The Canadian in America: Real-Life Tax and Financial Insights into Moving and Living in the U. S.
303
The Canadian in America: Real-Life Tax and Financial Insights into Moving and Living in the U. S.
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Product Details
| ISBN-13: | 9781550227574 |
|---|---|
| Publisher: | ECW Press |
| Publication date: | 05/28/2007 |
| Edition description: | New Edition |
| Pages: | 303 |
| Product dimensions: | 6.00(w) x 8.90(h) x 0.80(d) |
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Read an Excerpt
The Canadian in America
Real-Life Tax and Financial Insights into Moving and Living In The U.S.
By Brian D. Wruk, Terry F. Ritchie
ECW PRESS
Copyright © 2007 Transition Financial Advisors Group, Inc.All rights reserved.
ISBN: 978-1-55022-757-4
CHAPTER 1
American Aspirations
A simple man believes anything, but a prudent man gives thought to his steps. — Proverbs 14:15
So, you've decided to move to the U.S. It may be because of a great job offer, a spouse, or returning to your roots, but you have decided to leave Canada and move to the U.S. How do you prepare for such a major transition?
You have entered our world ... the world of Canada-U.S. transition planning. With the laws and regulations of two countries such as Canada and the U.S., such planning quickly becomes complex. This unique niche has been termed "cross-border" planning by some, but we prefer to call it Canada-U.S. transition planning. We caution you now that you shouldn't proceed with your move to the U.S. without allowing yourself enough time to understand all the nuances of your unique situation and then take the necessary actions before leaving Canada. If you are reading this book, you are off to a good start.
What Is Transition Planning?
You have your stuff packed and the moving company selected, but suddenly you think, "How do I move my financial affairs to the U.S.?" Financial planning is the core of transition planning, but we clearly define which border we are talking about and, in particular, how to smoothly transition your finances from Canada to the U.S. while saving you time, aggravation, professional fees, and every tax dollar you possibly can.
According to the College of Financial Planning, comprehensive financial planning is "the process in which coordinated, comprehensive strategies are developed and implemented for the achievement of the client's financial goals and objectives." According to the Financial Planners Standards Council (the licensing organization for the Certified Financial Planner™ designation in Canada), financial planning consists of the following six distinct steps.
1. Establish the client-planner relationship.
2. Gather client data and determine the client's goals and objectives.
3. Clarify the client's current financial situation and identify any problem areas or opportunities.
4. Develop and document the financial plan and present it to the client.
5. Assist the client with implementing the plan.
6. Monitor and update the financial plan.
You will notice that financial planning is a process, not a transaction or an end in itself. The same applies to transition planning. Since the financial planning industry is only about 25 years old, a brief history might help. The industry started as a transaction-based business with life insurance agents selling policies over the kitchen table or mutual fund salespeople coming to your door. It has since evolved to a technically based business where people manage an investment portfolio or provide tax advice. Today the industry has realized that you can't make decisions with a person's money and ignore the person — the two are integrated. As a result, the industry is rapidly moving toward a relationship-based model where "Money is a means to an end, not an end in itself."
Comprehensive financial planning begins by understanding what you are trying to achieve in terms of lifestyle now and in the future. This is driven by your values and beliefs about money and what you have observed during your lifetime. It is akin to taking off in an airplane with a flight plan in hand. Once our firm knows where you are trying to go (documented goals and objectives), we can develop a specific plan to test the feasibility of your goals and figure out how to get you to your destination. Other factors constantly affect your ability to achieve your goals, such as changes in the tax and estate laws, your income and expenses, death, disability, and investment performance. Therefore, our firm views transition planning as a lifelong process, not an event or a transaction. Without a flight plan, how do you know which direction to go?
There is a difference between a goal and an objective. A goal is a desired end state, such as "I want to simplify my life" or "I want a better understanding of my financial situation." Only you will know whether you are accomplishing that or not. An objective is clearly measurable, and everyone knows whether it has been achieved or not. For example, "I want to move to the U.S. by December 31st of this year." Once in place, your plan provides the overall context in which to place the individual, day-to-day decisions. When people struggle with individual financial decisions, it is usually because they do not have a plan. They are stuck in the individual decisions and have lost the overall perspective in which to place each decision. For example, a popular question we field is "Should we withdraw our RRSPs?" The answer is "What are you trying to achieve?" The tax implications are one small part of the answer. Why do you want to take them out? When do you need the funds? What will you do with the funds when available? Will you move the funds to the U.S.? How? Do you understand the pros and cons of doing so? Will you invest them? If so, how? For what purpose or objective?
1. Customs planning addresses issues in relocating your physical assets to the U.S. The transportation of items such as pets, guns, cars, or a wine collection across the border has unique issues that need to be dealt with in advance.
2. Immigration planning looks at the legal ways of moving to, working in, and residing in the U.S. either temporarily or permanently. You need some legal means of entering the U.S. because, despite popular opinion, the U.S. is another country, not another province of Canada!
