Jumping the line

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  By Guest Blogger Sinan Terzioglu

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Every year thousands of Canadians go to the US to work or spend their winters. For those planning to relocate there for the long term or become a snowbird it’s very important to understand the tax implications, eligibility for cross-border social security benefits and American estate laws.

U.S. Retirement Accounts

Many Canadians have accumulated retirement savings in US plans such as a 401(k) or an individual retirement account (IRA); or they may have inherited a US plan after the death of a spouse; or received a portion of a US plan from a former spouse.  Those who eventually return to Canada are often surprised to learn the Canada-U.S. tax treaty allows continued tax deferral for Canadians who consolidate their US-based retirement plans with their RRSPs in Canada.

The Canadian Income Tax Act allows Canadian residents to contribute withdrawals from a US-based retirement plan on a tax deferred basis to an RRSP without requiring RRSP contribution room, provided a number of conditions are met:

1.       You must be a resident of Canada at the time of the contribution to your RRSP.
2.       The withdrawal from the US-based plan must be received as a lump sum payment.
3.       Transfers to RRIFs are not allowed and the transfer to your RRSP must take place by December 31 of the calendar year in which you turn 71.
4.       The transferred amount can only be contributed to your RRSP, not a spousal plan.
5.       For employer-sponsored plans such as the 401(k) the transfer amount must relate to your services as an employee.

There are several other conditions to be met and the tax rules can be complex so it’s very important to consult a professional tax advisor to ensure consolidating plans makes sense and that the US-based plan qualifies under all of the special provisions.

Consolidating a plan with an RRSP provides many benefits especially for those expecting to spend most of their retirement here. Also, consolidating would simplify the management of one’s portfolio, more easily ensure proper asset allocation, potentially reduce investment management fees and reduce one’s exposure to US estate tax because retirement plans based there are considered US situs assets for estate tax purposes.

Social Security Benefits

Canada and the States have an agreement to coordinate the operation of the Old Age Security (OAS) program and the Canada Pension Plan (CPP) with the US Social Security program in order to protect the benefits of people who relocate between Canada and America. The process of totalization makes a person eligible for a social security benefit without affecting the calculation of the benefit.  Each country prorates the benefit to reflect only the credits earned under its system.

Example – Paul is 30 years old and moves to the US after working in Canada for 10 years.  The minimum requirement for a CPP retirement benefit is only one contribution so no requirement for totalization.

The OAS benefit is based on residency and in order to receive the benefit outside of Canada Paul would need to have lived in Canada for a minimum of twenty years after the age of 18.  If he continues to work in the US and makes contributions to the Social Security system, he will be permitted to combine his 12 years of residence in Canada with eight years of Social Security contributions to meet the 20-year minimum requirement.  The totalization agreement allows Paul to qualify for a benefit, but the calculation is based on his 12 years of residence in Canada.  In order to receive the full OAS benefit, 40 years of residency is required so Paul’s benefit will be 30% of the full OAS pension because 12 years is 30% of the 40-year minimum.

Estate Planning for Snowbirds

If a snowbird’s US–situated assets are worth less than US$60,000 at death, no estate tax, regardless of the value of the person’s worldwide estate.  All non-resident aliens of the US are permitted an estate tax credit of US$13,000, which provides a shelter for up to US$60,000 of taxable U.S. property.  However, if a snowbird’s US-situated assets at death exceed US$60,000, the executor/liquidator of the estate is required to file a estate tax return regardless of whether there is actually a tax liability.

The Canada-US tax treaty currently increases the US applicable credit for residents and citizens of Canada from US$13,000 to US$4,577,800 which works out to the equivalent to having US$11,580,000 of assets not subject to U.S. estate tax.  If a snowbird’s worldwide estate is worth more than US$11,580,000 and US situs assets exceed US$60,000, there could be US estate tax exposure on all US-situated assets.

The types of assets subject to US estate tax include:

·         US securities (stocks, bonds, mutual funds, ETFs) held in brokerage accounts in Canada and elsewhere.
·         Property held in the States including vacation homes, vehicles and boats.
·         US–based retirement plans.

There are various strategies to reduce or even eliminate US estate tax for non-resident and non-citizens of the US such as:

• Sell U.S. securities that are held directly – The potential estate tax savings should be carefully compared to the costs of realizing capital gains taxes now because it may make more tax sense to defer Canadian taxes until death because the estate could then pay the US estate tax and use foreign tax credits under the Treaty to create some tax relief through the matching of foreign tax credits.
• Gift US property prior to death – Intangible property such as securities or debt is not subject to gift tax for non-residents of the US.  However, the Americas have a separate tax on the gifting of tangible US–situated assets such as real tangible property.  The current annual limit for gifts to a non-US citizen spouse is US$157,000.
• Be aware of how US real property is acquired and titled – real property such as a vacation home may be titled on a JTWROS basis (Joint With Rights of Survivorship) with a spouse, so when the first owner dies, title passes to the co-owner.  However, even though property may be titled JTWROS with a spouse, the entire value of the property may be subject to US estate tax, unless the survivor can prove he/she contributed to the purchase price because the US Internal Revenue Service (IRS) assumes that the first to die contributed 100% of the purchase price
• Use only a non-recourse mortgage to finance the purchase of US real property.  It’s widely assumed by many Canadian snowbirds that mortgage debt reduces the amount of the taxable estate by the amount of the mortgage, however, this assumption is not correct.  This is only true with non-recourse mortgages as it only allows the lender to use the property on which the mortgage is provided as security for the debt.

As with all options it is very important to compare the various costs for each strategy and weigh the pros and cons by consulting with tax and cross-border legal specialists before executing a plan.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.