Dual citizen unsure of where to invest

[pauld82]

Hi everyone, I'm new to forums. I searched but couldn't find this question, so I thought I'd ask.

I'm a citizen of both the US and Canada. I recently received my B.A. and moved from Ontario to Indiana to take a job. I expect to stay at this job for 3-5 years before returning to school (most likely in the US) for graduate studies.

So, I'm looking at about 7-10 years in the US minimum. After this, I'm not sure whether I'll remain here or go back to Canada. I' wondering where the best place to put my savings is. An IRA? The 401k offered by my employer? Regular old mutual funds?

I'm worried about losing my money if I decided to settle in Canada.

Oh, and when people throw out the percentage of the salary that should be invested, is that a percentage of net income or gross income?

Thanks a lot for any help.

 

[Nords]

Welcome to the board, Pauld. One of our Canadian experts should be along shortly...

The conventional wisdom on investing your salary is take-home pay (after tax witholding). However creative use of deductions can make that figure however much you want to lend Uncle Sam interest-free. Maybe it's better to try to save based on your gross salary income and see how painful that is.

 

[AltaRed]

So, I'm looking at about 7-10 years in the US minimum. After this, I'm not sure whether I'll remain here or go back to Canada. I' wondering where the best place to put my savings is. An IRA? The 401k offered by my employer? Regular old mutual funds?

I'm worried about losing my money if I decided to settle in Canada.

You wil not lose your US based investments if you decide to settle eventually in Canada. Canada and USA have a tax treaty recognizing each other's registered investments. You may want to Google and read up on the appropriate sections of the tax treaty to get comfortable with it.

You will also want to ask a cross-border tax expert from one of the major accounting firms (in Canada) before you leave to determine how to position your IRA or 401(k) for your best advantage. A few hundred dollars spent now could save a lot of grief later. Since you say you are both a US and Canadian citizen, I assume you have been filling out dual tax returns already on the basis of being a Canadian resident so far.

I do not know whether you currently have Canadian based equity and bond investments currently, but you will need to have a 'deemed' sale of these investments (at FMV on date of departure) in your last Canadian tax return, e.g. 2006 filing in Apr 07 if you leave before end of this year. There are certain investments that you cannot hold if you become a non-resident of Canada, e.g. LP's. Your Canadian based brokers and banks will also withhold non-resident tax on your investment income (15% on dividends and 10% on interest) while you are out of country....but that can be used as a FTC (foreign tax credit) when you file US returns.

 

[Ed_The_Gypsy]

There is one little glitsch that might cause someone a problem.

It is my understanding that CCRA does not recognize Roth IRAs as tax-protected accounts. That is, you will be asked to pay Canadian income tax on earnings within a Roth.

If you have a Roth or are considering one, you should verify this true or false.

 

[pauld82]

You wil not lose your US based investments if you decide to settle eventually in Canada. Canada and USA have a tax treaty recognizing each other's registered investments. You may want to Google and read up on the appropriate sections of the tax treaty to get comfortable with it.

This is good news. I will try to get familiar with this treaty.

You will also want to ask a cross-border tax expert from one of the major accounting firms (in Canada) before you leave to determine how to position your IRA or 401(k) for your best advantage. A few hundred dollars spent now could save a lot of grief later. Since you say you are both a US and Canadian citizen, I assume you have been filling out dual tax returns already on the basis of being a Canadian resident so far.

Actually, I have not been filling out dual returns. Prior to my moving to Indiana, I lived only in Canada, and was under the impression that as long as I made under 80 K/year, I was not required to file in the states. But, as you may have gathered, I'm quite ignorant and unprepared about what does and does not apply to me.

I do not know whether you currently have Canadian based equity and bond investments currently, but you will need to have a 'deemed' sale of these investments (at FMV on date of departure) in your last Canadian tax return, e.g. 2006 filing in Apr 07 if you leave before end of this year. There are certain investments that you cannot hold if you become a non-resident of Canada, e.g. LP's. Your Canadian based brokers and banks will also withhold non-resident tax on your investment income (15% on dividends and 10% on interest) while you are out of country....but that can be used as a FTC (foreign tax credit) when you file US returns.

I left several things in Canada: 1500 in savings bonds, a 17000 student loan, and 500 in my chequing account. Is it too late to sell the bonds? I think I really need to talk to an international tax specialist...I've just been having trouble finding one.

 

[AltaRed]

I don't think you need to sell the CSBs if you don't want too. Check the residency rules for those bonds on the CSB website to be sure. Those bonds never have a FMV more or less than face value because they are cashable at any time... so you won't have a capital gain/loss issue on them.

