Hello. I have studied Otto's thread and everything else I can find on this page regarding the question of cross-border asset locations for USCs living in Canada. I have also talked to several brokers and tried to get their views as I work through the process of figuring out what to do with some assets inherited from family members.
The assets in question are fairly diverse.
TOD assets: I received some US stocks and some shares in US tax-exempt municipal funds via a transfer on death clause (TOD). I gather that for both US and Canadian income tax purposes, I am to treat the values of each item as at the date of the decedent's death as my cost basis. The stocks are held in brokerage accounts; the muni fund shares are bare shares that were found in a file folder, held directly by the decedent. I understand that if the stocks are distributed by the broker directly to another broker account, they are not considered to have been disposed of. And the muni fund shares ready for physical delivery in kind, with to disposition event.
Grantor trust: I am a beneficiary of a US grantor trust that holds US corporate CDs and US stocks. This is an intentionally defective grantor trust, which means that the trust's cost basis in the shares remain equal to the grantor's original cost basis; being inherited via this type of trust, they retain their original cost base when distributed to me. Thus their current value is mostly capital gain. (I could come up with modest capital losses for offset but not enough to cover the capital gain completely from the US perspective.)
Third party trust: I am a residual beneficiary of a US third party trust that was funded by TODs; upon the death of the original beneficiary of this trust, the residual clause came into effect. The contents of that trust are mostly US mutual funds (lots of Franklins) and some US bonds. The cost bases of the assets in this trust are, apparently, equal to their value on the date of the death of the original beneficiary (the one after whom I take).
Going asset by asset, I can just barely get my mind around how the interest and dividends from these assets will need to be reported on my 1040 and T1 (and in trust returns). My understanding is that current income will be currently reportable, but that no capital gains (or losses) would be recognized in either country until actual disposition of the items occurs, either in the hands of brokers or trustees, or in my hands after in-kind distributions or transfers directly to me. (It is my understanding that distributions in kind from trusts or from brokerage accounts would not be considered to be actual or deemed dispositions in either country, but I need to be corrected if I am wrong.)
But what I cannot really pull together is where to keep these assets. Should I leave them all right where they are? Or, should I get the assets in the trusts moved into the hands of US brokers and then leave everything in the US? Or, should I move some/all of these items to Canada? Older threads on this site indicate that there are broker registration issues, but TD Waterhouse has assured me that they can bring any and all of these things into Canada, and for no up-front charges. Some other Canadian brokers, however, have panicked at the thought of trying to bring title to US shares or mutual funds over the border, so that gives me a bit of pause re TD Waterhouse.
But are there other issues that I have to consider, overall? How big a factor is compliance reporting? Are income tax reporting, credit calculations, and foreign asset reports going to be more complicated and difficult if these assets are left in the US, or if they are moved to Canada? For example, if I move any of the US mutual fund interests to Canada, would they then be treated as PFICs and involve additional financial reporting that might not be worth the trouble?
This all comes to a modest total amount: It would not come anywhere near to triggering the CRA $100,000 foreign account reporting requirement. On the other hand, I already have to file 90-22s re Canadian accounts, so adding a few more to the list does not seem so bad.
This is not a situation in which I have any plans to move back to the US. On the other hand, I am not sure I should totally rule it out, either. In one sense, it might be easier to coordinate my overall financial situation if things were all here. However, I have at least one inherited asset (an inherited IRA) that I don't really think I can move, so complete coordination is also probably an unrealistic goal. (And may not be a worthwhile planning objective in any event!)
I kind of get the impression from the many threads and posts on this site that it might not really make much difference, except for perhaps getting assets out of trusts. But am I missing something important here?
I would appreciate any comments anyone can make on this!
USC in Canada: leave inherited assets in US, or move?
Moderator: Mark T Serbinski CA CPA
Hi, JGCA. Sorry, I was not very clear. Nothing in this situation is off track. The question is this: As a USC in Canada, should a leave these inherited assets in the US, where they have always been held, or should I try to figure out how to move them to Canada? One of my goals is to not trigger unnecessary tax liability. Another is to not have to spend any more of my time filing out complicated forms than necessary.
Just for convenience sake, my preference would be to simply move all these items to Canada. Then I could just go meet with an advisor whenever I need to, and get talked through things. But no one around here seems to know a whole lot about many of these issues, and so for example, the local TD says one thing and then comes back with another story from head office. And now it is looking like not all these types of assets can move easily. But I don't want to just sell everything just so I can move the money into Canada, because I would like to evaluate them as investments and carry out some sort of orderly plan.
