How to Manage Your Family’s Cross-Border Wealth

Video Script

In this video, we’re going to talk about cross-border financial planning and eight tips on how you can manage your family’s cross-border wealth.

As a Cross-Border Financial Advisor, I have spoken to hundreds of families and professionals who are planning moves across the border. I’ve seen what can go wrong when people aren’t aware of the steps they need to take to optimize their cross-border wealth.

One of the biggest mistakes I see is a lack of expert planning. Many people end up coming to us after they’ve already made many costly mistakes. So watch to the end to make sure you don’t miss a single tip that could save you time and money!

First if you’re currently living in the US or Canada and you haven’t moved across the border, I have two action items for you today.

1) You need to get in touch with a cross-border financial advisor and schedule a call.

2) You need to find a cross-border accountant and schedule a call.

If you haven’t moved yet, speaking to these two professionals will help prevent countless mistakes.

There’s a reason this is tip #1.

It is the most important step you can take if you want to ensure your investment portfolio is optimized for where you live. It’s also the best way to avoid costly headaches like double taxation, a massive accounting bill, or accidentally being invested in PFICs.

The next few tips I’m going to go over are important for US Persons who will be living in Canada. There are other concerns for people who have worked in the US and have retirement accounts but are no longer tied to the country. I’ll go over those tips at the end of the video.

AVOID DOUBLE TAXATION

Nobody wants to be taxed twice, and this is a common concern. You can

avoid double taxation by getting a cross-border accountant who understands how to utilize the foreign tax credits fully.

But what exactly are foreign tax credits?

A foreign tax credit is used to offset calculated tax in one country for tax you already paid in another country on the same income. For example, the tax you have paid in Canada is used to offset tax you might owe on the same income in the US. Tax credits are used to help prevent double taxation. This is important as a US person living in Canada because you have a continual filing obligation back to the IRS as well as to Canada.

You need to know exactly how the IRS will treat what you do in Canada, so you don’t owe more tax.

CREATE A PLAN FOR YOUR REVOCABLE LIVING TRUST

Next, in the US, it’s common for people to keep their homes, assets and investments in a revocable living trust as part of their estate planning.

Unfortunately, this causes complications if you move to Canada and still have this type of trust. Trusts are taxed differently in Canada than in the US, and the foreign tax credits likely will not match up. This puts you at a high risk of double taxation.

Next, I recommend that you avoid massive complications and a big accounting bill by not investing in PFICs in Canada. This PFIC issue is something I’ve seen come up many times.

PFIC stands for Passive Foreign Investment Company. It’s a type of investment that is subject to extremely complicated tax guidelines by the IRS. So investing in these should be avoided. But many common Canadian investment tools are considered PFICs.

I have a quick example of what can go wrong with PFICs, and why you need to be aware of this issue and avoid it.

One of my clients, who is a dual Canadian/ US citizen, had a particularly frustrating experience recently. She moved to Canada, and everything was going well. She wasn’t worried about tax time because she had already done some planning while in the US.

But then she got a large bill from her accountant, which she wasn’t expecting. It was much more than in previous years. And on top of that, she owed tax she hadn’t planned for.

Barb thought her situation should be simple because she was retired and didn’t have any employment income or own a corporation.

But because she had invested in Canadian mutual funds, which are considered PFICs, her tax return had become extremely time-consuming. Barb’s accountant had to fill out complex forms and spend a lot of extra time doing the return.

Barb had done all this work to simplify her situation before she moved to Canada, only to invest in something as simple as Canadian mutual funds and get hit with extra tax and a large accounting bill.

To avoid this kind of stress, you should meet with a cross-border accountant and cross-border financial advisor before you move.

Not only that, when you work with Raymond James in Canada, they can give you a full set of investment tax receipts for your Canadian tax return and for your US tax return. This saves your accountant time preparing the return, which will save you money. It also means tax time is less stressful for everyone.

I think the biggest frustration comes when we do all this planning to make smart decisions only to find we fell into a trap anyway, and all our planning feels useless.

Now, you may be thinking about what investments could be PFICs.

Some of the most common PFICs are Canadian mutual funds, Canadian ETFs and Canadian money market funds.

GILTI TAX

Next, be aware that starting a business in Canada or moving your business to Canada can have tax implications. One of the complications is the GILTI tax.

You should speak to a cross-border tax accountant before you consider starting a corporation in Canada as a US person.

YOU DO NOT HAVE TO SELL YOUR INVESTMENTS

Next, one of the biggest misconceptions people have about cross-border wealth management is that to work with a cross-border advisor, you have to sell your investments. Most people think you have to change them to Canadian currency and move them across the border.

This is not the case. If you own publicly traded securities, You usually do not have to sell your investments to work with a cross-border financial advisor. We will review your list of investments to determine transferability.

Instead, you open accounts with a cross-border advisor. Your investments can be moved into these accounts and you may not have to sell a single asset. From there, your cross-border advisor will create a plan that makes sense based on your situation.

KNOW THE STEPS TO MOVE YOUR INVESTMENTS TO CANADA

Recently our family did a move to a new home. It was only about a 5 km change, but the process of packing everything up, planning and considering all the things you need to do was overwhelming.

When you add in a cross-border move to a new country, you need to multiply this by 20…at least! It is far more complicated, and I now appreciate why so many of my clients only deal with the basics before their move. You have a lot on your plate!

Unfortunately, only dealing with the basics often costs them money because of the mistakes made.

If you decide to work with a cross-border advisor, here are the steps that would typically happen:

1) First, you would open your accounts with a cross-border advisor, ideally while living in the US. You usually won’t need to sell any investments to do this.

2) Your cross-border advisor will look at all your investments. They’ll determine what can be moved over to Canada in kind, meaning it won’t need to be sold as most investments can be moved to Canada. You also can invest in Canada in US and Canadian currency.

3) Your IRA will stay intact. They won’t need to be transferred into an RRSP. And you won’t need to deal with taxable event.

4) If you determine you want to move your 401(k) it can be rolled into an IRA as long as you are no longer contributing to it. It can then be actively managed in Canada.

5) Your non-registered taxable investment accounts will need the most planning to ensure you don’t overpay your taxes now or in the future. Based on the advice of your accountant and financial advisor, you may want to get rid of anything that is in a loss position and keep anything that is in a gain position. It is important to get advice before you make these decisions.

Finally, if you’re not a US Citizen or Green Card Holder, but you’ve worked in the US and have retirement accounts in the US, then your concerns will be slightly different.

Like US Persons, you’ll need to know how to access your retirement accounts while living in Canada.

You may choose to have your 401(k) rolled into an IRA and actively managed by an advisor licensed in Canada and the US.

However, it is important to note that, unlike a 401(k), an IRA doesn’t usually allow you to avoid a penalty if you take a distribution before age 59.5.

Having your entire US and Canadian portfolio managed by one cross-border advisory team can make things easier.

Your team will understand your overall investment risk. And they can create diversification because they know all the individual holdings.

Your team will also know the tax impact and rules for drawing money from a US plan versus a Canadian plan. And you’ll only have to contact one team when you’re doing financial and estate planning.

This is important because you’ll need to know the tax implications and ensure there’s no excessive taxation or a confusing mess for your beneficiaries.

As you can see, the situation for US persons is more complicated than for those of you who have no ties to the US beyond your retirement accounts. This is because if you are no longer considered a US person, you usually do not have a continual filing obligation to the US.