I don't know if you have an issue with not having filed US returns up to now or not. You need to check with a cross-border tax expert. And as per Ed's post, check out the Roth IRA question.

If you PM me, I can give you a name and phone number of a tax expert from PriceWaterhouse in Calgary you could talk too. She will charge a fee of course, but is very fair and will give you the straight goods.

 

[pauld82]

Will do. Thanks for you help, and thanks to Ed and Nords as well.

 

[pauld82]

For some reason, I am not able to send PM's. Perhaps AltaRed could email me the phone number at paul.davis AT uottawa dot ca

 

[Nords]

For some reason, I am not able to send PM's. Perhaps AltaRed could email me the phone number at paul.davis AT uottawa dot ca

Uhm, nothing personal, it's a spammer countermeasure. Your account won't be able to send PMs until you reach 10 posts. I'll tell AltaRed.

 

[pauld82]

Ahhh. I figured it might be something like that. Thanks.

 

[Cool Dood]

Uhm, nothing personal, it's a spammer countermeasure. Your account won't be able to send PMs until you reach 10 posts. I'll tell AltaRed.

Quick! Post a lot of boobies jokes!

On a serious note, what's this about under/over $80k? I'd never heard of that before. Come to think of it, learning the important rules governing US-Canada taxation is something I've been meaning to do for a while, although every time I try to learn about it I get a pain in my head and my vision blurs.

Hm, maybe there's a Cole's notes version somewhere on the web. Anyone have any good (on- or off-line) resources? I'm also a U.S.-Canadian dual citizen, currently living in Canada, and thinking of moving to the U.S. or a third country. I wish all countries just operated a simple (low) flat tax only, or just a sales tax, or anything other than the God-forsaken mess we've got now.

 

[Cool Dood]

I'm worried about losing my money if I decided to settle in Canada.

Oh, and Paul, the easy way to avoid this is to avoid settling in Canada. Seems like a country worth giving up on, anyway. Oops, I mean -- Canada's wonderful, come visit the Falls! You'd never want to go to Texas when you can spend time in peaceful Canada!

 

[bpp]

Prior to my moving to Indiana, I lived only in Canada, and was under the impression that as long as I made under 80 K/year, I was not required to file in the states.

Nope, gotta file, even if your total earned income is below the Foreign Earned Income Exclusion (~$80k, depending on the year). If you don't file, and the IRS notices that you haven't been filing, they can make you file back returns and disallow the FEIE as a penalty. Your safest course of action is to file back returns now, before the IRS asks questions (like why you apparently didn't exist until now). Check Pub. 54 at irs.gov for details.

 

[pauld82]

Nope, gotta file, even if your total earned income is below the Foreign Earned Income Exclusion (~$80k, depending on the year). If you don't file, and the IRS notices that you haven't been filing, they can make you file back returns and disallow the FEIE as a penalty. Your safest course of action is to file back returns now, before the IRS asks questions (like why you apparently didn't exist until now). Check Pub. 54 at irs.gov for details.

Okay. Well, that's good to know. I've gone from being concern about early retirement to concerned about jail time . Should I get in contact with the IRS first, or talk to a knowledgable expert?

If anyone has any recommendations for good US-Canada tax experts (especially those in Ontario or Indiana), I'm all ears. You can either PM them to me, or email them at the above address.

 

[bpp]

Okay. Well, that's good to know. I've gone from being concern about early retirement to concerned about jail time . Should I get in contact with the IRS first, or talk to a knowledgable expert?

The IRS should be pretty helpful. They can tell you how many years back you need to file; usually around 6, I think. You might try calling one of their taxpayer help lines, so that you can be anonymous. (But keep a log of the conversation, in case they have a different story in future dealings -- been known to happen.)

 

[mikew]

I came in from the cold a couple of years ago. I live overseas and hadn't filed for 15 years. The accountant suggested filing one year and if the IRS wanted more, they would come back to me. It worked out OK. Being a small fish they didn't seem to care. I am not giving advice on what to do, just saying what happened to me.

Mike

 

[Martha]

I would work with a tax professional rather than going straight to the IRS.

FYI, the statute of limitations on collecting taxes doesn't start running until returns are filed. But I don't believe there is a failure to file penalty if you don't owe anything.


http://www.irs.gov/businesses/small/article/0,,id=122901,00.html

 

[AltaRed]

For some reason, I am not able to send PM's.

I trust you got my message?

Also, there was a thread on Financial Webring Forum not that long ago on this issue of dual citizenship and not having ever filed US returns. You may wish to pose that question there, or peruse the threads with the Search function.

http://financialwebring.com/forum/index.php

 

[bpp]

I would work with a tax professional rather than going straight to the IRS.

Why is that?

