Ines Zemelman, EA 25-Jul-16
It has always been easier for US index investors than for Canadians since they have more choices and lower costs. But, it becomes a lot more difficult if investors choose to move into Canada.
US citizens are required to file a tax return annually, and pay appropriate taxes, although they may live outside the US. This is unlike almost every other country in the west, including Canada. This may be the case even for those whose birthplace is Canada and who have not lived within the United States. It is possible to have US citizenship based on the citizenship status of parents born in the US. As far as taxes are concerned, it isn’t even necessary for “US persons” to be US citizens. Even holders of green cards or snowbirds can be considered “US persons”.
US persons face tax consequences when they live in Canada that are both controversial and complex. If you are a US person who is residing in Canada, you should ask advice from a specialist in these types of issues. There are two issues, though, that have become more prominent lately, and which many investors are unaware of.
Stay away from RESPs and TFSAs
There are substantial tax advantages for Canadians who own Registered Education Savings Plans (RESPs) and Tax-Free Savings Accounts (TFSAs). But, they may be considered to be foreign trusts by the United States government and require separate reporting. Filers of US taxes must also report any gains from those investment accounts (e.g., capital gains, dividends, and interest) on their tax returns.
In all likelihood, it is not beneficial for US citizens living in Canada to open TFSAs. If you already have a TFSA, it is in your best interest to hire a specialist to ensure you remain compliant, and the expense of doing so is likely to offset the tax savings the account provides. One easy solution for married couples where one is a Canadian citizen, and who do not fund the accounts at their maximum, is to simply give the spouse money that can be added to their own TFSA.
The workaround is similar for RESPs as well - just ensure that the plan’s account owners are not considered “US persons” from a tax perspective.
Keep Canadian funds out of registered retirement accounts.
Income from PFICs - Passive Foreign Investment Companies - is subject to punitive US taxes. Canadian ETFs and mutual funds are classified as PFICs. If a US person holds them inside of an account that is non-registered they must file a Form 8621 annually, although amounts less than USD 25,000 might be exempt.
The reporting of PFICs can be an overwhelming job (the instructions for Form 8621 run 13 pages), and the fee charged by a tax specialist to complete the paperwork will be significant. In addition, it might be necessary to get information from the fund provider, which is often difficult. There are some companies that do provide them online, but ETF companies rarely do.
,Assets held in RRSPs or in Registered Pension Plans arranged by an employer or a union do not have to get reported. Form 8891 is no longer required to preserve income deferral status of the accounts held inside the RRSP or Registered Pension Plans. Whereas RESP, albeit also a registered account - does not have this privilege because this is a Registered Education Saving Plan, not a Registered Pension Plans.
For US citizens who live in Canada, simplicity is to just steer clear of Canadian ETFs and mutual funds held in not in Registered Retirement accounts. Ideally, Canadian ETFs and index funds should be held in an RRSP, and ETFs listed in the US should be used in accounts that are non-registered. Even though currency conversion can be expensive, it is probable that the cost will be substantially less than the expense of United States tax law compliance.