3. Cash management planning includes the development and review of your net worth statement and a review of your cash inflows/out-flows during your move. From there, our firm can analyze the ownership of your assets between spouses and between Canada and the U.S., and we can calculate various financial ratios to determine if any opportunities or issues exist. The net worth statement serves as a benchmark to evaluate the effects of your move over time. We also address the movement of cash from Canada to the U.S. and how to simplify your life prior to your move.
4. Income tax planning is a comprehensive review of your current and projected tax situation with an eye for opportunities to reduce your current and future tax liability both before and after your U.S. move. It is important to note the difference between tax preparation and tax planning. Tax preparation is a completely historical perspective and merely takes what has happened (your tax slips) and records it on a tax form for the Canadian and U.S. governments. At that point, whatever tax liability or refund results is what you must adhere to. Tax planning, on the other hand, tries to reduce your tax liability by reviewing any tax avoidance techniques that may apply to your situation. There is nothing illegal about proper tax planning or tax avoidance, but it must be differentiated from tax evasion, which is the intentional defrauding of government authorities of the tax dollars they are due.
5. Independence/education planning develops detailed projections out to age 100 using current assets, income, and expenses to determine the feasibility of your financial independence and lifestyle objectives in the U.S. Alternative scenarios and sensitivity analysis are conducted to provide insights into which actions, if any, may be necessary to achieve your goals. For example, do you need to save more and be more aggressive with your portfolio, or can a more conservative approach be taken? Education planning determines how much is required, at what point in time, and what you need to do to fund these future education liabilities. It also provides a review of your education saving options in the U.S. and what to do with your education savings in Canada before moving.
6. Risk management examines your current situation for risk exposures and determines the best course of action in addressing them. For example, illness, fire, theft, accident, disability, death, lawsuit, et cetera are potential catastrophic events that could devastate what has taken a lifetime to build. There are many differences in managing risk between Canada and the U.S. that need to be addressed to ensure you are fully covered.
7. Estate planning helps you to arrange your affairs so you can (1) continue to control your property while alive, (2) provide for the needs of loved ones in the event of disability, and (3) give what you have to whom you want, when you want, the way you want, at the lowest overall cost. The focus is on control first and on tax dollars, professional fees, and court costs saved second.
8. Investment planning determines your investment objectives as derived from your financial plan and then designs an investment portfolio to achieve your required rate of return while managing your tax liability. Ongoing monitoring, reporting, and rebalancing of your portfolio are required over the long term to ensure it is achieving your goals and risk tolerance.
Before You Go!
The two items you must have in place before you even consider a transition to the U.S. are adequate health-care coverage and a legal means of residing in the U.S. (a valid visa).
1. Health-Care Coverage
You may not be aware, but your provincial coverage will be of little or no use to you when you move to the U.S. The rules are different for each province, but typically, if you reside out of your province for six months or more, you lose your provincial health coverage. And, once you have lost your coverage, you may not be able to get it back immediately because of your individual provincial rules (Alberta allows you to have it back immediately, while Ontario has a three-month waiting period). As a result, you must have some form of U.S. medical insurance to cover yourself in the event of illness or injury in the U.S. because there isn't universal government coverage like there is in Canada. This coverage is best secured just before you make the transition to the U.S. in the event you, or someone in your family, has a "preexisting" condition and is "uninsurable." There are several options to cover you and your family that are discussed in more detail, along with items such as life, auto, and homeowner insurance, in Chapter 2, "Cover Your Assets."
2. Residing in the U.S.
Despite popular opinion, you must have a legal means (i.e., valid immigrant or non-immigrant status or U.S. citizenship) of entering and remaining in the U.S. for any period of time. To work there, you require the appropriate authorization as well. No matter what, you have to fit into one of the immigrant or nonimmigrant "boxes" as outlined by the U.S. Citizenship and Immigration Services. Unfortunately, many Canadians go to the U.S. on a "visitor's visa" (good for six months) and mistakenly believe they can work in the U.S. just like they can in any province. This misconception comes in part because a B-1 (visitor for business) or B-2 (visitor for pleasure) visa is not physically issued when you cross the border (you may get a stamp in your passport, but that is it). This leads some to believe they can stay or work as long as they want. In fact, if you are caught working in the U.S. without a valid work visa, you will be considered an illegal immigrant and could face deportation and lifetime banishment from the U.S. There are numerous legal options you can use to enter the U.S., and you can review your possible visa options in Chapter 3, "A Pledge of Allegiance."
Once you have these two essentials in place, the following must also be considered.
Customs
This is where most people spend the bulk of their time, to the jeopardy of most everything else. No doubt the movement of your physical assets to the U.S. is time consuming. You have to make travel plans for yourself, your spouse, and your children to get yourselves down there whether you are going to fly or drive. There is also coordinating the visa applications for spouses and children that can cause havoc if not done correctly at the border. Then there is the packing of your household goods, selecting a moving company, filling out all the requisite forms for U.S. Customs and Border Protection, and so on. When you get down to your final destination, you have to coordinate the arrival of your moving truck with the closing on your house. And then there is unpacking and putting everything away. We offer some considerations in Chapter 4, "Moving Your Stuff."