FYI, the statute of limitations on collecting taxes doesn't start running until returns are filed. But I don't believe there is a failure to file penalty if you don't owe anything.

I'll confess that I, like mikew, also spent some time out in the cold at one point, and have also helped another person who was in a similar situation get back in good with the IRS. There may be no failure-to-file penalty if you owe nothing, but if you don't turn yourself in before they catch you, they can disallow the FEIE on those back returns, which will likely end up costing you a lot of money (the money you now owe due to loss of FEIE, plus the failure-to-file penalty on that money). Plus, with the new stacking rules, the days of typically owing nothing to the IRS are over for many people, so one cannot count on the lack of a failure-to-file penalty even if the FEIE is not disallowed.

I didn't know/couldn't afford any tax advisors, so just called the IRS directly (the IRS still maintained an office in Tokyo then), and found them very helpful; I think they see this a lot. They told me that they require 6 years of back returns, though I don't know if the rule has changed since then.

 

[pauld82]

I trust you got my message?

Also, there was a thread on Financial Webring Forum not that long ago on this issue of dual citizenship and not having ever filed US returns. You may wish to pose that question there, or peruse the threads with the Search function.

http://financialwebring.com/forum/index.php

Got it. Thank you. I will look into the other forum as well.

The reason I am thinking of going to an expert before the IRS is because I would like someone to explain to me what is required of me and what is the best course of action to take (not simply in regards to what I've failed to file, but for what I should do in the future to keep both countries happy). And I'll need it to be explained in dumbed down language...

 

[bpp]

The reason I am thinking of going to an expert before the IRS is because I would like someone to explain to me what is required of me and what is the best course of action to take (not simply in regards to what I've failed to file, but for what I should do in the future to keep both countries happy). And I'll need it to be explained in dumbed down language...

That's fine. I might gently suggest that after you get the expert's advice, you run it past the IRS before acting on it. You could talk to the IRS anonymously, or "on behalf of a friend," for example.

I've seen some bad advice put out by tax experts, really basic stuff that a careful reading of the IRS documentation and/or speaking to the IRS would have cleared up. For example, one person who has written a book on US expat tax issues and who was running a Q&A on an expat website said that one could intentionally exclude part of one's income from the FEIE in order to be able to make IRA contributions. This is patently untrue. Another expert, who gave a good description of PFIC issues on his website, then stated that one only has to report foreign accounts where the total in each account exceeds $10,000, so that 10 accounts with $9,000 each in them would not need to be reported. This is also not true; if the aggregate total over all foreign accounts exceeds $10,000, then ALL accounts must be reported.

Anyway, ask but verify. Unless you want to end up like Wesley Snipes...

 

[Martha]

Why is that?

I've seen some bad advice put out by tax experts, really basic stuff that a careful reading of the IRS documentation and/or speaking to the IRS would have cleared up.
Anyway, ask but verify. Unless you want to end up like Wesley Snipes...

I agree that this is a problem. But, the IRS is also often wrong too and unless you get a private letter ruling you cannot hold them to what they say if incorrect.

So, my feeling is start with a professional familiar with the area and ask for copies of what regulation/publication/whatever they are relying on.

 

[nun]

Will do. Thanks for you help, and thanks to Ed and Nords as well.

I too am a dual citizen, but US/UK and you ahve to make sure you comply with both tax regimes, in your case US/Canada.

US is "easy", no matter where you are or how much you earn as a US citizen you must file a return. I'm not sure about Canada, but I bet its similar to the UK, and most other countries, in that they tax on residency and whether you have funds arising within the country. So even though I'm a UK citizen (or is it still subject) as I don't live in the UK and have no earnings or investmenst there I have no UK tax liability and do not file UK taxes. However, if I move back to the UK I will have to file both UK and US tax forms.

Also if you own Canadian mutual funds or PFICs (Passive Foreign Investment Company)

http://www.altassets.net/casefor/countries/2002/nz3254.php

I'd talk to a tax accountant as there are some really nasty tax laws for them.

Also as a US citizen you must now report any foreign accounts over $10k to the Treasury Dept. on Form TD F 90-22.1 and if you don't the fines are frightening.

Bottomline is as a US citizen the IRS and Treasury can hammer you with nasty taxes and fines for money you invest or have abroad if you are not careful. I'd talk to a dual qualified accountant to make sure things are ok

 

[InTheFlow]

The IRS should be pretty helpful.

I've found that IRS personel are much like the Dementors in the Harry Potter novels. At least that has been my personal experience...along with other family members/friends. Not that all the IRS personel are like that or anything...but some of them lord the power over you and suck up your energy. If you don't HAVE to deal with the IRS, you're better off.