Residents of Canada: What are the Canadian and U.S. Tax Ramifications of being forced to liquidate a U.S. retirement account

As mentioned in a previous article, many banks and brokerage firms are informing U.S. non-resident clients that they are no longer able to service their accounts and that their accounts have been restricted or even closed.

In that same article, we outlined the following:

  • S. citizens and Green Card holders who reside in Canada or anywhere else abroad would be considered to be non-residents for the purposes of these regulations.
  • These regulations are not new, but were not generally monitored or enforced.
  • Financial institutions have started to enforce these regulations much more diligently.

The options available to an individual for their taxable brokerage accounts once they have received notification that they are required to find another service provider were addressed in the above mentioned article. Individuals with tax-deferred accounts, such as an IRA or 401K, are being told much the same thing.

The account holder will generally be told that if they are not able to transfer the account to another service provider within a set period of time, the assets within the account will be liquidated and a distribution will be sent.

If a distribution from an IRA/SEP IRA/Roth IRA is received, you have 60 days to deposit the funds into another retirement account with a U.S. custodian or the distribution will become fully taxable.  Distributions from an inherited IRA/Roth/SEP IRA do not have a 60 day window.

For many, it is difficult to find an alternate service provider that allows a non-resident to maintain a retirement account in the U.S.

Even if a new service provider can be found, it is possible that the new provider will restrict activity within the account, effectively freezing the account.  Because of these complications, Canadian residents may feel compelled to liquidate their U.S. retirement accounts.

For the majority of U.S. retirement accounts, a liquidation would have U.S. and Canadian tax implications for both U.S. citizens residing in Canada and Canadian citizens living in Canada.  A couple of common scenarios include the following:

  • A U.S. citizen owning a U.S. retirement account moved to Canada and became a tax resident of Canada.
  • A Canadian citizen who lived in the U.S. for a period of time on a work permit, and who contributed to a U.S. retirement account while living in the U.S., moved back to Canada and once again became a Canadian tax resident.

We will discuss each scenario separately, since the tax implications of the liquidation of the retirement account will be different for each scenario.

U.S. Citizen Becomes a Tax Resident of Canada

As mentioned in our previous article, when you establish income tax residency in Canada, for Canadian income tax purposes, you are deemed to have disposed of all of your property immediately beforehand, with some exceptions, for proceeds equal to the fair market value of that property at that time.

You are then deemed to have acquired such property at a cost equal to such fair market value.  U.S. retirement accounts are one of the exceptions to this rule. As such, the retirement assets would retain their historical cost basis for both U.S. and Canadian tax purposes.

As a U.S. tax resident, a distribution from most types of U.S. retirement accounts would be taxed as ordinary income subject to taxation at marginal tax rates.  Distributions from Roth IRAs are not  taxable.  The maximum marginal tax rate is currently 37% (2018).  Depending upon circumstances such as the age of the recipient, there could potentially be early withdrawal penalties as well.

Canada will also tax the entire distribution from most U.S. retirement accounts.  The entire distribution is taxable even though an individual in this scenario did not previously receive a deduction on a Canadian tax return related to the contributions.

Distributions from Roth IRAs are not taxable in Canada.  The marginal tax rate would depend upon the province of residency. For example, a resident of Ontario would currently have a maximum rate of 53.53% (2018).  A foreign tax credit can be claimed in Canada in relation to the U.S. tax payable on the distribution. Early withdrawal penalties are not eligible for a foreign tax credit.

Individuals in this scenario are generally subject to an overall tax rate upon liquidation equal to the Canadian tax rate. The tax payable to the U.S., which is subsequently claimed as a foreign tax credit in Canada, is usually not sufficient to completely eliminate the Canadian tax liability.

Canadian Citizen Resumes Canadian Tax Residency

The second scenario is of a Canadian citizen previously living in the U.S. who moves back to Canada and resumes Canadian tax residency.

In this scenario, the U.S. requires a 30% non-resident withholding tax. Due to the tax treaty between the U.S. and Canada, that rate can be dropped to 15% for periodic payments, but there is some debate about whether or not that applies to a liquidation event, and recently, service providers have been less inclinded to agree to the lower rate.

Because of this, we advise our clients to expect a 30% withholding rate from most providers.  In order to recuperate the other 15%, the filing of a U.S. non-resident income tax return would be required.  Note that recuperating the other 15% would not be required if the entire 30% withholding tax is claimed as a foreign tax credit on the Canadian tax return.

In the case of an early withdrawal, the penalty normally imposed would be included in the 15% or 30% tax, which is considered a final tax for U.S. tax purposes.

Canada will also tax the entire distribution from taxable U.S. retirement accounts in the same manner as was discussed in the earlier scenario.  A foreign tax credit can be claimed in Canada in relation to the U.S. withholding tax.

Individuals in this scenario are also generally subject to an overall tax rate upon liquidation equal to the Canadian tax rate.  The U.S. foreign tax credit is generally not sufficient to completely eliminate the Canadian tax liability.

A relatively common tax planning technique for individuals in this scenario is to roll funds from their IRA into a RRSP in an effort to defer taxation of the IRA income.  This strategy is now less attractive due to the application of the higher 30% U.S. non-resident withholding tax.

We would also point out that this strategy is generally recommended by service providers that do not have the ability to actively manage U.S. retirement accounts.  A more effective solution would be to find a service provider, such as Cardinal Point, that can actively manage the IRA and eliminate the need for a liquidation altogether.

The Cardinal Point Advantage

These examples highlight the complicated and negative tax implications involved with an unexpected liquidation of U.S. retirement accounts.  The main negative tax implication being that the full value of most retirement accounts becomes taxable upon liquidation.

