So Trump will be our 45th president of the United States, and you now ‘claim’ you are moving to Canada. Did you think about your tax implications for moving to Canada? Judging by the quick reactions on social media, I doubt it.
Here are things to consider…
First and foremost – will Canada have you?? In order to move residency to another country, the other country will need to grant you permission in the form of a visa or citizenship.
Assuming the country, such as Canada, grants you permission, you must consider your new tax home as if you do not relinquish your U.S. green card or U.S. citizenship. Your U.S. income tax filing requirements will continue and your tax compliance will become quite complex and expensive – with that said, read on!
- When are you moving? Canadian tax is based on your residence status for tax purposes, and it will determine when and how your income is subject to Canadian tax. Normally that date is the date you physically move to Canada; however, it could rely on other factors not listed in this blog.
- Canadian tax is subject to worldwide income and similar to the U.S., there is a foreign tax credit. However you may want to do your research and find out what Canadian tax rate you fall under, and don’t forget the provincial/territorial tax rates, because those should definitely not be ignored considering they range from 4% up to 21%! Compare this to AZ income tax rates that range from 2.59% – 4.54%.
- Social Security tax – The U.S. and Canada have an agreement and if you qualify, you might be able to continue to pay into the U.S. Social Security system. But even if you qualify, this special arrangement will max out after around 5 years. If you do stop paying U.S. Social Security tax then your future benefits may be lower than had you stayed in the U.S. system, which brings us to the next point…
- Are you planning on coming back (may be in 4 years) and not relinquishing your U.S. green card or U.S. citizenship?
- a. If yes, you will need to file both a U.S. income tax return and Canadian income tax return each year, but you will be able to take a tax credit for taxes paid to each country so that you will not be double taxed, thanks to the U.S. /Canadian treaty. But be warned that there may be certain investments for which the credit does not alleviate and a negative tax situation may be created.
The foreign tax credit in the U.S. will not provide a credit for a rate in excess of the U.S. tax rates, as such, if your Canadian tax is higher, you will pay more.
- If no, then you may be subject to *expatriation tax. The U.S. may impose an expatriation tax on those who give up U.S. citizenship. This tax also applies to U.S. green card holders who abandon U.S. residency after having held a green card for at least 8 of the last 15 years. Under expatriation tax law “covered expatriates” will be treated as if they sold all their assets on the day prior to expatriation, even if you didn’t sell anything! They will take the fair market value on that day, less your basis and you may be subject to tax on that gain.
This blog should not be relied on for tax advice, but is solely to highlight issues to consider before seeking refuge in Canada. If you plan on moving to Canada, or any other country for that matter, please consult your tax advisor first because there might be some truth on a tax aspect behind the memes that are flooding the internet; yes, I am saying Mexico might be a better option for you depending on your weather preference.
*If you would like to see if the expatriation tax applies to you, go to the IRS website by clicking here.
Chris Morrison, CPA MAFM