Recently, a tax client informed that he was moving to the US from Canada. He had owned a couple of rental properties in Canada, as well as owned a numbered corporation in Ontario, Canada. He also had a salaried job in Canada. He wanted to know the optimum way to manage his assets and move to the US for work.
Before I go into the different steps, a little bit of background about how both countries tax your income. Both countries follow a worldwide income method - this means, if you are a Canadian resident, any income you earn anywhere in the world has to be declared as gross income for Canadian income tax purposes. This includes income earned in the US on a work visa, or otherwise. Even if a Canadian has lived in the US for more than 183 days to be considered a US resident (IRC 7701(b)(1)(A)(ii)), Canada considers them to be a factual Canadian resident due to the Canadian maintaining ties to Canada - including a Canadian passport, properties, bank accounts, etc.
What now entails during tax preparation time is two things:
1. Client has to prepare a Canadian return as he is considered a factual Canadian return. This return is exactly the same as if he lived in Canada the entire year (though he was living in the US during that time). This also includes the income earned in the US. If the client has rental properties in the US, the rental income is included as well in the income.
2. Client has to prepare a US income tax return (Form 1040) as he is considered a US resident. US residents are subject to worldwide income, so the income earned in the US while on work (typically a W2), as well as the rental income earned in Canada, is subject to US taxation.
As you can see, both countries have taxed the same set of income. There is some relief offered by way of tax treaty that prevents double taxation on the same source of income. This takes the form of tax credits taken, typically, in the higher tax country. (This is a separate topic in itself, which I will cover in a separate blog). But as you can see, the tax situation has become complicated due to a simple move to the US.
So, what can be done?
If the intention is to move to the US on a long-term basis, it is advised to file an exit return in Canada. What this does is (among other things), a deemed disposition of your property in Canada. It is as if you sold your property at fair market value, and then immediately bought it back at the fair market value. Even though your property has not been sold to a third party for cash, the deemed disposition triggers capital gain (or loss). This is taxed in Canada. The general method is to file this exit tax before, or closer to your move to the US, so that you can avoid having Canada tax your US sourced income.
The word "property" is generally very broad. It includes assets for investment, stocks that are outside your RRSP (or registered portfolios), rental properties, residence owned by you where you were living in Canada, any art you own that has appreciated in value, paintings, etc.
Please do not attempt to file an exit return on your own. Consult an experienced tax professional. Canada audits 100% of all exit returns, so you can be sure that someone at Canada Revenue Agency is going to look at the return with a fine toothed comb and look for additional tax opportunities!
Even though you have filed an exit return, how do you handle the Canadian rental income? Read about it in my BLOG.
Please feel free to email me at PhoenixITIN@gmail.com or call me at +1-480-442-7063 if you need to engage me for preparation of your cross border taxes.
DISCLAIMER: The above blog is to give you a general idea and is not to be construed as tax advice. Each person's tax situation is unique, so consult a qualified tax professional.