Canadian US -> Canada Move

[NCtoCanada]

After 9 years in NC, we (Canadian citizens) moved back to Cananda in May 2007 after I was laid off by my employer. I still have IRA, 401K, bank and brokerage accounts in the US which I plan to keep open as they offer more flexible investment options.

After arriving in canada I received a settlement from my employer. I also had profits from the sale of stocks from my US brokerage accounts. I also incurred a substantial moving cost to move back to Canada.

Since moving to Canada, I have had very little income from Canadian sources ($200 for interest from a bank) and most of my income is through the profits from trading stocks through my US brokerage accounts. Here is what I plan to do with some questions.

1) File the 1040 in the US for all world income and itemize deductions (mortgage interest, property taxes etc)
2) File a Canadian tax return with newcomer status reporting all income since May 2007. I will claim a foreign tax credit on my Canadian return for the US taxes paid.
3) Is the moving expenses deductible in US tax return? I have enough income from US sources after the move to cover the moving expenses.
4) Looks like I cannot deduct moving expenses in my Canadian return
5) For the foreign tax credit in my canadian return, do I use the full US taxes paid or calculate the portion for the income received after May 2007
6) Do I have to do anything regarding the 401K and IRA accounts when I file the canadian taxes (as I plan on keeping them active and not convert to RRSPs)


Also a few questions for planning for 2008.

I plan to continue to actively trade stocks using my US brokerage accounts from Canada.

7) For 2008, would I the have to file a US tax return because of the gains from the sale of stocks from US sources? Or can I get away with filing just a Canadian return
8) From reading other posts, it is suggested for people returning to Canada to sell losers before entry and wait until entry into Canada to sell winners. Any reason for this? (Does not apply to me as I was in cash before moving)
9) Based on the non-discrimination clause in the US-Canada treaty, I can file a 1040 (instead of 1040NR) in the US in any given year in the future even if I did not step on US soil for that year. Am I correct


Thanks

[nelsona]

Once you leave US, you are no longer taxable in US on your stock trades, even if done through a US broker. question (7)

However, You should file a full-year 1040 for 2007 reporting all income. This is allowed for anyone who leaves, not just by treaty.

Your moving costs are not deductible on your Cdn return. Your moving costs are not deductible on your US return because of the fact you haven't earned any wages due to the move.

On your Cdn return, you should report any income earned after you left US. The tax paid in US on that portion (calculated on a pro-rata basis on your 1040 and state returns) can be used toward the tax credit.

Your 401(k) and IRA are fine as is. A better solution would have been to convert these to Roths before returning (and staying in US until all your company payments had been made) but that is past now.

Since you held cash when you moved, there is no deemed acquisition for you to worey about, so i wo't go into the details about question (8)

You can always file a 1040. But it will require you to report all income that year.

[NCtoCanada]

Thanks Nelsona for your quick reply. Just a few follow up questions

<B>
Your moving costs are not deductible on your US return because of the fact you haven't earned any wages due to the move.
</B>

I am self employed right now and fit the Time test (work full time for 39 weeks in the 1st 12 months and 78 weeks during the 1st 2 years) does it still mean I cannot deduct the moving expenses. I realize I did not make lots of money as a self employed person, but then again self employed people do not automatically start making money from day 1 but take time to get the business going.

<B>
Your 401(k) and IRA are fine as is. A better solution would have been to convert these to Roths before returning (and staying in US until all your company payments had been made) but that is past now.
</B>

I did not realize Canada recognized Roth IRAs because the last time I looked a few years back they were not recognized.

Is there any way to convert it a Roth if I establish residence in the USA again. My business can be conducted from anywhere (only reason I moved is because I was working on a H1B and that required we leave the USA when my employment was finished). As a Canadian, I can live in the US for 6 months, come to Canada for a few days and return to the USA to stay for 6 more months while cutting ties that would deem me a factual resident in Canada.

I like the idea of converting my IRA's to Roths and trying to see if I can convert it without actually having to work for a US employer again.

Thanks

[nelsona]

You said you did not earn any money in the rest of 2007. So you cannot deduct moving expenses in 2007. If you earn money in this tax year, you can.

You could recharacterize your IRA/401(K) next time you live and work legally in the US (tourist visa is not sufficient, since it requires Cdn residence at all times.) So, yes you need another job.

The rules on Roths changed last september. Too late for you, unfortunately.

[us2can]

Nelson would you please briefly explain why a Roth conversion is desirable before making a move to Canada?

Specfically, how is a Roth treated in Canada before and during retirement?

Thanks!

[nelsona]

BEFORE one leaves US it is always waise to review one's sheltered account holdings, in order to determine whether it is worth taking them out as income before going to canad (thus not taxable in canad) or leaving as is.

With the new treatmnet of Roths in the protocol (which essentially treats them the same as US does), it becomes even more important to decide whether you wish to doa conversion to Roth, pay the US tax, and then have these funds grow both tax-shelterd and tax-free in both Canad and US.

The reason it must be done BEFORE leaving US, is that the protocol spells out that Roth contributions need to have been made as a US resident in order to maintain their tax-free characteristic when in the eyes of canada (in otherwords, they don't want Cdn residents setting up or contributing to Roths to take advantage of the provision).

[canampilot]

I plan on rolling my 401K into an IRA and then into an RRSP should I take employment in Canada. Does this need to be done before I return to reside in Canada?
Also,when moving for the purpose of another job can moving expenses be claimed on my 2008 1040 US return. I am a dual citizen relocating to Canada...permanantly.Thanks.

[nelsona]

Unless you are 60 yrs old, there is no pOint in transferring your 401(k) to Canada, as you will be subject to US tax AND penalty (penalty which cannot be claimed in Cdn return)

Also, you need to have Cdn income at least equal to the amount of the transfer to use up the US tax you will pay (so you need to be in canada first, and working there)

A better move, noe that the treaty will be changed is to move all your 401(k) to a Roth before you move (in 2009), pay the same US tax (no penalty) and the money will be forever tax-free in both US and Canada.

[canampilot]

Thanks. We are moving in one month so will I need to switch my 401 K to a roth now when my job terminates?

[nelsona]

You should proabbly leave the 401(k) as is .

To roll this to a Roth in 2008, you need to meet income restrictions, which will be removed in 2009. So, it is unlikley that you will be allowed the roth conversion in 2008.

If you roll it after moving to canada, the rollover wil be taxable in US as usual, but ALSO in canada, resulting in more tax than its worth. And, it is unclear that the Roth funded after your move would be sheltered in canada's eyes. The treaty specifically mentions this.

So, as I said, unless you can avoid the penalty, leave your 40(k) in US. Youcan roll it to a normal IRA if you wish.