  Although our asset position is very strong, there’s not a huge amount of passive income except from our overseas investment property.  We know our stock holdings is very low and this is something we are aiming to build up over the next few years for diversification.

Here are our plans and some questions I would like to pose:   

i) Move to Canada permanently 'early retirement' in 4-5 years => this is mainly for family reasons.  How can I optimise my investment choices while based in the US over the next 4-5 years before making that move?  For example, does is make sense for me to max out 401k and HSA?   Would options like Roth Conversion ladder and access HSA without penalty even be possible or make sense if I'm not in the US?
ii) We have the option of applying for a US Green Card does it makes sense to do this?
iii) Despite alternative having a large part our Networth in real estate, we are very interesting in building a Property Investment portfolio.  Does it make sense to investment in US Real estate if we know we are leaving?  The size and opportunity of the US market is the main reason I tend to favour the US RE market.  We have also considered the Canadian RE market too.
iv) How and when to dispose of our Australia investment property and minimise the potential Capital Gains Tax.
v) We have a huge passion for travel and we would like to consider travelling with our children and home schooling them for 1-2 years, perhaps before moving to Canada.
vi) What else would you change?

I appreciate that this may be difficult question to answer and more suited to wealth management/cross border experts, if anyone has any contacts on firms/individuals who could help that too would be appreciated.

Welcome any thoughts or questions you may have.

daverobev

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Re: US->Canada move tax implications?
« Reply #1 on: November 07, 2018, 06:34:39 AM »
i) Generally "pensions" are 'seen' by foreign governments, other tax shelters are not. So, the Canadian TFSA is not recognised by anyone else as a tax shelter. Check with the double taxation agreement. Generally you are going to be bringing a pension in tax free but everything else will be taxable. In Canada the TFSA is only $5500 (probably $6k next year actually, it's inflation linked) a year... so it'll take time to shelter much.

Remember - Canada taxes investments on growth while in Canada. So if you come in, have three years of good stock market (or property) increases, and leave, you will pay capital gains on the growth *even though you sold nothing*.

ii) Fuck no. US people have to file US tax returns regardless of where they live. You would NOT use the TFSA if you are a US person, you're limited in what you can invest in without filling in a load more forms... it goes on and on. Look up PFIC, FBAR, I dunno. Generally, if you're leaving the US and NOT planning on going back, getting a green card would be a nightmare.

iii) Sure why not? Income is income. If you can get those lovely 15 or 30 year fixed rate mortgages, good for you - I wish I could have, I would still own US property. There are some great bargains to be had. Now - you'll still have to file a US tax return if you do this, but whatever.

iv) Presumably Aus taxes capital gains regardless. There probably isn't a right answer to this, but see my 'remember' - if you move to Canada, they will want a cut. So you need to know the value of the property when you arrive vs when it's sold. Cap gains are 'included' at 50% here. And there is no doubt a DTA, so if you pay more to Aus than Canada thinks you owe, you won't pay Canada at all. Still - do you want to be doing Aus, US, and Canadian tax returns each year?

v) Yeah do this sooner than later. When they are older, school routine is a lifesaver.

vi) Why would you wait? You've got loads of cash. Learn to live frugally and be done now - unless you love your job.

daverobev

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Re: US->Canada move tax implications?
« Reply #2 on: November 07, 2018, 07:03:31 AM »
Oh, regarding 'iii) Sure why not?' - make sure you end up below US Estate Tax thresholds, though. That's something worth thinking through - how inheritance is dealt with in each country you have assets. Or, set up a corporation or whatnot to hold those things - best to talk to a lawyer I suppose.

Greatoutdoors

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Re: US->Canada move tax implications?
« Reply #3 on: November 08, 2018, 09:34:11 PM »
Many thanks for the details response which is very helpful.

i) With 401k and for brokerage investment account, is it possible to simply leave these account in the US while I live in Canada?  Access the 401k at 59.5 preservation age and sell off part of the brokerage account as and when I need income?

ii) Thanks for the pointer here.

iii) Sounds like the mortgage environment in Canada is much tougher.  Is it that the mortgage during are simply short and higher rates? I haven't delved into too much details here. 

iv) this in my mind is a big issue, current a capital gain >$1m.  As a non-resident I basically end up paying the highest marginal tax in Aus ~46-47%.  Wondering whether it's almost worth going back for 1-2 yrs to reestablish residency and then sell, I believe you get a 50% discount as a long term asset.

v) Agree.

vi) I don't love my job, obviously pays very well, hrs are ok but I'm not passionate about it. Welcome to financial services.  I'm also in the process of convincing the Mrs with the whole FI plan she wants to have a lot of cushion!  She is most of the way there.

Goldielocks

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Re: US->Canada move tax implications?
« Reply #4 on: November 24, 2018, 01:12:08 AM »
Many thanks for the details response which is very helpful.

i) With 401k and for brokerage investment account, is it possible to simply leave these account in the US while I live in Canada?  Access the 401k at 59.5 preservation age and sell off part of the brokerage account as and when I need income?
you need to transfer them to a bank that allows non-resident canadians to trade.   Try TD Ameritrade.  There is at least one other brokerage that allows this, otherwise your accounts are essentially frozen after you leave the USA (as soon as the bank realizes it), until you close it out in one go.
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ii) Thanks for the pointer here.

iii) Sounds like the mortgage environment in Canada is much tougher.  Is it that the mortgage during are simply short and higher rates? I haven't delved into too much details here. 
  Mortgages in Canada are very different, but not tougher, at all.  Much less fees on the mortgages.   I have a variable rate that started at 2.1%, and is sill under 3% today, 4 years later...which is great and much cheaper than the USA.  Mortgages tend to be held by the banks that issue them, not sold off.   Don't take a longer locked-in period than what you think you will keep a property for, as breaking the mortgage is very expensive.
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iv) this in my mind is a big issue, current a capital gain >$1m.  As a non-resident I basically end up paying the highest marginal tax in Aus ~46-47%.  Wondering whether it's almost worth going back for 1-2 yrs to reestablish residency and then sell, I believe you get a 50% discount as a long term asset.

v) Agree.

vi) I don't love my job, obviously pays very well, hrs are ok but I'm not passionate about it. Welcome to financial services.  I'm also in the process of convincing the Mrs with the whole FI plan she wants to have a lot of cushion!  She is most of the way there.

Another thing to consider -- I second the opinion not to get a green card.   If you move to Canada (or out of US) as a visa , non greencard holder, you can not file jointly on your final tax return.   (I could as a Canadian until the year that we moved, so we paid an extra $8k in taxes that year we moved).  But, we don't have the hassle of renouncing it.  US taxes are a bear.

As for holding US property while non-resident.  If you don't plan on returning, ensure that you sell your property in the USA long before you die.  Canada does not have estate taxes and the USA does.  All the canadians with US "snow bird homes" that die face ESTATE TAXES.  Yes, right now the exemption is quite high, but that can change in a single US budget season.  Canada has no estate taxes.

As for Australian property -- I know nothing about australia....  but if you have had tremendous growth in value since you left it may be worth it to live there for a few year.   In canada, you can claim the total number of years you lived in the property, your primary residence, as a % that is "free from capital gains".  I mean, you could live somewhere else for 10 years when the property appreciated greatly, and then  10 years living there at the property when it was stagnant, and still protect 50% of your capital gains from taxes.  Australia (a common wealth country) may be  similar, and it can be worth it.  Check it out and do the math.