Pre- US naturalization but return to Canada: Should I do it?

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worryfreeinvestor
Posts: 145
Joined: Thu Mar 24, 2005 6:17 pm
Location: Seattle, WA

Pre- US naturalization but return to Canada: Should I do it?

Post by worryfreeinvestor »

I appreciate that this is a question which nobody can definitively answer, because there are a lot of personal choices that can't really be assessed by strangers. Nevertheless, it may draw out a few facts that would help.

I am a Canadian citizen who moved to US in 2005 and now have green card. Scheduled for naturalization oath ceremony February 7, 2014. Sod's law: I have received a job offer in Canada and am likely to take it.

So: Should I go through with U.S. naturalization?

I will not renounce Canadian citizenship, so that is not the issue. The issue is: Do I really want the hassle of filing a 1040NR every year and otherwise worrying about the IRS?

It's not that I think I will pay more taxes. I think I understand enough of the tax treaty to know that does not happen. And my taxes won't be hard to do: I have no real estate and just some IRA assets.

I just don't want the hassle.

The trade off is that it seems self-destructive to abandon naturalization so close to the finish line. Who knows? A couple of years from now, I may get a job in the US, and it would be awful to have to go through the visa process all over again.

I plan to retire in either Canada or the US, not Costa Rica or somewhere like that, so there is no need to run and hide from the IRS.

I undertand that if I move to Canada and abandon both my green card and naturalization, any capital gains in my taxable invetment account have to be "characterized". However, if I am a US citizen and leave the US that is not necessary because I will still be filing 1040NRs. On the other hand, I cannot trade in the account once I'm not a US resident, so it probably makes sense to cash out and move the money to Canada anyway. Does that sound right?

Utlimately, my decision will likely be made by factors that I cannot really predict,. However, are there any other factors I should be considering?
worryfreeinvestor
Posts: 145
Joined: Thu Mar 24, 2005 6:17 pm
Location: Seattle, WA

Post by worryfreeinvestor »

Actually, I think I made an error in my initial post. If I am a US citizen resident in Canada, do I file a 1040NR or a 1040?
tdott
Posts: 21
Joined: Mon Jul 08, 2013 1:04 pm

Post by tdott »

You would file a 1040.

You will have to make this decision on a personal level - nobody can do it for you. However, one thing to be aware of is that the US taxes multiple things that are tax-free in Canada, so a Canada-resident US citizen can indeed end up owing taxes to the US:
- If you sell your principal residence and have a gain of over $250K (USD), you will pay US tax
- If you sell your small business, you will pay US tax
- If you buy an asset when the the CAD is low and sell when it is high (e.g. principal residence) your capital gain will include "phantom gains" and you will likely pay US tax.
- If you have a RESP, TFSA, RDSP, you will pay US tax on the gains.
- If you win a lottery, you will pay tax.
- If you exercise employee stock options you may have to pay US tax.
worryfreeinvestor
Posts: 145
Joined: Thu Mar 24, 2005 6:17 pm
Location: Seattle, WA

Post by worryfreeinvestor »

That is great information. Thank you.
tdott
Posts: 21
Joined: Mon Jul 08, 2013 1:04 pm

Post by tdott »

Forgot to mention the Net Investment Income Tax (NIIT). If it applies to you, this 3.8% tax is NOT creditable against foreign tax. So it is truly a case of double taxation.
worryfreeinvestor
Posts: 145
Joined: Thu Mar 24, 2005 6:17 pm
Location: Seattle, WA

Post by worryfreeinvestor »

Never even heard of it! So far, the TFSA is the one that gies me pause. I wonder if that is just a question of time lag.
tdott
Posts: 21
Joined: Mon Jul 08, 2013 1:04 pm

Post by tdott »

I believe the NIIT is new and started in the 2013 tax year.

BTW, rather than expect things to get better, (e.g., TFSA gains become non-taxable), I'd expect things to get worse (e.g., NIIT). The US is hurting for money and expats are an easy, voice-less target.
worryfreeinvestor
Posts: 145
Joined: Thu Mar 24, 2005 6:17 pm
Location: Seattle, WA

Post by worryfreeinvestor »

I see that NIIT is an Obamacare tax.
tdott
Posts: 21
Joined: Mon Jul 08, 2013 1:04 pm

Post by tdott »

Which only adds insult to injury that a person living in Canada (public health care) should have to pay it.
worryfreeinvestor
Posts: 145
Joined: Thu Mar 24, 2005 6:17 pm
Location: Seattle, WA

Post by worryfreeinvestor »

Well, I don't want to NIIT-pick...
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