Taxes for Canadian Snowbirds in the US

[kcowan]

Taxes for Canadian Snowbirds in the US
I did an update to my paper on tax issues for Canadians being snowbirds in the US. There are two developments that are very much in a state of flux:
1) Homeland Security is tracking cross-border movements to enforce the existing laws that have not been enforced previously, and
2) US Estate Taxes are up for revision in 2010 with potentially dramatic impact on Canadians.

Tax implications for Canadian Snowbirds in the US

[bosco]

I don't know if the situation is different for Canadian snowbirds than for US citizens living in Canada. There is a statement in the link you provided that is not accurate for a US citizen living in Canada, but it may be accurate for snowbirds--I'm not sure.

The link states that RRSP earnings count as income in the US. There is a form that you can fill out which allows you to defer US tax on RRSP earnings until you cash them (in other words, the tax-deferred status of the RRSP is honoured). Of course, you have to report the value of the RRSP every year to the IRS. But at least you don't necessarily have to pay tax on the earnings until you withdraw them.

I don't know if the income deferral form is valid only for US citizens and permanent residents, or whether it would also apply to snowbirds. The US/Canada tax treaty in all it's glory (complete with 3 or 4 amendments) probably spells this out. I don't remember the form number, but if it might apply to snowbirds, let me know and I can dig into our tax returns and look it up.

There is also a treaty provision which supposedly prevents double-taxation on income up to $85,000 per person annually. In other words, even if you spent more than 122 days/year in the states, if your income was under $85,000 you should not owe US taxes, except on US-source income. In reality, with AMTs, etc., it seems to work imperfectly. The treaty also spells out who gets "first dibs" on taxing what income.

Every year, DW and I have to fill out 3 tax returns--2 in Canada (no joint returns in Canada) and one joint US return. Plus, bank account reporting to homeland security. We don't plan to spend a lot of time in the US anymore, but since we are dual citizens, we have to file a US return even if we didn't have a dime of US income or spend a day there.

[kcowan]

Quote:

Originally Posted by bosco The link states that RRSP earnings count as income in the US. There is a form that you can fill out which allows you to defer US tax on RRSP earnings until you cash them (in other words, the tax-deferred status of the RRSP is honoured). Of course, you have to report the value of the RRSP every year to the IRS. But at least you don't necessarily have to pay tax on the earnings until you withdraw them.

Most of the provisions of the tax treaty enable "work-arounds" for snowbirds. The one common element is annual filing with the IRS to get the exemptions. The form required for RRSPs is Form 8891.

The point of my posting is that many snowbirds have no clue and then discover the bad news when one of them dies in Florida. I am just trying to inform. Forewarned is forearmed...

[itsmyparty]

"Every year, DW and I have to fill out 3 tax returns--2 in Canada (no joint returns in Canada) and one joint US return. Plus, bank account reporting to homeland security. We don't plan to spend a lot of time in the US anymore, but since we are dual citizens, we have to file a US return even if we didn't have a dime of US income or spend a day there.[/quote]

Bosco, I'm a dual citizen of US/Canada and have been living in the US for 30 yrs, with family still in Canada. My DH and I are thinking of possibly moving to Canada (BC) for at least 6 months of the year. Would we have to do anything special with the Canadian gov't...or just set up residence. We'd be retired with not 'earned' income, but income from investments and, in futurem from ss and even a little from Canada Pension. Is there still the 6 month rule (don't really know what it is) that if you spend 6 months or less in Canada, you don't have apply for any special status (ie my DH) or file income taxes there? Can you suggest any reading materials or websites. Sure appreciate any info you can give. Thanks!

[bosco]

yes, I agree that your warning is very appropriate.

DW lived in Canada for 10 years and did not know she was legally required to file a US return (even though she would have owed nothing). When we married, I was aware of the requirement--it was total news to her. I can see how snowbirds would have no inkling of a requirement this ridiculous unexpected.

It is not intuitively obvious that a person might owe $ to the US just for visiting the US or simply by being a citizen through accident of birth, without ever even having been there. This is not the case in other countries. Just as it is not obvious that an American in Canada is violating US law if he takes a puff of a Cuban cigar, even if he doesn't so much as breath a molecule of the smoke over into US airspace.

[bosco]

Quote:

Originally Posted by itsmyparty Bosco, I'm a dual citizen of US/Canada and have been living in the US for 30 yrs, with family still in Canada. My DH and I are thinking of possibly moving to Canada (BC) for at least 6 months of the year. Would we have to do anything special with the Canadian gov't...or just set up residence. We'd be retired with not 'earned' income, but income from investments and, in futurem from ss and even a little from Canada Pension. Is there still the 6 month rule (don't really know what it is) that if you spend 6 months or less in Canada, you don't have apply for any special status (ie my DH) or file income taxes there? Can you suggest any reading materials or websites. Sure appreciate any info you can give. Thanks!

