Nina and Simon are successful marketing executives with plenty of income and savings and no worries at all about their financial future.
They have a home in Toronto and a vacation home in Florida where they are thinking about retiring some day. Simon, 51, is a Canadian. Nina, 38, is an American with permanent residency status in Canada.
With assets on both sides of the border, they wonder how best to arrange their affairs - Simon has his own company - and they have a number of questions about cross-border tax issues.
"Our conundrum is not that we have debt issues," Simon writes in an e-mail. "Our problem is that we have assets spread all over the place, both in Canada and the U.S."
So they wonder: "How do we handle assets on both sides of the border? What happens to CPP and OAS if we are living in the U.S.? What are the tax implications for the Canadian company?"
We asked Linda Stalker, a financial planner at Henderson Partners Chartered Accountants in Oakville, Ont., to look at Nina and Simon's situation. Ms. Stalker cautions that she has taken a broad brush to the questions and Nina and Simon will have to consult a cross-border tax adviser for detailed information before making the final move.
What the Expert Says
When Canadians leave the country, they are deemed to have sold most of their assets for fair market value on the date of departure, Ms. Stalker notes. Hence they must pay what is called a departure tax.
Some assets are exempt, including real estate, property used in a business and registered assets such as registered retirement pension plans, registered retirement income funds and registered education savings plans.
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If Simon and Nina choose to give up their Canadian residency, it is important that they leave their RRSPs intact, she cautions. Collapsing their RRSPs would result in the whole amount being included in income and taxed at their marginal tax rate.
When they withdraw funds from registered plans after they are no longer Canadian residents, they will have to pay a 25-per-cent withholding tax. This can be reduced to 15 per cent through the Canada-U.S. tax treaty, depending on the type of withdrawal, she says.
There may be other ways - related to the book value of the plan - that Nina and Simon can withdraw some of their RRSP funds free from U.S. taxation, she says. To do this, they should ensure the book value (the original cost of their investments) is as high as possible before moving to the U.S.
If they become U.S. residents, Nina and Simon's RRSPs would be treated as unregistered investment accounts. Ms. Stalker says it is possible to avoid U.S. taxes on the growth inside their registered plans by filling out certain information forms when they file their U.S. tax returns each year. This way, taxes can be deferred until withdrawals are made from the RRSP or RRIF.
As non-residents, Nina and Simon will be eligible to receive Canada Pension Plan and Old Age Security payments as long as they meet certain criteria, the planner says. They do not have to live in Canada. To qualify for OAS, they must have been a resident in Canada for at least 20 years in total after the age of 18. The 20 years do not have to be consecutive.
CPP and OAS are not subject to the 25-per-cent withholding tax because they are considered to be U.S. social security payments and are taxed on the individual's U.S. tax return.
Simon is also concerned about how his private company will be taxed if he moves to the United States. There, when a foreign (Canadian) corporation earns passive investment income, it is considered a personal holding corporation, Ms. Stalker says.
The investment income earned is taxed in the hands of the individual with one exception: The net profit from investing - interest, dividends and capital gains income - is considered to be a dividend earned by the individual. Regardless of the type of income it will be considered to be dividend income.
"However, for Canadian tax purposes, the corporation remains a separate taxable entity and pays tax on its income."
One note of caution. If Simon and Nina do decide to retire to the United States, they must take care to make a clean break of it so they are not considered Canadian residents in the eyes of the Canada Revenue Agency, Ms. Stalker says. Cutting ties includes cancelling club memberships, withdrawing assets from financial institutions, cancelling health cards, cancelling drivers' licences and relinquishing Canadian passports.
Their Toronto house could either be sold or rented "as long as they cannot re-occupy the property on short notice."
As well, the CRA will look at the frequency and length of visits to Canada, she says. Nina and Simon must be out of the country for longer than 183 days a year.
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Simon, 51, and Nina, 38
How to plan for retirement and keep taxes to a minimum on income and assets held in Canada and the United States if they decide to retire to their Florida home in the future.
Plan well ahead of time, make a clean break and get expert tax advice before making the final move.
Tax savings and a comfortable retirement regardless of which country they choose to live in.
Monthly net income:
House $635,000; Florida vacation home $280,000; RRSPs $257,000; TFSA $10,000; Nina's IRA $50,000 (U.S.); Nina's 401K $185,000 (U.S.); non-registered $75,000; value of Simon's Canadian company $240,000. Total: $1,732,000
Mortgage $1,169; property taxes, property insurance, utilities and repairs $1,154; gas, car insurance, repairs, transit, parking $250; groceries $500; clothing $200; housekeeping $165; vacation $400; entertainment, dining out $250; gifts $100; charity $100; personal care $200; hobbies $370; club memberships $1,050; Florida condo $2,183; other family living $500; RRSP contributions $3,667; TFSA $833; other savings/additional mortgage payments $8,862; investment loan $286. TOTAL: $22,239
Mortgage, Toronto house $277,700; mortgage, Florida property $150,000. Total: $427,700.