US Canada Dual Resident Tax planning

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8xroad
Posts: 5
Joined: Fri Oct 25, 2019 8:53 pm

US Canada Dual Resident Tax planning

Post by 8xroad »

Hello Nelsona and cross-border Gurus.
I am in a sort of a rare situation (I think) and could use your knowledge and expertise.
I am a Canadian citizen living in Canada with family, have RRSP, RESP, Joint residential/investment properties, mortgage, bank accounts etc. in Canada. Dependent kids are in high school/college in Canada. Wife has rental income in Canada and no income in US.
I am working for a US company on a W2, commute to the US frequently, have bank accounts, 401K, IRA, High deductible health insurance and HSA in US.
A few days back I received the US Green card just for me. Family has applied for follow to join. We want to slowly reduce our footprint in Canada over the next year or so and then physically move to the US.
For several years I was filing 1040NR in US (never met substantial presence test) but I believe I will be a tax resident now in both US and Canada in 2019 and possibly 2020. whereas wife will be resident in Canada only. Please correct if i am wrong.

I am afraid I might fall into some double taxation trap and a lot of questions are swirling in mind and but here are a few questions i have to begin with-
1- Where would I file my tax return first, US or Canada?
2- Will Revenue Canada allow foreign tax credit for US taxes paid or will I be double taxed?
3- Is there any filing status in the US that would work better than other?
4- Is there anything I could be doing now to plan my taxes in the short and long run?
5- Is there any potential pitfall I should be worried about while I remain a dual resident?

Thank you for your patience to read this long post and hope with your advise I can begin to get some clarity.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: US Canada Dual Resident Tax planning

Post by nelsona »

Your situation is not unique, there are 100's of posts that deal with these issues. Happy browsing.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
8xroad
Posts: 5
Joined: Fri Oct 25, 2019 8:53 pm

Re: US Canada Dual Resident Tax planning

Post by 8xroad »

Thanks Nelsona. Good to know there are many in my situation. I tried searching relevant posts earlier and did not have much success, but I will check more thoroughly now.
Thanks again for everything you do.
Steve15
Posts: 75
Joined: Mon Jun 10, 2013 11:26 pm

Re: US Canada Dual Resident Tax planning

Post by Steve15 »

Here are a couple of things that might help point you in the right direction. I will start by saying that I have a very solid understanding of your implications on the Canadian side, but I’m no specialist on the US side by any means.

Correct, now that you have your Green Card, you will start filing as a resident of the US and continue filing as a resident of Canada until your departure from Canada (basically until the day you move to the US with your family). Your wife will continue to be a resident of Canada only, not the US (until she gets her Green Card). However, there may be an argument for filing a joint return on the US side regardless of her Canadian residency status. I’m no expert on what filing status on the US side would be best for you. In any event, the treaty will prevent or minimize any double taxation.

Upon your departure from Canada, you will be deemed to sell all your non-registered investments outside of a tax shelter and a few other personal use items. Your Canadian real estate, RRSP, RESP, IRA, 401K and bank accounts will NOT be impacted by these rules.

There is no specific order to file your tax returns. You complete both of them together at the same time without accounting for foreign tax credits. Then you add the foreign tax credits on the respective returns. Unless you have non-registered investment income, you should not have to worry about the resourcing rules and it should be relatively straightforward for you. Sounds like the only other income you will need to report on the US side is your joint rental income.

Be careful with this. The IRS forces you to depreciate the property and it’s optional in Canada. If you are not already taking CCA (depreciation) on the Canadian side, you might want to consider doing so. This will better match up your income for foreign tax credit purposes.

Keep in mind that the IRS does not recognize RRSP contributions, so if you are making any, you might want to take a closer look at this to see if it still makes sense.

Your RRSP’s are no problem to keep in Canada after you depart and become a non-resident. For your RRSP, I recommend that you make a fund switch or temporarily move all your investments to money market right BEFORE you depart Canada. This will “crystalize” the gains in your RRSP (bump-up the ACB) to the market value on your departure. The market value will then be your new starting point on the US side and will reduce the tax you will eventually pay in the US when you start withdrawing the funds.

The RESP will be a potential problem for you. The IRS treats them as trusts and will require you to complete some onerous paperwork on an annual basis (3520 forms). Also, the annual growth in the account will not be sheltered in the US like it is in Canada. For these reasons, it may be prudent to transfer the ownership of the contract to another Canadian resident family member or close friend BEFORE you go. Alternatively, for the child that’s already in College, you might want to consider making a full withdrawal from the RESP depending on how large the EAP (taxable portion) will be. If your child has some carry forward tuition from previous years and/or the current year, they can use this to offset the EAP. Any carry forward tuition will essentially be wasted anyway, unless the child moves back to Canada at some point in the future. The carryforward tuition can’t be used on the US side.

What are your plans with your principal residence? If you are not going to rent it out and have no intentions of keeping it, I recommend selling it BEFORE you depart. This will avoid the unnecessary process of applying for a Certificate of Compliance (T2062) when you sell it as a non-resident. This can be a significant cash flow problem, as CRA will require you to remit 25% of the GROSS selling price in trust with our lawyer until the T2062 paperwork is processed. Often times there are delays with this paperwork. If you need these funds to pay off the mortgage, it can create some major cash flow problems in the short term. Furthermore, selling it before your departure or within one year of your departure will also eliminate any future tax that you will have to pay in Canada on the property. The Principal Residence Exemption can’t be used for years when you are a non-resident.

For your joint rental property, you will need to start remitting 25% of your GROSS rental income to CRA as soon as you become non-residents. You can hire a Canadian resident agent to remit the payments on your behalf or set-up your own non-resident account with CRA and do it yourself. Either way, an annual NR4 tax slip will have to be produced by your Canadian agent or you will need to request a PROFORMA NR4 slip from CRA if you do it yourself. BOTH of you should file annual elective S.216 rental returns to claim your rental expenses and recover all or a portion of the 25% payments. There is also an NR6 form you can submit each year to reduce the monthly 25% remittances to a NET basis (gross rental income minus your monthly expenses). This will help you out from a cash flow point of view.

The mortgage and bank accounts are fine to keep in Canada if you choose to.

For your Canadian return, I trust that you have been completing the necessary RC268 form for your cross border 401K contributions, grossing up your income on line 104 by the 401K contributions and then deducting them on line 207?

There is tons of great info on all these topics on this forum. Hope this helps you a bit.
8xroad
Posts: 5
Joined: Fri Oct 25, 2019 8:53 pm

Re: US Canada Dual Resident Tax planning

Post by 8xroad »

Thank you very much Steve15. I was not aware of the RC268 and may have been overestimating my taxes in Canada in the prior years. Will definitely take advantage of this in 2019. Really appreciate all your insight and recommendations.
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