American residents moving to Canada should be aware of the following investment planning and portfolio management issues.
Passive Foreign Investment Companies
As discussed in greater detail under the Tax Planning section, US persons (US citizens, permanent residents/Green Card holders) who move to Canada and retain their US citizenship or permanent residency status will continue to be taxed by the IRS on their worldwide income.
Within a Canadian taxable or non-registered account, Canadian mutual funds, exchange-traded funds (“ETFs”), and real estate investment trusts (“REITs”) are classified as passive foreign investment companies (“PFICs”) by the IRS, with extremely punitive tax treatment. If you will be establishing a taxable or non-registered account, you should avoid holding these securities.
Canadian mutual funds, ETFs, and REIT holdings are not subject to the PFIC classification within tax-deferred/retirement/qualified accounts (such as RSPs and RIFs, which are the Canadian equivalents of IRA accounts).
We can help build, maintain, and oversee a holistic and optimized cross-border investment portfolio that remains aligned with your strategic investment objectives, risk tolerance, and time horizon while complementing other aspects of your cross-border financial plan and remaining compliant with Canadian and US tax authorities.
Regulatory Compliance
With your move to Canada, it is very likely that your current US-based investment professionals will no longer be able to continue to work with you due to regulatory and compliance restrictions.
For investment professionals, the relevant regulatory bodies in Canada are the Investment Industry Regulatory Organization of Canada (“IIROC”) and the provincial securities commissions. The relevant regulatory body in the US is the Securities and Exchange Commission (“SEC”).
While there are recognition and reciprocity of investment credentials on both sides of the border, investment professionals who are licensed only in one country need to formally apply for registration with the relevant regulatory entity in the other country so that their education, training, and work experience are recognized.
Owing to the additional legal complexity, heightened business risk, and regulatory reporting workload associated with operating in another country, most firms are unwilling to embark on the registration process because of their focus on domestic or regional clients.
We have partnered with best in-class cross-border compliant investment management firms and can help build, transition, and oversee an optimized and compliant cross-border investment portfolio that remains aligned with your strategic investment objectives, risk tolerance, and time horizon, while complementing other aspects of your cross-border financial plan. We work with each client to independently determine the most suitable investment portfolio for each particular situation.
US Retirement Accounts (401Ks/403Bs/IRAs)
US persons moving to Canada typically have investments in US retirement accounts. As discussed in greater detail under the regulatory compliance section, once you move to Canada, it is very likely that US-based investment professionals will no longer be able to continue to work with you.
For individual retirement accounts (“IRAs”), the assets can usually remain in the US. However, depending on the custodian, they can either continue to be held with the existing US-based custodian, or they must be transferred to another US-based custodian who can hold assets for non-US residents. In either situation, unless the US-based investment professional is also licensed to work with Canadian residents, they will not be able to manage the portfolio and provide investment guidance and advice to you; rather, the assets will become self-directed.
For employer-sponsored plans such as 401Ks/403Bs, the situation is similar; it is likely that large investment firms handling and managing the plans cannot work with non-US residents. Assets in employer-sponsored plans can be transferred to a rollover IRA with a US-based custodian who can hold assets for non-US residents and then the client can self-direct the investments in the rollover IRA or transfer the assets to a Canadian RSP account.
In such cases, we can help build, transition, and oversee an optimized and compliant cross-border investment portfolio that remains aligned with your strategic investment objectives, risk tolerance, and time horizon, while complementing other aspects of your cross-border financial plan. We work with each client to independently determine the most suitable investment portfolio for each particular situation.
Manager Selection and Oversight
Portfolio management is a daunting process for many individuals in general and is compounded by the additional complexities within a cross-border context. Your advisory team should be knowledgeable about investing on both sides of the border; ideally, your team will have a comprehensive understanding of the cross-border tax, financial planning, and regulatory issues that can arise.
Having an investment manager who understands your situation and needs and who works seamlessly with tax experts, lawyers, and financial planners is crucial to your financial well-being.
We favour a multi-manager approach to portfolio management by identifying and selecting top-tier managers for a particular asset class or investment mandate. Our independent oversight helps you determine which managers fit best with your investment objectives and risk tolerance. Moreover, we will coordinate total portfolio reporting, manager monitoring, optimized tax management, and comprehensive cross-border advice to help you avoid tax traps, penalties, and other issues. Where possible, we negotiate preferential pricing on investment management fees for our clients.
As an independent firm and investment fiduciaries, we can help build, transition, and oversee an optimized and compliant cross-border investment portfolio that remains aligned with your strategic investment objectives, risk tolerance, and time horizon, while complementing other aspects of your cross-border financial plan.
US citizens and Green Card holders who establish Canadian tax residency do not need to notify the IRS of a change in tax residency status.
Rather, US persons living in Canada as Canadian tax residents will continue to meet their US tax filing obligations by filing US federal tax returns on IRS Form 1040 each year. They will also file state income tax returns if necessary.
US persons resident in Canada are also responsible for filing Canadian tax returns to the CRA, and they will need to pay all applicable tax on both the federal and provincial levels. It is not necessary to notify the CRA of one’s new status as a Canadian tax resident. US persons who move to Canada simply begin filing Canadian tax returns.
Needing to file income tax returns in two countries necessitates organization and careful planning. Since US persons must report foreign bank accounts and financial assets that they retain offshore to the IRS, US tax filings for Canadian tax residents can become complex, with several moving pieces.
Americans who move to Canada will establish bank accounts and financial assets in Canada. As such, they may have to meet FATCA filing requirements. Reportable financial assets under FATCA range from bank accounts to Canadian partnership interests and stocks and securities issued by non-US corporations. US persons with Canadian assets may also have to file FinCEN 114, the Report of Foreign Bank and Financial Accounts, commonly known as the FBAR. Failure to comply with FBAR and FATCA requirements can lead to costly penalties.
Canadian tax residents with certain foreign property holdings, such as some US trusts and bank accounts, are also required to report this foreign property to the CRA.
Given the complexities involved in filing taxes and complying with reporting obligations in both countries, Americans moving to Canada typically require the assistance of cross-border financial planners and accountants.
