Canadian and American citizens move across the 49th parallel for education, employment and retirement reasons. Clearly, many overt similarities exist between the two countries and their citizens. However, the tax systems operate under unique mandates. This dichotomy creates the risk of “double taxation” for expatriates. Double taxation occurs when both Canada and the U.S simultaneously tax the same income during the same tax year. The Canada U.S. tax treaty is the most powerful tool for mitigating double taxation. It is also noteworthy that Canada and the U.S. exchange citizen and resident tax information. This collaborative approach allows both governments to pursue and punish tax evaders.
The treaty was established on September 26th, 1980 and has had five amended protocols. Residence is the most important factor with certain criteria validating status. Citizenship is not the determining component as is commonly assumed. Per the treaty, Canada and the U.S. allow tax credits against income tax schedules for income sourced and taxed within the other country. Credits must be adjusted for currency conversion.
Also, tax-withholding guidelines are established within the treaty and are used for income earned outside of the residing country. This is an important consideration when moving to Canada and maintaining U.S. retirement accounts (401K, IRA, etc.) as well as pensions. For example, a Canadian resident who distributes funds from a U.S. retirement account or pension must evoke the treaty. Importantly, the appropriate tax filings must be completed to ensure the correct withholdings. We recommend that the Canadian U.S. Tax Treaty be carefully reviewed prior to moving to Canada.
There is no “one size fits all” cross-border financial planning strategy. Therefore, it is important to partner with a qualified team of tax, legal and investment professionals who specialize in Canadian and United States cross-border transitioning and asset management. Stay tuned for part four of “Exiting the U.S. for Canada?” or contact Cardinal Point Wealth Management at http://www.cardinalpointwealth.com/US/contactus.html to review your unique situation.