If you are moving to the USA from Canada, there are certain things you have to take into consideration. Note that there are numerous unique lifestyle, immigration, financial, tax, and estate planning issues necessary to be considered.

It is best to be aware of these considerations and also start the process as early as you can to ensure that your transition to the new country is as smooth as possible. Unlike the United States, Canada barely or does not impose its income tax system based on Canadian citizenship.

Instead, income tax in Canada is dependent on residency, which is why you must understand how residency is decided in the country. Have it in mind that residents of Canada are mandated to pay Canadian income tax on their worldwide income.

Non-residents of Canada are only expected to pay Canadian tax on income from employment in the country, as well as rents, royalties, interest, and dividends. To make this more confusing and daunting, the term “resident” in the country is not explicitly defined in the Canadian Income Tax Act.

Instead, it is based on common-law principles and will depend on the kind of residential ties you have or maintain in Canada. Anyone leaving Canada for the United States permanently would want to be considered a non-resident of Canada.

But just as it was noted above, from a Canadian income tax perspective, an individual’s residency will be dependent on their personal facts and certain individual circumstances. Howbeit, you are considered an emigrant for income tax purposes if you leave Canada to live in another country and have severed your residential ties with Canada.

5 Notable Tax Implications of Moving from Canada to the USA

If you intend to make the move southward, there are notable tax implications to consider before you leave. They include;

  1. Departure Tax

Upon departure from Canada, it is believed that you have disposed of your property and this could entail you paying taxes on capital gains if those assets have appreciated. However, some assets are considered exempt from this “departure tax,” such as Canadian real estate, your registered plans (RRSP, TFSA, RESP, etc.), employee benefit or pension plans, stock option rights, and some trust interests.

Howbeit, you still get the opportunity to file a special election to defer the tax owed when you leave (using Form T1244), you may be expected to post security for the amount owed. In addition, you will also have to file forms T1161 (a listing of assets owned upon emigration) and T1243 (showing the deemed disposition) when you leave the country.

When moving to the United States, there are ways to avoid tax there on the same capital gain you paid on departure from Canada (avoiding double-taxation). You can achieve this by making a special election under Article XIII(7) of the Canada-U.S. tax treaty. However, consider speaking or consulting a tax expert about your departure as the rules tend to be very complicating and daunting.

  1. Registered Retirement Savings Plan

Most often, Canadian residents moving to the USA are advised to leave their registered retirement savings plan intact. Have it in mind that collapsing your plan before you leave will only add to your already growing tax bill. Therefore, consider making withdrawals from your RRSP after you must have taken up residency in the United States.

You will only be expected to pay a simple withholding tax to the Canada Revenue Agency (the tax is 25 percent, which can be reduced to 15 percent under the Canada-U.S. tax treaty on periodic withdrawals, as against the huge sum withdrawals from your plan).

While in the United States, note that you will still be able to withdraw, free of U.S. tax, the cost amount of your investments inside your RRSP (any gains on your RRSP assets will be taxable in the United States).

Owing to that, you should consider maximizing your cost amount before moving to the United States by selling the investments in your RRSP and reinvesting the proceeds. By doing this, you won’t have to pay tax in Canada since the assets are inside an RRSP, but greater tax-free withdrawals in the U.S. later.

  1. Tax-Free Savings Account

If you have a tax-free savings account in Canada, note that you can continue to hold that TFSA even while you’re in the United States. However, although you won’t have to deal with tax in Canada on income and growth inside the TFSA, there is a possibility you will face tax in the United States on any income and acquired capital gains each year because of the tax treaty between both countries doesn’t provide any form of protection here.

Owing to that, right before you depart from Canada, you should consider collapsing your TFSA investments and withdrawing every one of the proceeds. Although there will be no tax in Canada, have it in mind that it offers you the opportunity to increase your TFSA contribution room by the amount of the withdrawal, so that if you come back to Canada later, you can expressly re-contribute that amount to a TFSA.

  1. Registered Education Savings Plan

If you are a subscriber to a registered education savings plan, although you still get the opportunity to continue to be the subscriber on an RESP after you move to the United States (the RESP would continue to be exempt from tax in Canada), have it in mind that the annual income earned in the RESP each year, coupled with every other government grant or bond money received annually, would be taxable to you in the US.

In the United States, an RESP is considered to be a foreign trust. It simply means that when children or grandchildren carry out withdrawals from the RESP later, they will have to contend with tax in Canada at that time on the accumulated income, and grants, in the plan.

This will more or less result in double-taxation (taxed in your hands in the U.S., and again in their hands in Canada). Owing to that, it is recommended you name a Canadian resident, maybe a family member or friend, as the subscriber of the RESP before you depart the country.

How to Sever Residency from Canada for Tax Benefits

To server residency from Canada and avoid certain tax implications, here are viable actions to take;

  1. Unify your bank accounts by closing all unnecessary accounts and moving all or a substantial percentage of funds to a bank account in the United States. After a bank account must have been established in the United States and all checks cleared against the Canadian accounts, move the balances and close all Canadian accounts.
  2. Also, shut your Canadian non-registered brokerage accounts and move the investments to a U.S. account, or liquidate if possible.
  3. Speak with every Canadian financial institution you intend to have ongoing dealings with about your move to the United States. These institutions will start to withhold non-resident tax from any investment income earned by you outside of your registered assets. Note that the tax withheld under the Canada-U.S. Tax Treaty (0% for interest, 15% for dividends) is more or less your final Canadian tax obligation in terms of this income, and a Canadian tax return is not expected to be filed to report this income.
  4. Ensure you obtain a driver’s license in the United States as soon as possible, and then cancel your Canadian license.
  5. Collapse or change your professional memberships to non-resident status. Also, do away with your memberships to clubs and other organizations. Note that an individual can retain membership in any professional organization as long as he or she can carry out some duties abroad without in any way impacting their non-residency status.
  6. Sell or do away with all personal possessions you don’t want to take with you as you move abroad. Where possible, it is recommended you avoid storing items in Canada, as the maintenance of the personal property will mean that residency was not terminated.
  7. Don’t also forget to cancel your credit cards with Canadian financial institutions and obtain cards with U.S. institutions.
  8. Terminate your Canadian healthcare and medical insurance coverage.
  9. Consider having a personal file that notes your efforts to cease Canadian residency. The determination of residency status is not always clear, and while you may have a concrete fact pattern, CRA can always declare that individual facts and circumstances do not support the argument that you have ceased residency from Canada. Therefore, a personal file with this information may be very crucial to show the CRA that you have in many ways severed your ties with Canada.

Conclusion

If you’re a Canadian resident looking to move permanently to the U.S., have in mind that there are necessary tax considerations that will come with this decision.

Also note that as a resident of the U.S., there are additional tax implications to consider, like the U.S. estate tax which may be imposed when you pass away, and U.S. gift tax which may be applicable when you give assets away. Since these can be very complicating and complex, it is recommended you work with a cross-border tax advisor before making a move.