The American in Canada: Real-Life Tax and Financial Insights into Moving to and Living in Canada -- Updated and Revised Second Edition

The American in Canada: Real-Life Tax and Financial Insights into Moving to and Living in Canada -- Updated and Revised Second Edition

by Brian D. Wruk

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Product Details

ISBN-13: 9781770410893
Publisher: ECW Press
Publication date: 02/10/2015
Edition description: Revised Edition
Pages: 352
Sales rank: 598,081
Product dimensions: 8.80(w) x 5.90(h) x 1.00(d)

About the Author

Brian D. Wruk: Brian D. Wruk, MBA, CFP(US), CFP(Canada), TEP, CIM, was born and raised in Edmonton, Alberta, but moved between Canada and the U.S. on several occasions. Now a dual Canada-U.S. citizen residing in Arizona, Brian and his firm specialize in helping American citizens or green card holders living in or making the transition to Canada.

Read an Excerpt

The American in Canada

Real-Life Tax and Financial Insights into Moving to and Living in Canada Revised 2nd Edition


By Brian D. Wruk

ECW PRESS

Copyright © 2015 Transition Financial Advisors Group, Inc.
All rights reserved.
ISBN: 978-1-77041-089-3


CHAPTER 1

CANADIAN 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 Canada (or maybe you are already there). It may be because of a great job offer, a spouse, or to return to your roots, but you have decided to leave the U.S. and move to Canada. How do you prepare for such a major transition? On the other hand, maybe you are an American or U.S. green card holder living in Canada and have heard all the horror stories about your tax filing obligations with the IRS or that you are subject to U.S. estate taxes.

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 Canada without allowing yourself enough time to understand all the nuances of your unique situation and then having enough time to take all the necessary actions before leaving the United States. 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 Canada?" Or you are an American citizen and have seen article after article about how the IRS is coming to get you, and it is leaving you feeling very uncomfortable, particularly when you are clearing customs for a trip 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 the United States to Canada while saving 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 40 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 into a technically based business in which people manage an investment portfolio, analyze your insurance needs, 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 objectives and then figure out how to get you to your destination. Other factors constantly affect your ability to achieve your goals, such as changes in 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 when you take off from the airport?

It is important to note the 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 have accomplished that goal or not. An objective is clearly measurable, and everyone knows whether it has been achieved or not. For example, "I want to move to Canada 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 IRAs?" 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 they are available? Will you move the funds to Canada? How? Do you understand the pros and cons of doing so? Will you invest them? If so, how? For what purpose or objective?

Table 1.1 depicts the elements of Canada-U.S. transition planning. Based on this table, our firm's transition planning includes the comprehensive analysis of eight specific areas in any move to Canada.

1. Customs planning addresses issues in relocating your physical assets to Canada. 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 Canada either temporarily or permanently. You need some legal means of entering Canada because, despite popular opinion, Canada is another country, not another state in the union!

3. Cash management planning includes the development and review of your net worth statement and a review of your cash inflows/outflows during your move. From there, our firm can analyze the ownership of your assets between spouses and between the U.S. and Canada (for U.S. estate tax issues), 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 the U.S. to Canada 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 Canadian move. It is important to note the difference between tax preparation and tax planning. Tax preparation is a purely historical perspective and simply 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 optimize your tax situation by reviewing any tax avoidance techniques that may apply to your situation in advance of any tax preparation. 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 Canada. 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 Canada and what to do with your education savings in the U.S. 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, etc. are potential catastrophic events that could devastate what has taken a lifetime to accumulate. There are many differences in managing risk between the U.S. and Canada 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 saving tax dollars, professional fees, and court costs 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 in both Canada and the U.S. are required over the long term to ensure that it achieves your goals and meets your risk tolerance.


BEFORE YOU GO!

The two items you must have thought out and in place before you even consider a transition to Canada are adequate health-care coverage and a legal means of residing in Canada (valid immigration status).

1. Health-Care Coverage

You may not be aware, but despite its socialized health-care acclaim, you may not automatically be eligible to join the health-care system in Canada immediately when you move there. Further, your current U.S. group or individual health insurance policy will most likely consider you "out of network" for any benefits, resulting in direct costs to you if you need health care in Canada. The rules are different for each province, but you should have some form of U.S. travel medical insurance to cover yourself in the event of illness or injury in Canada until you are eligible for provincial benefits. This coverage is best secured just before you make the transition to Canada to minimize your liability and costs. 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.

2. Residing in Canada

Despite popular opinion, you must have a legal means (i.e., a valid permit or Canadian citizenship) of entering and remaining in Canada for any period of time. To work there requires the appropriate authorization as well. No matter what, you have to fit into one of the immigration categories outlined by Citizenship and Immigration Canada. Unfortunately, many Americans go to Canada to visit and mistakenly believe they can work there just like they can in any state. This misconception comes in part because Americans do not need a visa to cross the border into Canada (you don't even need a passport, just a valid form of identification, such as a birth certificate). Even though you don't need a visa to cross the border into Canada, some people believe they can stay or work as long as they want. In fact, if you are caught working in Canada without a valid work visa, you will be considered an illegal immigrant and could face deportation and banishment from Canada. There are numerous legal options you can use to enter Canada, and you can review them in Chapter 3, "O Canada!" 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 Canada is time consuming. You have to make travel plans for yourself, your spouse, and your children whether you are going to fly or drive. There is also coordination of the visa applications for your spouse and children that can cause havoc at the border if not done correctly. Then there is packing your household goods, selecting a moving company, filling out all the requisite forms for Canada Border Services, 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. Then there is unpacking and putting everything away. We offer some considerations in Chapter 4, "Moving Your Stuff."


INCOME TAXES

CANADA

There is much work to be done in optimizing your tax situation before taking up tax residency in Canada. 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 theater, and CRA is sitting in the audience. You have one chance to "set the stage" before the curtains open, and CRA has a full view of your "financial stage." As soon as you become a tax resident of Canada, you open your entire "financial stage" for CRA to see. At that point, you can no longer set the stage to present your tax and financial situation in the best light possible to optimize your tax liability, and maximize your opportunities. Interestingly enough, 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 determine to which country you belong for tax purposes. All of this is explored in greater detail in Chapter 5, "Double Taxes, Double Trouble." As a side note, Canadian citizens, properly severing their tax ties with Canada, no longer have to file any tax returns with CRA.

Social Insurance Number: To work or live in Canada, everyone in your family must have a Social Insurance Number (SIN). It is required by your employer, and you need it to file your Canadian tax return or open a bank account. See Chapter 5 for further details on obtaining a SIN.


UNITED STATES

Based on popular opinion, many people just stop filing U.S. tax returns when they leave the U.S. for Canada. The rationale is usually "I don't live there anymore, so I don't have to file taxes there anymore." In fact, there are filing requirements with the IRS that could increase your tax bill unexpectedly. This is doubly true because U.S. citizens, derivative citizens, and green card holders living in Canada must file U.S. income tax returns annually! Ensure that you do the requisite planning before your departure to understand how to mitigate the taxes in your unique financial situation.

The bottom line: if you haven't done proper planning prior to your departure, many planning opportunities may be lost forever, and you'll 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 governments in addition to paying higher taxes.


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 Canada. Doing so can be confusing, and most folks are unsure about how to tackle it. There are many misconceptions about currency exchange, and people often leave assets in the United States because they believe they will "lose" money in moving them to Canada, but other risks can be incurred by leaving everything in the United States. These myths and facts are addressed in Chapter 6, "Show Me the Money."


(Continues...)

Excerpted from The American in Canada by Brian D. Wruk. Copyright © 2015 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.

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