US Citizen in Canada... any U.S. tax-friendly investing options available?

[Ms. Stache]

Hi Mustachians,

My husband is American and we live and work in Canada. We have no plans to move back to the States.

I'm aware of options to set up brokerage accounts in the US from abroad, but I'm wondering whether he is eligible to set up any tax-advantaged accounts. I'm thinking something like a Roth IRA, which I understand to be like a TFSA (after-tax income invested, no tax on gains and income).

I've read in another thread that you must have W2 income to use an IRA, but I believe they were talking about a traditional IRA. Is the same true for a Roth? I've also read that you must reside in the US (regardless of citizenship) to use an IRA. Anyone know if this is true?

Anyone have any other ideas for how an American living in Canada can invest in a way that is tax-friendly to both the IRS and the CRA? Preferably also friendly to the tax-preparer (me)?

[Rockies]

I'm a US citizen living in Canada and I often wonder the same. I had one US/Canadian tax expert tell me to stay the hell away from ROTH IRA's, but another say they wern't really a problem.

I opened a roth IRA last year through my vanguard account (that I started when I lived in the USA). There was no requirement to produce a W2 or anything like that. As far as I know so far there havn't been any negative tax implications.

As far as investing in the US and Canada while making both countries happy - I've been advised to do the following:

1. Stay the hell away from TFSA's. If you have one already close it out today. The USA treats it as some sort of a foreign trust and it can get you into trouble.

2. Its okay to invest in RRSP's (there is a cross border treaty in place).

3. If you have extra money on the Canadian side of the border you want to invest in non-registered accounts I've been advised by multiple sources to exchange for US dollars and buy stocks or ETFs through my Canadian brokerage account on the NYSE. I've purchased Vanguard ETF's on the NYSE through by canadian bank's trading platform.

4. Make sure you start filing your US taxes correctly. This includes the FBAR (foreign bank account reporting form) and other things that are beyond my ability to properly explain, though resources exist online detailing them.

I'd really advise that he gets a US/Canada tax specialist if he hasn't already and that he does it sooner than later. All of this stuff is quite complicated and you don't want to get yourself in trouble.

[EfficiencyNerd]

I'm in a similar situation to you - my wife is from here in Canada, I'm from the US, and we plan to stay here. We just moved to Canada this year to be near her family.

I opened a TFSA in my wife's name, but won't ever do one in my own name (since the US doesn't see it as tax-exempted). Next year I'll open RRSPs for the both of us. We also have a taxable account, again just in the wife's name for now. Personally I don't plan to hire a tax specialist as I somewhat like doing this kind of stuff myself.

From my understanding, filing the US taxes when you have no income in the US is fairly straight forward, as up to a certain income amount is exempt to some extent.

As far as opening accounts in the US, from what I just read here: https://thunfinancial.com/iras-roth-iras-and-the-conversion-decision-for-americans-living-abroad/ American citizens living abroad can have IRAs (and I'm assuming that's both types of IRAs) but cannot contribute unless they have earned income that doesn't fall under the Foreign Exemption (either some other income based in the US, or income greater than what's allowed - which I think is something like $90k USD).

Out of curiosity, is there a reason you want to open accounts in the US when you have no plans to move back there? To me I think it would be easier both from a taxes standpoint and a currency conversion/exchange rate standpoint to keep everything on the same side of the border as where your income is coming from.

[Heckler]

I haven't looked at it (prefer to read taxtips.ca), but it saw this link and thought of this thread.



http://www.ustaxtips.net/personaltax/citizensoutsideus.htm

[Ms. Stache]

Thanks all for the tips and links.

I concur with avoiding TFSAs. I do my husband's taxes and 2013 was the year of tax hell for us -- not only did we open a TFSA in his name, but had Canadian ETFs in there! I shut it down, filled out the 3 lbs of forms, paid the tax to the IRS and learned my lesson.

My interest in opening a US-based account was mainly because we're so limited in what we can do in tax-favoured accounts here. We max out my husband's RRSP and my TFSA every year, but we still have some extra left over and my income is low enough that it doesn't make a lot of sense to max my RRSP as well. At best, we'd be tax-neutral when I withdrew it as income later.

We have unregistered accounts in my name with Canadian equities so we can take advantage of of dividend tax credit (which is the one benefit of my income being low). That sort of leaves us overweighted in Canadian equities though. I'm just trying to see if there's an optimal way to balance tax-advantage with asset allocation.

I have considered the option of US-listed ETFs in an unregistered account in his name, but was unsure of how much it of a pain it might be when doing our Canadian taxes. I've never had to report foreign-earned income to the CRA before. Is this a pain?