One worry is that if I keep US corporate stocks in the US, would I be able to claim dividend tax credits on them in my Canadian tax return? They are coming out of the trusts and accounts they are in fairly soon, so does that mean I should sell them as soon as possible and use the money to buy Canadian stocks so I can get DTCs on my Canadian return? Or will I get to claim the DTC if I simply move those stocks into Canada to TD Waterhouse?
Another question is what to do with mutual funds, bonds, and municipal tax-free funds. I gather that I can't transfer them into Canada through Canadian financial institutions, so does that mean that I have to sell them? Or can I keep them in direct personal accounts in the US? Again, I don't think I want to just sell all of them off so I can move the money to Canada, without knowing if there are comparable investments here, and without having a chance to sift through the cost bases, etc., to figure out what the overall impact of sale might be.
Added into all this is a desire to pick locations that might keep the paperwork to a bearable level. If all things were equal (which of course they never are), then I would rather keep assets in the US and do Canada's foreign financial reporting (should that ever become relevant) instead moving things to Canada without really knowing what I am doing, and ending up having to file a bunch of forms that sound pretty daunting. Reading the threads on this site, I fear that I might not even know enough to figure out when something transferred to Canada will in fact bring new and different forms into my life.
So that is what I am asking ideas on -- have I spotted all the issues yet? Or are there other lurking out there? And any observations on any points mentioned above would be greatly appreciated.
Just for convenience sake, my preference would be to simply move all these items to Canada. Then I could just go meet with an advisor whenever I need to, and get talked through things. But no one around here seems to know a whole lot about many of these issues, and so for example, the local TD says one thing and then comes back with another story from head office. And now it is looking like not all these types of assets can move easily. But I don't want to just sell everything just so I can move the money into Canada, because I would like to evaluate them as investments and carry out some sort of orderly plan.
One worry is that if I keep US corporate stocks in the US, would I be able to claim dividend tax credits on them in my Canadian tax return? They are coming out of the trusts and accounts they are in fairly soon, so does that mean I should sell them as soon as possible and use the money to buy Canadian stocks so I can get DTCs on my Canadian return? Or will I get to claim the DTC if I simply move those stocks into Canada to TD Waterhouse?
Another question is what to do with mutual funds, bonds, and municipal tax-free funds. I gather that I can't transfer them into Canada through Canadian financial institutions, so does that mean that I have to sell them? Or can I keep them in direct personal accounts in the US? Again, I don't think I want to just sell all of them off so I can move the money to Canada, without knowing if there are comparable investments here, and without having a chance to sift through the cost bases, etc., to figure out what the overall impact of sale might be.
Added into all this is a desire to pick locations that might keep the paperwork to a bearable level. If all things were equal (which of course they never are), then I would rather keep assets in the US and do Canada's foreign financial reporting (should that ever become relevant) instead moving things to Canada without really knowing what I am doing, and ending up having to file a bunch of forms that sound pretty daunting. Reading the threads on this site, I fear that I might not even know enough to figure out when something transferred to Canada will in fact bring new and different forms into my life.
So that is what I am asking ideas on -- have I spotted all the issues yet? Or are there other lurking out there? And any observations on any points mentioned above would be greatly appreciated.
As a USC in Canada you are taxed on the income from the US in Canada including interest and Dividends, there is no such thing as a dividend tax credit in Canada on US dividend income that is not generated in Canada.
Any sale of assets will trigger cap gains in Canada from the value date of when you came to Canada, also you are taxed in the US from original cost.
You can not take out any money from a Trust without tax the nature of teh income is determined by the trust distribution it will be taxed in Canada once it is taken out.
Actual sale of assets is the best way to realise teh cap gain and bump up teh cost basis in Canada and acquire securities in Canada.
Any sale of assets will trigger cap gains in Canada from the value date of when you came to Canada, also you are taxed in the US from original cost.
You can not take out any money from a Trust without tax the nature of teh income is determined by the trust distribution it will be taxed in Canada once it is taken out.
Actual sale of assets is the best way to realise teh cap gain and bump up teh cost basis in Canada and acquire securities in Canada.
JG
I have been in Canada all along; the assets in question are recently inherited. So their coming to Canada would not be the same as me moving to Canada, right? But you are saying that for the assets in the trusts (two different types of trusts), the distributions could be treated as taxable events even though the proceeds stay in the US?
Take for example the third party trust: There are mutual funds in it, and some bonds. The trust account statements make it look like there are some capital losses on some of the items. If the trust distributes the actual funds and bonds to me instead of selling them first, is that a disposition by the trust in US income tax law? Or is it a distribution in kind that brings out the original cost of the assets to the trust? And then on the Canadian side, are you saying that even a distribution in kind would be treated as a disposition? Or would that also be an in kind distribution that brings out the asset basis with it, and no gain/loss would be recognized Canada-side until actual disposition of the asset?
