Retiring to Canada: A Financial Planning Guide
Written by Tiffany Woodfield, CRPC®, Dual-Licensed Financial Advisor
Reading Time: 9 minutes 29 seconds
When retiring to Canada from the US, expatriates and dual-citizens are often unprepared for the complexities of the financial transition.
Table of Contents:
- The Cost of Retiring and Living in Canada
- CPP Pension Plan Eligibility
- Old Age Security
- US Pension in Canada
- Healthcare in Canada
- Avoiding IRA Issues
- Keeping Your US Citizenship
- Selling Your US Home
- Buying a Home in Canada
- Leave Your Car in the US
- Professional Tax and Financial Advice
- Retirement in Canada vs. USA
- Minimizing Your Tax Burden
- Working with a Cross-Border Financial Advisor
- Should You Move?
Many of the U.S. brokerage firms such as Fidelity and Wells Fargo are informing their clients who are not US residents that they cannot service their account. These regulations are not new. They came out prior to Foreign Accounts Tax Compliance ACT (FACTA), but the financial institutions have been recently enforcing them much more strictly. Even updating a phone number can be a trigger for your brokerage firm that you are no longer a U.S. resident.
A client is then faced with two options: to find another advisor or close out their account and have a major taxable event.
Additional downsides include:
- A Canadian advisor, unless dual licensed, cannot manage your IRA
- Finding the answers and someone to guide you is exceedingly difficult
- Your 401(k) account may be restricted and frozen
- Certain investments in Canada cause an additional tax liability in the US.
Before you get too worried, you should know that there are financial planning solutions available for every cross-border issue you might be facing.
If you deal with a firm who specializes in helping people retiring to Canada from the US, they can help you avoid the common pitfalls. With a U.S. Canada dual licensed advisor you can keep your IRA intact and have it managed in Canada. Your cross-border team can help if you decide to move your 401(k) into a rollover IRA and have it managed from Canada.
In this article, we’ll review some of the key areas that every American, dual-citizen, or expatriates should know and understand before moving or retiring to Canada. This is important because common Canadian investments and accounts can cause additional complications and liabilities if you’re a U.S. citizen or dual-citizen living in Canada.
Often clients wonder how much things will cost when living in Canada compared to the United States. While the costs depend greatly on your lifestyle and where you are going to live, there are certain things that are more and others that are less expensive. In Canada, healthcare and rent tend to be less while gasoline, food and consumer goods are more expensive.
You will be eligible for the Canada Pension Plan (CPP) if you worked in Canada after the age of 18 and paid into CPP through payroll deductions. You also may receive credits from a former spouse or former common law relationship. You can start CPP benefits at a reduced rate at age 60 or full retirement age at 65 or receive delayed credits if you wait until age 70.
Worktime in the US may qualify towards CPP due to the Canada-US Totalization Agreement between the two countries.
You may be entitled to Old Age Security in Canada (OAS) if you are 65 years or older, a Canadian Citizen or permanent resident of Canada, and have lived in Canada after the age of 18 for at least 10 years.
It is best to sign up for a My Security Online account before you move as you need a US address for this. This can be done here on the government website. If you are already living in Canada, go to the SSA Foreign Page for the closest foreign affairs office and phone numbers to call from Canada. File with the Social Security Association three months before you want your payments or eligibility to begin.
Canada has a publicly funded universal health care system. If you are a Canadian citizen or permanent resident, you do not pay for most healthcare services. To get access, you will need a government health insurance card from your province, which you must show at the medical clinic or hospital.
Getting Health Insurance Before You Move
Each province has their own health insurance plan and it can take 3 months after you apply to get medical coverage in most provinces. You should get private health care insurance while you wait for provincial coverage.
Americans and green card holders living in Canada have to file taxes in Canada and the U.S. The Canada-United States Income Tax Treaty helps avoid double taxation on the same income. Working with a Canada-US tax accountant is very helpful as they are up to date with the tax code changes and laws. They can help you avoid being penalized and are able to take advantage of the benefits of the treaty.
There is often a fear around the liability of having this continual tie to the U.S. and the potential tax burden with the IRS. Many people think the solution is to renounce their citizenship. This may be the best decision for some, but before you decide to start this costly and time-consuming process, speak to a cross border tax accountant to understand your tax liability. The continual tax filing obligation doesn’t mean you owe taxes in the U.S. In Canada we have a higher tax liability and often foreign tax credits reduce any tax owed to the United States.
Keeping your US citizenship allows you the benefit of moving back to the U.S., if you decide to do so in the future. It is a personal decision and all factors should be taken into consideration, not just the potential tax liability. Regarding your investments, when you work with a Cross- Border Financial Advisor, you will be helped whether you live in Canada or the US.
If you are selling your US home, there is a capital gain exclusion of up to USD $250,000 if single, or USD $500,000 if married. You need to have lived in the home for two of the past five years. You can use this exclusion once every two years. Any additional capital gain above these amounts will be taxed at the long-term capital gains rates in the US. You can find out more by reading Publication 523 on the IRS website.https://www.omreb.com/market-stats/
A great website to look up home costs in your area: https://www.realtor.ca/en
The Canadian Real Estate Association: https://creastats.crea.ca/en-CA/
Canada’s safety standards for vehicles are different to those of the US. Vehicles must meet Transport Canada’s import and admissibility requirements before being imported. To make the necessary updates, it may make more sense to sell your vehicle and purchase a new one in Canada. Other cost considerations are Registrar of Import Vehicles (RIV) fees, duties and taxes. Also research if there are any recalls on your vehicle.
