Investment Considerations
Tax Implications of Cross Border Investment Activities
TAX FREE SAVINGS ACCOUNT (TFSA)
For US citizens, US residents, and green card holders
A Tax Free Savings Account (TFSA) is a Canadian government registered account held with a Canadian financial institution. It is designed to encourage savings. Contributions to a tax free savings account are not deductible in computing income for Canadian tax purposes and the income earned within this account is not taxed, even when withdrawn.
This account is not viewed as a tax free account in the US and the Internal Revenue Service has never clearly defined how this needs to be reported for US income tax purposes. There are various interpretations as to whether this is subject to trust reporting, foreign disregarded entity reporting, or no special reporting at all (other than being treated as a regular investment / brokerage account). If you hold a TFSA we recommend involving a cross border tax specialist so that your tax reporting is done correctly.
RRSP & 401K
For those working in the US and in Canada and for US citizens, US residents, and green card holders
Registered Retirement Savings Plans (RRSP’s) and 401K retirement accounts are both registered retirement plans. The RRSP is a Canadian retirement account and the 401K is the most popular type of US retirement account. Both work similarly in that taxpayer / employee contributions are tax deductible when made (subject to limitations), both grow tax free and both are taxable when distributions are taken from these accounts.
The question arises as to whether you can deduct RRSP contributions on your 1040 US income tax return and whether you can deduct 401K contributions on your T1 Canadian income tax return. If you meet certain requirements the answer to this is yes. Your situation needs to be carefully reviewed to understand your facts and circumstances to determine whether you meet the criteria to deduct foreign retirement contributions on your domestic tax return.
MUTUAL FUNDS, ETF’s and REIT’s
For US citizens, US residents, and green card holders
Mutual Funds, Exchange Traded Funds (ETF’s) and Real Estate Investment Trusts (REIT’s) are common investment types that can be held in regular brokerage / trading accounts, in a TFSA, or as part of your retirement accounts. In Canada, most major banks have an investment arm and their investment advisors regularly recommend mutual funds to their clients.
Foreign or non-US mutual funds, ETF’s and REIT’s are usually defined as PFICs (Passive Foreign Investment Companies). PFIC’s require complex reporting by the Internal Revenue Service and related investment gains and earnings are taxed at unfavorable US tax rates.
ROTH IRA
For those moving to Canada from the US
A Roth Individual Retirement Account (Roth IRA) is a special tax favored retirement account in the US. It allows for after tax contributions to be made to your personal retirement account. All earnings / growth in this account grow tax free and distributions are also tax free provided you take these at the allowed times.
If you have a US Roth IRA and you move to Canada there is special time sensitive reporting that needs to be done to the Canada Revenue Agency (CRA) in order to preserve this tax favored status in Canada. In addition to the time sensitive reporting, no additional contributions can be made to this account after moving to Canada. Failure to comply with these steps will result in the Roth IRA losing its tax favored status from a Canadian standpoint.
529 Qualified Tuition Plans and Registered Education Savings Plans (RESP’s)
For US citizens, US residents, and green card holders
College / educational savings plans are popular investment vehicles in both the US and Canada. The challenge that a number of our client’s face is being aware of and understanding the adverse tax implications that may exist by investing in these plans.
As an overview, 529 College Savings Plans are US plans that are not recognized and are not tax favored in Canada. Similarly Registered Education Savings Plan accounts (RESP’s), are Canadian plans that are not recognized and are not tax favored in the US.
Holding these accounts may appear to have tax benefits in the domestic country where you set these plans up but be aware that those benefits don’t translate to tax favored treatment in the foreign country where you may be required to report that income. This unreciprocated tax treatment will often have adverse tax implications and its advisable to consult with a knowledgeable cross border tax expert before setting these up.
GET HELP WITH YOUR TAX RETURNS
Cross border and international tax issues can be complex
Our team have extensive knowledge of the US Internal Revenue Code, the Canadian Income Tax Act and the US-Canada Tax Treaty.
To ensure you meet your filing requirements with optimal savings, contact us for help with your tax returns.
How Can US Taxes Toronto Help?
We can assist with the preparation of your US and Canadian Tax Filings. Our team provides hands on ongoing support throughout this process, so that preparing and completing your tax filing is convenient and easy. If you would like to get more information on how we can help please reach out to us via our contact page.
Disclaimer
All information provided on this investment considerations page is for educational purposes only. This information should not be relied upon in making decisions and we make no representation that the information provided is current / up to date or accurate. If you have cross border investment considerations you should consult with with a cross border investment expert before making any decisions.