US Trusts vs. Canadian Trusts for Americans Moving to Canada

Video Script

In this video, I'm going to walk you through 5 things that change with US trusts when you move to Canada.

You’ll find out the steps to take to avoid double taxation and some surprising pitfalls of trusts in Canada.

Stay to the end to find out my honest opinion about whether Americans in Canada should have a cross-border trust.

I’m Tiffany Woodfield, a Cross-Border Financial Advisor and the co-founder of SWAN Wealth Management.

I work with Americans and Canadians managing cross-border wealth every day.

And over the years, I’ve seen how much misinformation there is around trusts in Canada.

So let’s get into it!

1 - Your US Revocable Living Trust Is Not a Disregarded Entity to the CRA

Almost everyone I speak to from the US has a revocable trust. But when you move to Canada, that trust becomes a problem.

In Canada, a trust is considered a separate taxpayer. But in the US, the trust is taxable to you personally.

The foreign tax credits may not match up between the two countries. This is a problem because you could be taxed twice on the same money.

We tell most Americans to close or restructure their US revocable living trusts before moving to Canada.

Once you're a Canadian tax resident, your options go down and the cost of fixing it goes up.

2 - Why Having Your Home Titled in a Trust May Be a Problem

Let’s say you move to Canada and your US home is still inside of a revocable living trust.

What happens if your house has increased in value significantly while you’re a Canadian resident?

To prevent double taxation on the gains, you have to use foreign tax credits.

To Canada, it’s like the trust is selling the house. But the IRS sees you as selling the house personally. If the house was your principal residence, this can often mean no taxable gain.

In this case, the tax credits don’t line up, which leaves you exposed to double taxation.

The best thing to do is to take the house out of the trust before you move.

3 - Canadian Trusts Are Taxed at the Highest Marginal Rate

When Americans find out their US trust is a problem, they often ask: Can I just open a trust in Canada?

You can. But it’s usually not the best move.

In Canada, income and capital gains earned inside a trust are not taxed at your personal rate.

They’re taxed at the highest marginal rate. And in most Canadian provinces, that’s over 50%.

You can flow money out to beneficiaries in a lower tax bracket, but that requires careful planning and the right trust structure.

4 - Holding a Canadian Trust as an American Can Create Double Taxation

Next, if you’re a US person with a Canadian trust, taxes become complex. The IRS has special rules, and there are potentially negative tax implications for foreign trusts.

Canada sees the trust as a separate taxpayer. While, the US may still see you as personally responsible for any income earned in the trust.

The foreign tax credits may not line up. And additional punitive tax implications may apply if income isn’t distributed out to beneficiaries in the same tax year.

On top of that, the reporting requirements are complex and expensive.

5 - Cross-Border Trusts Are Not a Magic Bullet

There are certain trust structures designed for cross-border situations.

They can help address the mismatch between how Canada and the US treat trusts.

But they’re expensive and complicated to set up.

You’ll need to pay specialized legal fees and ongoing compliance costs on both sides of the border—every year.

Do You Need a Cross-Border Trust?

Most people don’t need a cross-border trust.

In the past 5 years, none of our American clients have needed a trust.

A cross-border trust is usually only worth it if you have strategic estate planning needs.

If you have serious estate planning needs because you have a blended family, US estate tax exposure, or a complex estate with multiple properties, you should speak to a cross-border estate lawyer who specializes in this type of planning.

So, What Should I Do for Estate Planning?

The most important thing to do is to create a new estate plan as soon as you’re a resident of Canada.

Work with your cross-border advisor, accountant, and an estate planning expert.

The right steps to take will depend on your original goal. For example, why did you have the US revocable trust?

Was it to protect your kids? Avoid probate? Simplify your estate? Manage taxes efficiently?

Your strategy needs to be rebuilt for where you live and what matters most to you.

Closing

Finally, if you’re planning on moving across the border and have assets you want to protect, I recommend you schedule a call with a cross-border advisor well in advance. 

The biggest and most costly mistakes happen when people don’t plan in advance. You can schedule a call with a SWAN Wealth cross-border expert at swanwealthcoaching.com

Thanks so much for watching, and I’ll see you in the next video!