Retiring in Canada

[panamerican]

I am really impressed with the information provided in this forum for people planning to move or move back to Canada. I hope your firm can help us once we are there with the details of filing in 2 countries ;) In the meantime I have a few questions as to what a retired couple needs to do to plan efficiently before moving across the border.

My husband and I have recently retired and plan to move to Canada to be closer to my family with in mind an eventual return to the USA in our golden years. I am a dual national, my husband is a US citizen with permanent resident status in Canada. Our moderate income is based on interest and dividends from US brokerage accounts, plus my husband's social security.

* Because we may move back to the US in 10 to 15 years I am concerned about the reputed acquisition of our assets upon moving to Canada and their reputed disposition upon emigrating. Our assets have taken a real beating in the last year :) and I am afraid that in 10 years we will have to pay in tax a large portion of whatever appreciation they have gotten back. Any advice on that would be helpful.

* A related question is if our second home shared with a family member in the US would fall under the assets that have to be reputed acquired. Any reference to more information about the topic would be helpful. Our assets comprise cash, stocks, and bonds in US brokerage accounts, Roth IRA's for both of us, a 1/2 share of a vacation home in the US, a primary residence in Canada and cash in a Canadian savings account.

* On a different topic, I would also like to know whether it would make sense to have a US based immigrant trusts even if we had to pay taxes in the US to avoid paying taxes in Canada for the duration of the trust, which may be only 3 years in our case because my husband has previously lived in Canada as an immigrant for 2 years.

* And finally would having a trust report the reputed acquisition of our assets to a later date?

Thank you in advance for your time

[nelsona]

I won't touch the trust issue. I just don't know if they would help you.


However, I agree with you that coming to canada with assets that have depreciated is going to be problematic tax-wise given deemed aquisition rules -- and I don't see any way around it.

If you sell up now, before going to canada, you create for your self a huge cap loss. Then going forward, after you arrive in canada, your growth will be taxed in canada, but you will have no taxable gains in US (as your cap loss bank will take up the gains).

If you sell up after entring canada (it doesn't matter whether its soon after or years from now), you will have gains in canada and losses in US, or gains in canada and smaller gains in US. Still doesn't help you.


In any scenario I can envision, you are going to pay Cdn tax on the gains your investments make while residnet in canada, when in reality, if looked at over a 10/20 year period, you may have made nothing.

There are a couple of exceptions. If you stay less than 5 years, any property you had when entering canada is not subject to deemed disposition.

if you stay longer than 5 years (and the rule is 5 of the last 10 years, so becareful to account for time resident in canada in the 5 years before you move back) The only other 'trick' that could work, is if you keep whatever investments you have upon departure (as is) from canada for 10 years after you leave. You can then ask for deemed disposition tax to be forgiven.

[nelsona]

... and yes, the property in US would be subject to the deemed dispo rules.


The one thing that you should seriously be looking at is converting your IRAs to Roths before returning to canada. The new treaty allows Roths that have been funded exclusively while US resident to be treated the same as US treats them (ie. no tax whatsoever on gains or withdrawals).

But this must be done before leaving US. Th transfer to Roth will be taxable in US. There is an income limit which prevents the rollover for 2009 but not for 2010 and beyond.

So, it looks like the best you can do (other than looking at trusts), is stay in US until you can convert your IRA, make sure you generate enough cap losses every year you are still in US to use up the $3000 cap loss deduction.

[panamerican]

Thank you for the info! I am trying to digest it and make sense of it all.

* I had never heard of the 10 years pardon if we kept the investment "as is". You mean for example keep 100 shares of IBM, 225 of BofA, 450 of HP, etc. for 10 years?? I am wondering how could one plan to make that work to their advantage...

We have Roth IRA's already so it's a good thing :)

* We also have about 50,000 US dollar unused loss already from the sales of assets in 2008. How long can we carry that loss? And are we going to be able to use that to offset some of the gains we get in Canada if we sell?

* Practically can you tell me how are we going to file taxes? The major part of our income will be generated in the United States. Do we file in the US first and get credit in Canada? or vice and versa? is one way more advantageous than the other. And by the way we will reside in Quebec so we will face another layer of income taxes there. Do you offer income tax service to resident of Québec?

* Where do you suggest I look to find more information about trusts?

Thanks

[nelsona]

The losses you racked up can't be used in canada. As I explained earlier, the losses you trigger before arrival in canada will do nothing to reduce your Cdn cap gains tax, which will be based on gains made after arriving in Canada.

The 10 year rule works as follows: AS you leave canada, you defer deemed disposition tax on your assets, posting security, until you sell the assets. The US canada treaty only allows Canada to tax capital gains on US residents for 10 years after departure from canada. So if you hold the same investment you had when you leave canada for 10 years, you can petition CRA to releive you of deemed dispo tax on that investment.

But that is 10 years after you leave canada, not simply holding the stock for 10 years. Do you really think you'll have a stock for 25 to 30 years?


You will file taxes in both countries, at the same time; you simple prepare the taxes in a certain order. You will pay Cdn tax on everything, and get some credit from US on US pensions and US dividends. In US you will report everything, and get credit for cdn tax paid on everything except your US pensions and US dividends. Its a little more complex than that, but enough for now. The result is that you will pay Cdn tax rate on everything (plus a little more whn the math is done). this is always the case when one lives in one country and has most (but not all) income in the other.


As you can see by my signature, I don't offer any services.

[panamerican]

Thank you for sharing your knowledge with this bewildered tax payer :) I really appreciate your clear explanations, versus trying to read through the Revenu Canada and IRS literature.

I have another question regarding the cap gain losses I have accumulated. If I was to sell some of my assets that have gains prior to moving to Canada later this year, could I use some of these losses in my US return, with the understanding that I will also make a Canadian return for the portion of the year I have lived in Canada.

[panamerican]

Still on the topic of retiring in Canada.

Are there general principles one could follow to optimize one's portfolio in term of tax efficient investments before moving north.

We have gotten rid of most mutual funds except in the IRA, but still hold in brokerage accounts: stocks, mostly dividend paying stocks that provide income, Bond funds, ETF's, REIT, California tax free bonds, cash.

Are any of these disadvantageous to hold in Canada versus in the States.

And finally do you have any advice about annuities?

Thanks again for your help and Happy Cinquo de Mayo.

[nelsona]

Obviously, tax-free bonds are not going to be of much advantage moving to canada.

Also, by Cdn law, you are not allowed -- other than in a retirement account -- to have dealings with a broker not licensed in your province of residence, so you will need to move all your assets to a cdn brokerage 9this should not be difficult).


As to your scenario about selling some winners before crossing the border: Dies it really matter?

If You sell before leaving US, all that will happen will be to reduce the capital loss 'bank' you have now. You are already going to write-off $3000 this year, the sale of winners before or after you move won't change that.

If yousell after leaving US, you will still pay tax on the gain made after srrival in canada.

If you want to do this to simplify matter go ahead, but it won't benefit you taxwise.