Now that I'm thinking about all this, it's probably not worth it since he may just give up his citizenship in the future anyway. Lord only knows what it would be like trying to get money out of a Roth at that point.

[TravelJunkyQC]

Regarding the TFSAs, I was under the impression that while they were not considered tax-advantaged in the US as they are in Canada, there is no reason to "stay away from them". Rather, you treat them as a regular non-advantaged investment account when doing your US taxes. Am I mistaken?

[Ms. Stache]

@TravelJunkyQC:

Like Rockies said, TFSAs turn out to be more complicated than just not getting the tax-free status for any interest/income you earn in that account.

The IRS considers them to be a "foreign trust" -- i.e. a potential tax-evasion strategy. So you have to report them separately using forms 3520 and 3520-A (the American holder has to report both sides of the trust, as the trustee and the beneficiary). If you don't mind doing extra paperwork, and you have enough tax credits to cover any income or capital gains from that account each year, then it's not terrible, but you have to be careful what you put into it. Definitely no Canadian mutual funds, including ETFs. Then it's considered a Passive Foreign Investment Company -- if you want to both fall asleep and be terrified, take a look at the instructions for that form :)

I suppose individual stocks or ETFs listed on a US stock exchange could be ok in a TFSA and it would not be considered a PFIC, but I was turned off by having to do several years'-worth of amended returns, so I've sworn them off. In those years that the TFSA was open, we ended up owing money to the IRS. This is because you can only exclude foreign income for US taxes if is earned (i.e. not passive from investments). And you can only use a tax credit to offset the US taxes on earned income as well -- you can't use it to cover passive income tax. The whole point is precisely, I think, to stop Americans from earning passive income from investments overseas without paying US tax on it.

A really good source for US-Canada tax-specific info is the Serbinkski forums. They helped me get thru my tax mess.

[Ms. Stache]

oops, *Serbinski: https://forums.serbinski.com/viewforum.php?f=2

[TravelJunkyQC]

Thanks! I'll have to look into this. I may have screwed myself over the past few years....

[Bryan_in_Ger]

Hi Ms. Stache (and everyone else),

I'm an American in Germany, but the difficulties are similar.  I can only agree with the information which has already been posted: as an American abroad it is difficult to set up "tax-advantaged" accounts for several reasons.


There are a few exceptions as far as I can discern, but they seem quite specific:

-Any foreign earned income exceeding the Foreign Earned Income Exclusion but under the maximum income allowed by a Roth IRA (meaning from $100,800 and $116,000-$131,000 for single filers) which is a narrow window to hit.

-One can also count all foreign earned income as taxable income in the US and use another IRS-Form 1116 (Foreign Tax Credit) to deduct foreign taxes from the US tax burden.  If I remember correctly, using that method of filing taxes made it possible to contribute to an IRA.  But, once the Foreign Earned Income Exclusion is used in a tax year it is a pain to switch to the Foreign Tax Credit and vice-versa (requires more forms, an explanation why the person is changing exemption types, it can only be changed every few years, etc.).


For some more general info, I posted a "summary" (it got quite long) a while back for a US/German couple living here in Germany.  The info might be helpful here as well: http://forum.mrmoneymustache.com/investor-alley/us-ger-mustachian-couple-needs-us-investment-advice/msg1013356/#msg1013356

My two cents: set up a US-based brokerage account for your US-spouse despite how difficult it is.  I think the local authorities are more accepting of an American living there with investments in the US than the US is of an American investing abroad despite living there.  I am in the middle of setting up an account with Charles Schwab, so I'm close to practicing what I preach.

Good luck!

Cheers,
Bryan

[Novik]

This whole thing is so frustrating. I'm a dual citizen through my mom, but since all her investments are still in the states she doesn't deal with any of this so I'm in the middle of flailing around trying to sort out my mistakes solo (including closing a TFSA with ETFs... ugh - any tips??). Definitely considering renouncing citizenship later, but it seems a little rushed to do it at 22.

My interest in opening a US-based account was mainly because we're so limited in what we can do in tax-favoured accounts here. We max out my husband's RRSP and my TFSA every year, but we still have some extra left over and my income is low enough that it doesn't make a lot of sense to max my RRSP as well. At best, we'd be tax-neutral when I withdrew it as income later.

I think it makes sense to open an RRSP anyways and max it - because the growth is tax free (CND and US) and you can invest in whatever you want. (At least that's my impression... that the IRS treats RRSPs like the CRA does basically due to a tax treaty).

I am in the middle of setting up an account with Charles Schwab, so I'm close to practicing what I preach.

