TN Visa, RRSP, and Ceasing to be Cdn Tax Resident Mid-Year

[michaelthef]

All - wanted to get your thoughts on how to think about my tax status for this year. Particularly am focused on how I can go about making an RRSP contribution as a possible optimal option.

I moved to the US at the beginning of this year under TN visa.

My fiance lives in Canada but will be moving to the US shortly (with her own visa through her employer). We will be married this summer before she moves to the US.
My only connection to Canada at this point is a) I kept an OHIP health card (for a variety of reasons) and indicated that my assignment was temporary to the OHIP office; b) my fiance lives in Canada and we will be married there this summer; c) I have bank accounts/credit cards and an RRSP in Canada; d) I own a Canadian holding corporation (with not much in it and no active business) and am sole director/officer.

My question is as follows: what is the best way to file this year? Once my fiance moves to the US (will be my wife at that point) and then once I send back in my OHIP card, in my opinion I will have no more connections to Canada. All my belongings are here, I own no property in Canada, etc etc.

Two things I can think of:

1) Is there any way that with the above facts I can claim that I ceased to be a tax resident of Canada early this year when I moved to the US and took the new job? Would be nice to cut ties at that point and get taxed at the lower rate for all my US income this year. I think might be tough primarily due to having kept my OHIP?

2) I have a nice amount of RRSP room that got generated based on my 2012 tax year. So if set my official date for cutting ties to be later this summer when I send back my OHIP, can I make an RRSP contribution for all the room I have left to offset taxes owed to Canada from my US income in 2013? Then for the back half of the year, I will be a US resident and just pay US taxes only for that amount. If I can do it this way, would be a nice way to max out my RRSP contributions, get the tax benefit to offset having paid higher Cdn taxes for the first half of the year. I can then start making 401k contributions in the US and having it matched by my employer. I have held off on making any until I've clearly exited Canada given the issues that I've heard exist in that case.

Thanks in advance for any thoughts and suggestions.

[nelsona]

1) you ARE a Cdn non-resdient, and have been since the day you move to US to work. Yours is a simple case. Your OHIP card is a minor tie, your fiancee doesn't even count. Your will have to deal (wind-down) with your holding company, as it is of little use to tou now.. Proabably should have done this before leaving
2) There are no rules against making RRSP contributions as a non-resident, providing your RRSP manager allows it. You should be at TD waterhouse by now, and you can contribute. But, given that your Cdn income for 2013 will be minimal, why bother. Put just what you need to get into the lower tax bracket.

You should have started 401(k) already, btw, try to catch up for entire years worth if you can (think about Roth401(k)

Why pretend that yuou are thinking about going back. Move on. File as an emigrant with departure date when you left. You really don't have (or want) any other choice.

[michaelthef]

Got it thank you. That makes sense. I'd been worried that the OHIP was somehow an overriding feature given it might be a sensitive point... wanted to keep the OHIP alive in case things didn't work and it made sense for me to return to Canada sooner than expected (within months of moving). But things are in good shape now and am expecting to be in the US for many years.

One more wrinkle - my fiance and I have never filed common law in Canada or represented anything to that effect other than the fact that I am on her company's extended health insurance plan as a "spouse" as of last year, when we got engaged. We split rent and she didn't depend on me etc. But wasn't sure if this sort of connection might also result in a tie to Canada? I had kept OHIP open also because it was a requirement to maintain coverage under her plan (even while I was living in US). At this point, I will send back my OHIP within weeks and will be off her plan shortly after she moves here.

Sounds like overall it's pretty straightforward - left Canada and no longer a resident. I only got one pay check for 2013 from my Canadian employer so sounds like no reasons at all to contribute to RRSP this year as there really is no tax to reduce for the year. Will let it be and just manage my current RRSP balance from here and leave the contribution room that got created last year open for sometime in the future if I ever return.

Yes, I do have TD Waterhouse. Thanks for the good advice from you... I got something in the mail asking to confirm that I am a US person according to the IRS so that they don't withhold tax on income generated in RRSP. I assume it makes sense to send this back to them ASAP.

Lastly, thank you agree the Roth 401k makes sense. Will get that going today. Shouldn't be a problem to catchup for the year - I can just set my contributions to 50% of my paycheck and max out the contributions pretty quickly (and the employer matching). Is that you're understanding as well?

With respect to the holding company, is it OK to keep it though? Is it going to create problems? I have tax losses in there that I wouldn't mind keeping alive no to mention set up costs/legals. And it might be useful if I were to try to conduct some business in Canada down the line (rental properties, other...). Do you have any recommendations on who to talk to for this? Feels like a complicated arena. Preference is to keep it if possible unless costs and headache level are large.

Thank very much for the advice, as always!

[nelsona]

Agree with all you said.

I will let others comment on the corp, the two problems you fall into, is that it can no longer be considered CCPC, so no favourable tax treatment. And there is a problem with how the income is taxed in both countries thaat make it a headache. You may simply have to crystalize your losses and keep them for later -- the losses might not even be recognized by US so while you *might* not pay much in taxes in canada going forward, you would still in US.

I'll leave it at that, and let others comment.

[michaelthef]

Thank you. This is all very helpful.

Can I ask you to also opine on my fiance/wife's situation?

So by the time she moves here, we will already be married.

How should we think about filing this year? Filing jointly as married in US?

I think there is a benefit for her to file dual status this year since half her income will get taxed in Canada (so lower marginal rate reached since only half the income). Then for income earned in US, also overall should be lower since reach a lower mariginal tax rate. If I remember correctly from my research, on the dual status year you in a sense get to split your income since neither country thinks of your annual income on a "world basis".