Income Taxes
U.S.
There is much work to be done in minimizing your taxes before taking up tax residency in the U.S. If you choose not to do it, you can face unnecessary taxes and compliance issues that can be punishing. The Canada-U.S. Tax Treaty and the relevant provisions in the U.S. Internal Revenue Code and Canadian Income Tax Act are your protection from double (and triple) taxation in both countries. Obviously, a thorough understanding of these rules and their application to your situation is the key.
An analogy may help. Imagine you are the owner of a dinner theatre, and the Internal Revenue Service (IRS) is sitting in the audience. You have one chance to "set the stage" before the curtains open and the irs has full view of your "financial stage." As soon as you become a tax resident of the U.S., you open your entire "financial stage" for the irs to see. At that point, you can no longer set the "stage" to present your financial situation in the best light possible to minimize your tax liability. Interestingly enough, you can be a resident for tax purposes in the U.S. yet be considered an illegal alien for immigration purposes. Alternatively, you can become a tax resident of both Canada and the U.S. and have to look to the Canada-U.S. Tax Treaty to avoid double taxation and to determine in which country you belong. All of this is explored in greater detail in Chapter 5, "Double Taxes, Double Trouble." As a side note, U.S. citizens, derivative citizens, and green card holders living in Canada must file U.S. income tax returns annually!
Social Security number/individual taxpayer identification number: (SSN/ITIN)to work or live in the U.S., everyone in your family must have an SSN (for those working) or an ITIN. The SSN will be required by your employer and is needed to file a tax return or open a bank account. The ITIN is required for those who are not eligible to work in the U.S. but allows you to reduce your taxes by claiming your spouse and children as dependents. See Chapter 5 for further details on obtaining an SSN or an ITIN.
Canada
Based on popular opinion, many people just stop filing Canadian tax returns when they leave Canada for the U.S. The rationale is usually "I don't live there anymore, so I don't have to file taxes there anymore." In fact, there are final filing requirements with CRA that could increase your tax bill significantly due to the "departure" tax when you leave Canada. In addition, if you don't sever your ties properly prior to and after your move, CRA could come back and "deem" you a resident of Canada, causing you a lot of inconvenience and the potential of additional income tax. Alternatively, the rules state that, if you are considered a treaty resident of the U.S., you are automatically deemed a nonresident of Canada and forced into the departure tax. You need to ensure you do the requisite planning before your departure to understand your departure tax, how to correctly sever your ties with Canada, and how to mitigate the taxes in your unique financial situation.
The bottom line: if you haven't done the prerequisite planning prior to your departure, many planning opportunities may be lost forever, and you will find yourself in a situation where you have to pay many financial professionals on both sides of the border to get yourself back in compliance with both taxing authorities.
Currency Exchange
Along with moving yourself, your spouse, your family, and your physical goods, you have to move some, or all, of your financial assets to the U.S. Doing so can be confusing, and most folks are unsure about how to tackle it. There are many misconceptions about currency exchange, and often people will leave assets in Canada because they believe they will "lose" money in moving it to the U.S., but other risks can be incurred by leaving everything in Canada. These myths and facts are addressed in Chapter 6, "Show Me the Money."
Estate Planning
In our experience, the area most often neglected is wills and estates. Unfortunately, many Canadians go to their attorney to "update" their Canadian last will and testament before moving to the U.S. to make sure they have it in order. What they don't realize is it may be a complete waste of time and money because their Canadian estate planning attorney typically doesn't know the U.S. rules for non-citizens living in the U.S. Further, you can have a valid will in the U.S., but the provisions contained in the document may not be executable in the U.S. (i.e., domestic laws, disinheriting heirs, etc.). The complexities of estate planning for non-citizens residing in the U.S. are considered in Chapter 7, "Till Death Do Us Part."
(Continues...)
Excerpted from The Canadian in America by Brian D. Wruk, Terry F. Ritchie. Copyright © 2007 Transition Financial Advisors Group, Inc.. Excerpted by permission of ECW PRESS.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Contents
Dedication,Acknowledgements,
Introduction,
I. American Aspirations,
II. Cover Your Assets,
III. A Pledge of Allegiance,
IV. Moving Your Stuff,
V. Double Taxes, Double Trouble,
VI. Show Me the Money,
VII. Till Death Do Us Part,
VIII. Financial Freedom,
IX. Smarten Up!,
X. Money Doesn't Grow on Trees,
XI. The Business of Business,
XII. Mayday, Mayday,
XIII. Realizing the Dream,
Appendices,
Appendix A Glossary,
Appendix B Resources You Can Use,
Appendix C Transition Planner Interview Checklist,
Appendix D 100 Questions Typically Asked by the U.S. CIS Examiner,
Appendix E Comprehensive Case Study: Working Couple,
Appendix F Comprehensive Case Study: Retired Couple,
Index,