The current presidential race may have many Americans looking to immigrate to Canada but the IRS will follow them across the border
The U.S. presidential race is certainly interesting to watch from Canada. And as the primaries continue, it would appear that people in the U.S. are starting to explore their options beyond voting for the candidate of their choice. Some people don't look at either choice as being ideal.
Searches that involve the phrase "immigrating to Canada" seem to be growing and some Canadian communities are seeing it as a marketing opportunity to attract new people. So if the possibility of Trump or Clinton becoming president may make you think about leaving the country, there are some things to consider beyond just immigration rules if you want to come to Canada.
U.S. citizens are taxed based on residency and citizenship. Even if you come to Canada, you will probably still have to file a tax return with the Internal Revenue Service (IRS) every year unless you also decide to renounce your citizenship. Renouncing your citizenship is not an easy task and you cannot use it to solve any tax issues. Once you give up your U.S. citizenship, you cannot get it back with a few exceptions.
The U.S. Canada Tax Treaty does mean you will not be taxed twice on your income. Usually, the taxes you pay to Canada on your Canadian income more than offset what you would pay in the U.S. But Canada and the U.S. do not treat some tax deferred plans the same way. For example, if you set-up a Tax Free Savings Account (TFSA) in Canada, it does not receive the same tax treatment by the IRS. Or if you have a Roth Individual Retirement Account (IRA), Canada will only allow tax deferral if an election is made in the first year you arrive in Canada and you do not contribute to it while residing in Canada. In fact, there are some investments that U.S. citizens living outside of the country should not consider because of the tax implications.
But the treaty does help on other fronts.
A 401K - the U.S. equivalent of an employer-sponsored Registered Retirement Savings Plan (RRSP) - can be left in the U.S. and will continue to grow tax deferred in U.S. and Canada. But it will be taxable in both the U.S. and Canada when you start withdrawing funds. On the U.S. side, when you take money out of a 401K, it is considered a distribution and will be subject to both income tax and a 10 per cent penalty tax if you are under 59 and a half years old when you receive it - with a few exceptions. The distribution will also be taxable in Canada, but you can use the tax payable and 10 per cent penalty towards a foreign tax credit.
Unfortunately, you cannot transfer a 401K to Canada - only a traditional IRA. But there will still be US tax consequences with the possibly of a 10 per cent penalty if it is done before the age of 59 ½. It usually involves a direct transfer which means the funds are moved from one financial institution to another without ever touching the beneficiary. If you have contribution room, you can always just deposit some or all of the distribution into an RRSP to avoid immediate Canadian tax implications.
Once you move to Canada, you can contribute to the Canada Pension Plan (CPP) and there are specific instances when you can contribute to U.S. Social Security if you choose to for another five years. This would at least get you past Trump's or Clinton's first term. When it is time to collect Social Security, you will be given credit for the amounts paid into CPP and Quebec Pension Plan (QPP) if you have not earned the right to collect from both.
Besides your taxes, there are other issues to consider. Your credit does not automatically transfer when you cross the border and can make it difficult if you want to secure a mortgage or even a credit card. If you plan on buying all your furniture on credit, you may need to juggle your finances until you build a Canadian credit rating.
And value all of your accounts and assets on the day you enter Canada. You will need the figures if you decide to return to the U.S. and have to pay the Canadian exit tax. Or if you decide to sell or dispose of your accounts and assets.
So if the election process is making you think Canada could be a good escape, make sure you investigate all of your options before packing up and heading north.