Also, she can use her Cdn RRSP room to reduce her Cdn tax bill significantly/entirely if she contributes before she moves.

On the flipside, I am not sure of she can file this way if we are filing jointly in the US? I haven't quite figured out the benefits of filing jointly other than a higher tax exemption/deduction and marginal rate thresholds that are higher.

Anyways I have quite a bit of research left to do on the married filing side of things, but thought I would just ask for any easy pointers you can provide.

Thank you!

[nelsona]

You should file jointly (MFJ - assuming you marry). Not realluy much point researching.

There is 3 reasons for this. First, if you do not file jointly, you must file married filing separately, which will raise YOUR US taxes. MFS taxrates are higher than MFJ.

Second, she will exempt her Cdn wages (as will you) on your joint 1040, using 2555, so there will be no US tax araising on this.

Third, filing dual-status is difficult in that no off-the-shelf software can handle this (with the required 1040NR included) as opposed to MFJ.

I cannot think of a situation where it would be beneficial for her to file dual-status, particularly since you definitely will NOT be filing dual status.

And just a heads up on how your Cdn income will be taxed in Canada. As Emigrants, you will not get full personal deductions, so do not assume that your tax rate will be low simply because your income is lower,

And, again, there is no need to make a contribution before leaving Canada. If (big if) it is worth making such a contribution, it can be made anytime before next march just like in past years.

Note that, in the long run, any gains in your RRSP, although tax deferred, will be rather highly taxed in Canada/US in the end becuase of poor matching of credits, so much better to take whatever money you would have put into RRSP for 2013, and put it in something that will grow tax-free in US, like your house, or your Roth, rather than tax-deffered in Canada and US. You will probably find that you will ant to collapse your RRSP at some point before returning to Canada, so many simply do it almost immediately after leaving Canada, paying the 25% tax and be done with it. So, under no circumsatnmces where her marginal rate in Canada is less than 25% should she be making RRSP contributions.

[michaelthef]

Got it thank you for the great detail. And thanks for the heads up on how Cdn tax will work for the partial year - had forgotten about that.

Question on your RRSP comment though - you mentioned that most will just collapse right after moving from Canada. So in that case 25% tax goes to Canada at the source and no filings necessary for Canada (other than emigrant filing for the year). But then wouldn't I have to pay additional tax on the distribution when I report it as income in the US? So what is the net tax to me if I were to cash out RRSP later this year? Or does RRSP distribution while a US resident get treated tax free due to treaty since it's pension income? Or is it just on RRSP profits, meaning the cost base of the RRSP is taken into account? In this case, especially since I will be closer to the high 30's marginal tax rate in the US, it would be great to take out RRSP money at 25% and "redirect" that (indirectly) into Roth 401k which I know I can put up to $51k a year into.

Thanks!

[nelsona]

The gains after arrival in US are all that would be taxed in US. The sooner you collapse the RRSP, the less (if anything) will need to be taxed in US. So, 25% tax would be theend of it (and you could use the 25% tax as a dedution on your 1040 even if you report no RRSP income.

Not sure whwre youare getting 51K for Roth. Roth401(k) is limited to ~16.5K each -- if you are both working. 51K sounds like you would be both over 50, and each using a separate Roth acount as as well, which may not be your situation.

[michaelthef]

Hi Nelsona - just a few more questions on this. Thanks for the useful comments. The 51k number was my mistake - was referring to the total deferred contribution number from the IRS, which includes pension contributions. So please ignore.

Question: The RRSP gains start becoming taxable post my US arrival right? But these are all permanently sheltered when I file Form 8891 right? So in that sense, the RRSP continues to behave with the same tax deferral that I enjoyed in Canada and I can continue to actively manage it via TD Waterhouse. Do I need to have filed this form right when I arrived in the US (meaning earlier this year) or is it OK to just file with my first return in April 2014? Just want to make sure I wasn't supposed to have filed this right upon arrival and that I don't need to file this ASAP to "stop the clock" on having the gains taxed.

Secondly, question regarding 401k. I have tried to research this but couldn't get the answer. The 2013 limit is 17,500. But for a partial year resident in the US (in particular, my wife, who arrived a few months ago), does this limit get adjusted pro rata for the days she was in the US? Or can she go ahead and contribute the full 17,500 over the next few months? If so, sounds like a great way for us to reduce our total taxable income under a MFJ filing scenario. Since she'll have fairly low US income this year due to working for partial year only and she makes about a 1/3 of what I will make this year, it' will be like shaving over 17,500 x 2 off the top of our taxable income at the marginal rate.

Lastly, trying to figure out if the whole concept of the marriage penalty would apply to us. I know you were fairly clear that MFJ is better than MFS. But aren't there certain income levels at which MFS is better than MFJ? I had heard that if a couple has similar income levels, then MFJ can result in higher tax. If this is correct than probably not an issue in my case but our total wages will be 300+ so not sure if that impacts it.

Thank you.

[nelsona]

8891 is filed with your 1st US return. Buy you need to keep track of the BOOK value of your RRSP on date you arrived (or, if you elect to file full year 1040, which is likely), jan 01, 2013.

there is no partial limit on 401(k), you get the whole ammount. Besides, it is quite likley ypu will file full year anyways.

I do not know of any federal situatrion where MFJ is worse that MFS. There are some state cases. Of course, all you need to do is toggle back and forth to see this when you do your taxes.