If distributions in kind are recognition events on either side, the can the trust distribute the capital losses calculated in the trust, or are they left there forever? (There are also apparently reinvested mutual fund dividends or interest inside the trust, which I gather is still treated as income to the trust, so maybe the losses would be somewhat offset against the income.)
So maybe for the third party trust it is better to have all the mutual funds and bonds disposed of inside the trust before any distributions take place?
Take for example the third party trust: There are mutual funds in it, and some bonds. The trust account statements make it look like there are some capital losses on some of the items. If the trust distributes the actual funds and bonds to me instead of selling them first, is that a disposition by the trust in US income tax law? Or is it a distribution in kind that brings out the original cost of the assets to the trust? And then on the Canadian side, are you saying that even a distribution in kind would be treated as a disposition? Or would that also be an in kind distribution that brings out the asset basis with it, and no gain/loss would be recognized Canada-side until actual disposition of the asset?
If distributions in kind are recognition events on either side, the can the trust distribute the capital losses calculated in the trust, or are they left there forever? (There are also apparently reinvested mutual fund dividends or interest inside the trust, which I gather is still treated as income to the trust, so maybe the losses would be somewhat offset against the income.)
So maybe for the third party trust it is better to have all the mutual funds and bonds disposed of inside the trust before any distributions take place?
Living in Canada or not is no difference if you have income from US sources its taxable in Canada.
The trusts pay tax on any income they receive however to forego this they can distribute the income to beneficiaries depends on the trust agreement if the trust is a discetionary trust the trustees can alocate amounts as allowed by the trust to selected beneficiaries at their discetion if not the trust pays tax at the higest rate on the income. If the trust sells assets and realizes losses inside of the trust those losses can be allocated also to you the beneficiary. If the trust has received capital losses in the form of mutual fund allocations this too can be allocated to a beneficiary net of cap gains.
Any assets you inherited came to you at a cost most likely FMW this is your cost the cost on what the estate disposed to you on date of death you then pick up this cost for future cap gains when you dispose of the asset.
Taking out assets from a trust on a wind up the FMW of the asset is allocated to the beneficiaries and no tax is paid on the distribution out of the trust on a wind up, in reverse when one places an asset into a trust the value is deemed to be at FMV then the contributor has a gain but on a wind up of a trust FMW is used but no gain is realised, so you could wind up the trust and have the final taxable distribution of any income and then take out the assets at no gain.
Living in Canada you do not want to have a foreign trust the reporting and filing requirements are tredious.
Its complex, but it can be structured this way to distribute out the assets at no gain and take income out of the trust as a beneficairy so you are taxed on this and not the trust and the income will retin its nature as interest, dividend, cap gain or cap loss.
The trusts pay tax on any income they receive however to forego this they can distribute the income to beneficiaries depends on the trust agreement if the trust is a discetionary trust the trustees can alocate amounts as allowed by the trust to selected beneficiaries at their discetion if not the trust pays tax at the higest rate on the income. If the trust sells assets and realizes losses inside of the trust those losses can be allocated also to you the beneficiary. If the trust has received capital losses in the form of mutual fund allocations this too can be allocated to a beneficiary net of cap gains.
Any assets you inherited came to you at a cost most likely FMW this is your cost the cost on what the estate disposed to you on date of death you then pick up this cost for future cap gains when you dispose of the asset.
Taking out assets from a trust on a wind up the FMW of the asset is allocated to the beneficiaries and no tax is paid on the distribution out of the trust on a wind up, in reverse when one places an asset into a trust the value is deemed to be at FMV then the contributor has a gain but on a wind up of a trust FMW is used but no gain is realised, so you could wind up the trust and have the final taxable distribution of any income and then take out the assets at no gain.
Living in Canada you do not want to have a foreign trust the reporting and filing requirements are tredious.
Its complex, but it can be structured this way to distribute out the assets at no gain and take income out of the trust as a beneficairy so you are taxed on this and not the trust and the income will retin its nature as interest, dividend, cap gain or cap loss.
JG
This is really useful. So if the trustee has the discretion to distribute all the assets, then they come out with their tax attributes and their current values, to all be taxed in my Canadian and in my US returns. This works this way on both sides of the border, both sets of trust rules? I am going to have to find out more about the cost base and see what this looks like. Thank you!
You need to look at the trust deed to see if teh trust is a discecionary type whereas the trustees have the powere to distribute income and or capital in any manner they choose, my experience is that you probably have this power afforded in the trust document for the trustee. IMPORTANT not however is that if you are a trustee and a beneficiary and you try to allocate income to other beneficiaries the income could be atributed back to you , you have to not be the trustee and the beneficiary otherwise teh trust is "Tainted".
JG