L1-A move

[johncanada]

Hi,

I'm a Canadian resident. I work for Canadian company with a significant presence in the USA. I am able to take a position in one of our US offices on an L1-A visa for a July 1, 2014 move. It is expected by employer that I will come back to Canada in 2-3 years which I intend to do. The expectation is that I will become an employee of our US subsidiary and I will be paid from there. I have a few questions:

1) I have assets in the form of regular bank accounts, RRSP, LIRA and TFSA. I know from browsing the forum that it is optimal to close out my TFSA. I want to keep my Canadian bank accounts open as I'll be back and forth to Canada frequently. My question is on the RRSP and LIRA. Should I keep these both active and open? I will of course let my bank know i will be a non-resident
2) I understand for certain LIRA accounts, you can free up the money in your LIRA if you are a non-resident for 2 years. Will I have to pay a withholding tax in Canada AND report this as income in the US if I do this (presuming I am staying for 3, not 2 years)? I am in my late 20s and hate the idea that I have all this money sitting around that I cannot touch so I would love to free it up unless it is extremely punitive tax-wise
3) Is there any difference in my Canadian tax filing/declarations if you really do intend on coming back to Canada in my timeframe?

Thanks for any help!

[nelsona]

1. You can keep RRSPs and LIRAs, but you will probably have to move them from a bank to a self-directed broker like TD waterhouse, who is licensed to deal with you in US. Banks and there mutual fund dealers are not.

2. Your LIRA can be "boken" after you become non-resident for a specific period, it changes based on the jurisdiction that your LIRA was made under. the tax would be 25% in canad (as would any RRSP withdrawal), and the LIRA would be also 100% taxable in US (you would get credit for Cdn tax). You would also want to crystallize your RRSP into higher book value before Moveing (before jan 01, 2014 would be even better), as this affects future US traxation of those funds.


3. Doesn;'t matter. You are becoming non-resident in July, both in fact and by treaty.

[johncanada]

Thanks Nelson! Very helpful

What do you mean by crystallize my RRSP into higher book value? Thanks

[nelsona]

Future taxability of your RRSPs (not your LIRAs) -- when you atke withdrawals -- in US is based upon the book value oif your RRSP at the time you become a US taxpayer, which for you will either be jan 01, 2014, or the day you move to US (you will decide this at tax time for 2014.

You will eventaully be taxable on any growth that occurs while a US tax person, PLUS any accrued but not triggered gains before you arrived.

So, a stock you bought at $5 which is now worth $11, would eventaully see the $5 taxed in US, while if you sold the stock and bought a new one for $11, only the growth over $11 would be taxable.

That the simple version.

So, swap your holdings around to bump up their cost basis.

[johncanada]

Nelson - The move is a go. I have re-based my RRSP assets which previously had gains before December 31, 2013 thanks to your advice.

My question now is on my TFSA. I forgot to mention that I am in an unrealized loss position in it due to a really bad speculative investment. So I have market value assets of about $14k but the book value is $20k.

Does this impact whether I should collapse this account given that in the US it is treated as just a regular account (and thus I could potentially use this as a capital loss to shield my employment income?). Or do they only treat it this way when there are unrealized gains?

Thanks

[nelsona]

You can use whatever losses you trigger when you dispose of the TFSA, which makes it even a better idea to get rid of it than keeping it.

There are 2 reasons not to keep it: taxability AND reporting burden.

This is a win-win for you. get rid of it before it grows back, to lock-in those losses.

[basilfawlty]

Question regarding deferral of the gains and re-basing the book value. Confused around what the benefit of this is, which maybe is due to a confusion around what it means to file to defer gains in the US with form 8891.

Is the difference that if you rebase the book value to current value of the assets, then this part of the RRSP becomes treated as if it were "principal" by the IRS? While in Canada, the "principal" would be just the original contributions?

In doing so, the tax mechanics would be as follows once taken out using the following illustration. Assume that at the move date contributions of 30k have been made and the market value of the RRSP is $60k. Let's also assume that upon withdrawal in 25 years, the market value has grown to $100k. And let's assume that the rebasing of US book value is done as described earlier. Assume withdrawal is taken in the future as a US resident. Assume 30% effective tax rate when withdrawing in US.

[u]Principal at Move Date[/u]
CRA: $30k
IRS: $60k

[u]Book Value at Move Date[/u]
CRA: $60k
IRS: $60k

[u]Market Value Withdrawal[/u]
CRA: $100k
IRS: $100k

[u]Taxable Portion at Withdrawal[/u]
CRA:$100k - $30k = $70k
IRS: $100k - $60k = $40k

[u]Applicable Tax Rate and Taxes Due[/u]
CRA: 25% x $70k = $17.5k
IRS: 30% x $40k = $12k, but this is offset by the tax credit paid to Canada so therefore 0 additional tax to IRS

Would love to know whether my understanding of the mechanics given the assumptions I laid out is correct.

Thanks!

[nelsona]

Without looking tto closely at your numbers, let me just say, that for non-US citizens moving to US, the RRSP "investmebt" is the BOOK VALUE on the date you become a US taxpayer. It is not the contribution ammounts.

And for CRA, your RRSP 1s ALWAYS 100% taxable, NEVER reduced by some contributrion or move value.

So, whatever you do to raise the BOOK value of your RRSP before you become a US taxpayer, raises your investment in teh RRSP for IRS purposes, and makes "less" of it taxable in future, when you withdraw funds.

And, just so you'll know, foreign tax credits rarely give a 1 to 1 return, especiually whan one has bot hforeign and domestic income reported on their 1040.

Bottom line is that whtever your RRSP value when you collapse it, you will always pay 25% to CRA, and (based) on the growth) a little more to IRS and to your state. So consider any gains that your RRSP makes to be taxed at about 35%.
The only way to lower this is to (a) convert to RRIF and take small payouts every year, which reduces the CRA tax to 15%.
(b) if not working in a year, take out about 25K and use the 217 election to reduce CRA tax.
(c) take it all out the moment you become US tax resident, and pay no US tax becaueethere was no growth.

[basilfawlty]

Thank you this clarifies it. Makes sense.

So one other approach in the case of being in a position where market value at time of the move was lower than the book value at time of move is to let the RRSP grow back to book value after moving to the US and then only at that point take the distribution while a US resident. Would you agree with that strategy? This ensures the 25% tax and not leaving some "value" on the table.

[nelsona]

Yes, but look more closely.

The gain you make after leaving canada is taxed 25%. If you were to take the money as you left canada, and invest it outside your RRSP, it is doubtful that you would ever be taxed as high as 25% in US on that growth.

Besides, wiuth the funds available, you could invest in tax advantaged investments, Roths, your home, etc, that would be tax-free.

And you would get a terminal loss that you could use on your Schedule A

If you are going to collapse the funds, then you should do it sooner rather than later.

[nelsona]

If you are not going to take it immediately, then you should view it as retirement money, that you will withdraw only when you can secure the 15% (or lower) CRA taxrate.