One of the biggest fears clients face in retiring to Canada is whether they could have a major taxable event that would impact the amount of money they have to live the life they want. By working with a cross-border team who understands their situation, they gain clarity on their cross-border tax liability, and can understand the best way to create an income stream.
A cross-border accountant can make sure you utilize all the foreign tax credits available and ensure you are onside with the IRS. A cross-border financial advisory team can not only manage an IRA from Canada, but also has an understanding of both the Canada and US government pension systems and how to create a financial plan to maximize your retirement funds.
Moving across the border may be a onetime event but your cross-border needs are ongoing and you need a team who can support you.
Canada and the United States have mandatory old-age pension systems that are publicly funded through taxes. Both pensions offer some benefits for retirement, survivor, disability and minor children. The Canadian CPP income thresholds and tax rates are lower than Social Security. As a result the benefits from CPP tend to be lower than Social Security. The average CPP monthly payout in 2020 is CAD $696 and the maximum payout is CAD $1175. The average social security payment in 2020 is USD $1503 per month and the maximum monthly benefit is USD $3011. Both of these depend on your earnings history and whether you file at full retirement age, early, or at age 70.
Canada also has Old Age Security (OAS) which is in addition to CPP. It is based on the time you have lived in Canada over the age of 18. The average OAS payment for 2019 is CAD $613. If you earn more than CAD $75,910, the OAS payment would be clawed back by the government, and if you earn more than CAD$122,843, it is reduced to zero.
A major concern is the solvency of Social Security in the United States. As of 2020, the cost of Social Security payouts will exceed the total income of the country. There is a trust fund so social security can keep paying benefits until 2035, which is when the government reserves will be depleted. This provides time for the government to come up with a financing plan. In Canada, the Canadian Pension Plan does not face a similar problem.
To avoid overpaying on taxes as a US person retiring in Canada, there are steps you can take to minimize your retirement tax burden.
- Do not collapse your retirement account such as an IRA and take all the income in one year
- Do not invest in anything that the IRS views as a Passive Foreign Investment Company (PFIC)
- Do not move a Rollover IRA into an RRSP
- Do work with a team who specializes in client situations similar to yours and understands government pensions on both sides of the border, and the rules around RMD’s
- Do work with a cross-border accountant who understands all the foreign tax credits to reduce your tax liability
Consulting with a Cross-Border Financial Advisor and Accountant before you move is important to help prevent costly mistakes. At SWAN Wealth Management of Raymond James Ltd., we work with you on the steps to take to keep your retirement accounts intact and managed from Canada. As dual-licensed financial advisors, we understand both systems and can help you understand the investments you can keep once you are living in Canada. In addition, we work with a network of cross-border accountants and cross-border lawyers who can make your transition to Canada smoother.
A cross-border accountant can guide you and make sure you use all the available foreign tax credits to your advantage. They understand how the two systems work and can help you avoid double taxation.
A dual-licensed Canada and US financial advisor can inform you on how to keep your retirement accounts intact and avoid receiving a letter stating you have 30-90 days to find another advisor or you will have to close out your account.
We recommend working with an accountant who specializes in helping people in situations similar to yours. They can guide you on how to avoid double taxation and stay on side with the IRS. A cross-border licensed financial advisor can help you avoid having to collapse your retirement accounts and face a major taxable event.
For more information on the tax treaty between the US and Canada: Convention Between Canada and the United States of America
There are many factors to consider when making the decision on whether you should move back to Canada to retire. The most important being where do you want to live. Other considerations are family, lifestyle, cost of living and the medical system.
What shouldn’t hold you back is the fear around how to make the financial transition. Although it seems daunting, it is made easier by working with a team who specialize in helping people like you.
Summary of Key Points:
- Consider the cost of living in Canada versus the United States
- Seek professional tax and financial advice from cross-border specialists to reduce stress and save money
- Healthcare in Canada is good but remember to get health insurance for the first few months when you arrive in Canada
- You may be eligible for government pensions from Canada and the US depending on your work history
- It is best to sign up for a Social Security account before you move
- A cross-border advisor can manage your IRA whether you live in Canada or the US
- Avoid common pitfalls as a dual citizen or green card holder living in Canada
Are you an American, Dual-Citizen or Expatriate retiring in Canada?
To ensure that you’re optimizing your cross-border financial plan, we recommend speaking with one of our Cross-Border Financial Advisors. Schedule a 15-minute discovery call and find out how we can help you simplify and optimize your retirement investments.
ABOUT THE AUTHOR
Tiffany Woodfield is a dual-licensed financial advisor and the co-founder of SWAN Wealth Management, along with her husband, John Woodfield. Tiffany specializes in advising clients who live both in Canada and the United States and need to simplify their cross-border financial plan, move their assets across the border, and optimize their investments so they can minimize their tax burden. Together Tiffany and John Woodfield, CFP and Portfolio Manager, help their clients simplify their cross-border finances and create long-term revenue streams that will keep their assets safe whether they live in Canada or the US. Click here to schedule an introductory call with SWANWealth Management.
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