Canadians are making a run for the border like never before, a migration that's triggering a rash of financial planning issues for investors with dual citizenship.
"The Canadian currency is near all-time highs, there's depressed real estate (in the U.S.), especially in the Sun Belt, and Baby Boomers are starting to retire," says Dale Walters, CEO of Keats, Connelly and Associates, a Phoenix-based wealth management firm specializing in cross-border moves.
From a financial point of view, most people with a reasonable net worth would save a considerable amount of money by locating south of the 49th parallel, Walters says. First, income taxes in the U.S. are two-thirds those of Canada. Second, Old Age Security is clawed back in Canada, but it's not in the U.S. Finally, cashing in your registered retirement savings plans (RRSPs), the Canadian equivalent to 401(k) plans, can result in considerable savings in the U.S.
Taking the money out of the RRSP in one fell swoop would trigger a maximum 25% tax hit but if it's done gradually, the tax falls to 15%. In Alberta, Canada's fastest-growing province, that rate could be more than 40%, Walters says.
"You'd save tons of money (in the U.S.). Canadians have most of their savings in RRSPs. Withdrawing them in the U.S. could save them hundreds of thousands of dollars, depending on the (starting) amount," he says.
Cross-border financial planning is increasingly showing up on the radar screen of Canada's dominant financial services players, led by the brokerages owned by the Big Six banks–RBC Royal Bank, BMO Bank of Montreal, Scotiabank, CIBC, Toronto Dominion Bank, and National Bank. Also with a significant share of wallet are mutual fund giants like Investors Group, which has its own proprietary sales force, and AIM Funds Management Inc., which is sold through third-party salespeople.
There is also a small but growing segment of boutique brokerages which focus almost exclusively on high-net-worth investors.
Pick Your Tax Poison
Tannis Dawson, senior specialist of tax and estate planning at Winnipeg-based Investors Group, says that while you can have dual citizenship, you can only be a resident of one country for tax purposes. For Canadian snowbirds, the threshold is 183 days in the sun–exactly one day more than half a year–before they'd have to file a U.S. tax return.
Even if they stay longer, they can still maintain Canadian residency by filling out a so-called "closer connection" form, Dawson says, which looks at where your family, automobile, and personal belongings are based, as well as where you can vote and the government that issued your drivers' license.
She says the easiest thing to do is maintain Canadian residency for tax purposes so you don't have to file a U.S. tax return. There can be serious consequences if you are required to file one but have neglected to do so, she says.