Bryan - I'd be interested in hearing more about how things go with Charles Schwab. I have some individual stocks inherited from my US grandparents that are in the US with an adviser. I'd like to keep them invested in the US but move them to a self-directed account in index funds. Currently, opening a new account with CS seems like it might be the best way, so it would be great to hear first hand how the process is from outside the US.

[Rockies]

If you are getting frustrated just bite the bullet and spend the money to hire a US/Canadian tax specialist to do your taxes for one or two years and take as many notes as you can. You can just google and see where they are in your area, there are people who dedicate their profession to filing taxes for US citizens living in Canada. BDO and HR block have such specialists as do many other accounting firms, you just need to ask around. Its best to learn while you are young and before you have too much money in the game.

[Novik]

Hey Rockies, really appreciate the advice.

This will probably sound very complainypants... there's already an cross border accountant doing my taxes and I'm still frustrated. He does my mom's and she's had him doing mine too because I have some inherited stocks in the US (which I'm very grateful for). The downside is that it's too late to learn "before I have too much money in the game". My taxes are already complicated.

The big frustration is that I want to be able to open a TFSA or even a taxable account and dump my savings into index funds and just go! But PFIC etc means that's an expensive and ill-advised proposition. So I'm playing the savings account interest game and moving them around for bonuses as I can.

In 2016 I closed a lot of accounts including TFSAs so that's good. Goals for 2017 are to get caught up on FBARs, plan/start to move US $ into US index funds vs. individual stocks, and probably open up a questrade RRSP in addition to my plan through work.

[Bryan_in_Ger]

Hi Novik,

Sorry it's taken me this long to finally reply, been quite busy lately.

The process of opening an international account at Charles Schwab wasn't too difficult/complicated, but it took a few weeks:

They have an application form (pdf file) on their website that I filled out and mailed in.  Eventually they e-mailed me to set up a "Due Diligence Compliance" interview; it is a phone interview conducted with one of their representatives where they ask how much money one plans to initially invest, where the money is coming from (inheritance, salary, etc.), and a few other questions they seem legally bound to ask (to prevent laundering, etc.).  After that, I received a confirmation that my account was open and how to set-up a user account for their website.  To set up a user account I had to call and have one of their representatives guide me through the process which was somewhat odd compared to being able to set up the account myself, but whatever.  And I received some mail from them in the meantime, but nothing crazy.

After making sure I properly filled out my wire-transfer form for my bank and sending it off (it is odd ordering an international wire-transfer to transfer money to the local account they offer, but Schwab requires that form of transfer since the money will be credited in the US), I am crossing my fingers everything works out well and the money gets to where it needs to go.  I can keep you updated when things progress along far enough.


As for the tax side of things: I will receive the required tax documents and forward them on to my tax-professional/aunt when she files for me in the US.  In Germany I'm just going to include the realized capital gains from my holdings with Schwab.  It worked for my other capital gains last year and they didn't request any further documentation.


Hope this helps!


Cheers,
Bryan

[Novik]

No problem, Bryan, thanks for following up! Unfortunately my own internet research in the last week or so seems to indicate that Charles Schwab is no longer an option for Canadians, and they are closing for more and more countries.

When I go to open an account, and say I live in Canada, I get:

"Due to industry regulations, Schwab will need to review the details of your specific situation before proceeding with your account application. Please telephone Schwab at +1-415-667-7870 (if outside the U.S.)  for more information."

I hate phone calls but I think I need to just suck it up and call them... Probably they'll say no but at least I'll know for sure.

In better news, I've heard good things about Interactive Brokers and they seem to actively want expats despite FATCA etc, so that's next on my list to contact!

[Bryan_in_Ger]

You cannot open an account through their normal website, you have to download the application from their international website, fill it out (either in the PDF or by hand), and mail it in.

I am just assuming you are attempting to open an account through their website which is only for US-residents, but when I just tried to recreate your problem, I was notified the SSN I randomly picked is already listed with another account. Oops. :-D

[Novik]

The link I was using looked to be pretty clearly international, since the first page was literally only a dropdown with a country: http://international.schwab.com/public/international/nn/acct_open_intro.html

But your point is still encouraging and I will definitely give them a call to double check!

[Bryan_in_Ger]

Hmmm, I don't recall having to enter my country of residence, but I have a horrible memory. :)

And, to keep you updated: my wire transfer came through today and Charles Schwab gave me a way better rate than my bank has given me in comparison.  Schwab took off 1/2 cent per euro at the most whereas my bank took off almost 2 cents per euro transferred.

But either way, if you go with Schwab or IB, I wish you the best of luck!

Cheers,
Bryan