The Canadian taxman has no definitive definition of "residency" for tax purposes. The consider "major factors" and "minor factors." If you spend more than 6 months in Canada, you are considered a resident. Even if you don't spend 6 months, if you own a house in Canada, and don't rent it out to someone not related to you, or if your spouse is in Canada, they might consider you a resident.

On their websites, they suggest that you formally ask them for a determination. From your description, I think you would be considered a resident. Check out

Residency - Individuals

I would also look around the links of the Canada Revenue site.

Once you are considered a Canadian resident, you will need to file taxes in both countries. The US/Canada tax treaty will dictate which country gets to tax which income. If your sick like me, you might want to read the tax treaty. The full treaty can be found here.

Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital

The executive summary is that the US gets to tax the first 15% of your US sourced pension income (including IRAs etc.). You then get credit for tax paid to the US in Canada. Since Canadian tax rates are higher, you will likely also owe some additional to Canada. Canada gets first dibs to tax any CPP, OAP, etc.

Believe me, moving to Canada will not simplify your tax and financial life.

This website

Financial Webring Forum :: Index

is a good source of general information about taxes and finances in Canada. In particular, this post

Financial Webring Forum :: View topic - If You're a Snowback Returning from the U.S.

has good advice that is relevant to your situation.

Finally, this site

Amincanada

is worth browsing.

There are some issues regarding tax-deferred accounts in the US that you should be cautious with. Once you are no longer a US resident, you will have difficulty opening US bank accounts, getting US credit cards etc. Do all this before you abandon US residency, if you are going to. Also, position any tax-deferred funds the way you want them (i.e. complete any rollovers etc.) before you become a Canadian resident.

Hope this helps.

PM me if you want to discuss this further, although I'm no accountant or lawyer and there are certainly people far more knowledgeable than me.

[kcowan]

One of the most bizarre cases that I am aware of is a Canadian that worked for a US corp but always in Canada. Part of his compensation was holdings in a stock (and options) plan of the parent corp. When he died, the crystallized value of all those stocks triggered the IRS and they took their pound of flesh in estate taxes.

He could have just sold them and converted the money to Canadian funds held in Canada to avoid any tax before he died. The cost of ignorance of US tax laws can be very high!

[itsmyparty]

Hey Kcowan and bosco -- thanks for the great conversation and the links to finding out more about the complications of living in Canada/US...great stuff!! Its sounding like its a lot of trouble (probably worth it though)...maybe spending 3-4 months a year and just renting is easier, but of course has its hassels too. Thanks again!

[kumquat]

Quote:

The safest approach is to put all your US assets into a Canadian corporation.

I've been looking at this a bit and have seen suggestions that not all corporations are created equal (ie. a professional corp may work but not a holding company). Any ideas on where to do further research?

[Calgary_Girl]

Quote:

Originally Posted by bosco Every year, DW and I have to fill out 3 tax returns--2 in Canada (no joint returns in Canada) and one joint US return. Plus, bank account reporting to homeland security. We don't plan to spend a lot of time in the US anymore, but since we are dual citizens, we have to file a US return even if we didn't have a dime of US income or spend a day there.

Same here since DH is American. Tax time is a pain in the b*tt. Apparently, the only way to get out of it is for DH to renounce his citizenship but that's pretty difficult to do from what I hear.

[itsmyparty]

In a few years I'll be able to collect Canada Pension (I live in US) and was thinking of opening a savings acct in Canada for direct deposit, then use this when I visit or as someone suggestion, use a debit card for it. Am I right in assuming that if I do collect CP that I will then have to file a Canadian tax return? I know I'll have to report income on my US return. Thanks.

[kcowan]

Quote:

Originally Posted by itsmyparty Am I right in assuming that if I do collect CP that I will then have to file a Canadian tax return? I know I'll have to report income on my US return. Thanks.

Yes you will.

[kcowan]

Quote:

Originally Posted by itsmyparty ...maybe spending 3-4 months a year and just renting is easier, but of course has its hassels too. Thanks again!

Renting helps because you avoid the big equity holding. A non-recourse mortgage can achieve the same objective.

[kcowan]

Quote:

Originally Posted by kumquat I've been looking at this a bit and have seen suggestions that not all corporations are created equal (ie. a professional corp may work but not a holding company). Any ideas on where to do further research?

I recall reading about this. Professional corporations are BAU and so do not help. But if you set up a private corporation, the IRS will not "look through" such an entitiy to search for US assets. I would guess that a Canadian accounting firm would be the place to look. ISTR that BDO Dunwoody - Home Page was one of them.