We recommend that you avoid these unnecessary tax consequences by finding a custodian who is able to manage U.S. retirement accounts for non-residents of the U.S.  Cardinal Point has the unique registrations and ability to manage investment portfolios that include accounts in Canada and the United States.  As such, we have the ability to actively manage U.S. retirement accounts for our Canadian resident clients.

Cardinal Point has the cross-border financial planning, investment management, and tax expertise to ensure that our clients are able to maintain retirement assets in their country of origin, and to transition other assets from one country to another in a tax-efficient manner. Our clients receive tax planning as a part of their overall financial plan.

How California Taxes a Canadian Trust?

As we discussed in a previous article, many Canadians are shocked to learn that California taxes their RRSPs. Canadians are often also surprised and dismayed to learn that their Canadian trust could be subject, inadvertently, to the long arm of California’s tax system.

Even just having a beneficiary – think trust fund baby – of a Canadian trust who lives in California is enough to subject the trust to California tax.

California taxes a trust if the trust has (a) California source income; (b) a California trustee or co-Trustee; or (c) a California beneficiary.

California’s taxation of a trust’s income that is attributable to California sources, for example rental income from property located in California, is not a strange concept.

It’s California’s taxation of non-California trusts with California beneficiaries that – to borrow a line from Gowan’s song of the same name – is a “Strange Animal” and which will be the focus of this post.

In California, having just one beneficiary who resides in the state can subject the trust income to California tax in a proportion equal to the number of beneficiaries who are California residents.

With California aggressively chasing trusts with a nexus to the state for failure to file income tax returns, Canadians who are beneficiaries of Canadian trusts should be aware of the tax implications that moving to California entails.

The law in California subjects some or all of the income of a non-grantor trust to California income tax if any non-contingent beneficiary is a California resident.

As you can see, the key distinction in the law is that a California beneficiary’s interest in the trust must be non-contingent for California to tax the trust.

Hence, a non-California trust with contingent beneficiaries residing in California will not be subject to tax in California so long as there are no distributions to the beneficiary.

So, how do we determine between a contingent and non-contingent beneficiary?

Simply put, a contingent beneficiary is one whose interest is subject to a condition that must be satisfied for the beneficiary’s interest in the trust to vest.

For example, most trusts are drafted whereby a trustee may make distributions for a beneficiary’s health, education, maintenance, support, care, comfort, etc.

This constitutes a contingent interest in the trust property because the beneficiary’s beneficial interest is subject to the trustee’s sole and absolute discretion.

On the other hand, a beneficiary’s interest will become non-contingent if the terms of the trust agreement subsequently remove a condition to the beneficiary’s enjoyment of trust income or principal.

For example, the beneficiaries of a trust that provides for the distribution of all trust income after a certain age, or provides a stipend to the beneficiary, or allows the beneficiary a withdrawal right, would be considered non-contingent.

The determination of whether a beneficiary is contingent or non-contingent comes down to the distribution standards and rights of the beneficiary under the trust agreement and the trustee’s exercise of discretion in administering the trust.

Now that we’ve covered some of the basic laws applicable to California’s taxation of a trust, let’s look at this simple example.

Joe had a long and successful career playing in the NHL. To the diehard fans of one of the teams he played for, Joe is considered a legend and the second best player, after the team’s current young phenom, to ever play for the team. Over his career, Joe managed to amass a vast fortune from both playing hockey and endorsing many products.

Through some good advice from his tax professionals, Joe set up a trust in Ontario to minimize his tax bill and to provide for his only child’s future. After graduating college, Madison, Joe’s only child and the sole beneficiary of Joe’s trust, decided to move to Hollywood to pursue an acting career.

Madison, for lack of a better term, is a trust fund baby. The terms of Joe’s non-grantor trust provide that the Ontario based trustee shall distribute to Madison one-third of the trust income annually for her lifetime.

Because the trustee is required under the terms of the trust to distribute trust income, Madison is entitled to such amounts and her interest is not subject to a condition.

As a result, Madison is a non-contingent beneficiary regardless of the fact that she is entitled to just one-third of the trust income.

Because Madison is the sole non-contingent beneficiary of the trust and a resident of California, the trust will be subject to California taxation. The trust would have to report all of its income for California income tax purposes.

Specifically, Madison will be taxed on the income distributed to her, while the trust will be taxed on the remaining income.

At Cardinal Point, we specialize in working with Canadians in California and we diligently work with our clients to ensure compliance with their federal, California and Canadian income tax and reporting requirements.

Financial Consulting – Ways to Advance Consulting Financial Affairs

If you are looking out for a consultant to take care of your taxation matters then the best option for you is to hire the services of tax consultant as they are very much expert in the field of tax. It is their job to take into consideration all the taxation matters. Thus it is beneficial decision for you to hire the professional services so that you can focus on the other business activities.

Taxation matters vary frequently so keeping track of the same is not always possible for the layman. It is because Taxation policies are bit complicated so it becomes a quite difficult for a lay man to understand the same. So the consultant makes your work a lot easier as he knows the tax law very well and thus easily understands it.

tax consultant

The most common job of any Financial Consulting expert is to prepare and file their tax returns. However this is very vital service as failing to do so properly can make you to pay penalties. If you are preparing it incorrectly then you may lose out a rebate that is due. Secondly they also help and give advice on common tax matters. This also comprises of changing the set up of the business, and rearrangement of payments and income to fall into a different year. The fee charged by the tax consultants varies considerably. Most of them will charge a flat fee chiefly for the preparation purpose. Some will charge their fee based upon the time they spend on a project. These people are very useful at the time of an audit.

Hiring the right consultant saves you from being deceived

A tax consultant can guide you regarding reducing your tax amount. The methods that these experts suggest you with are in accordance with the government rules and regulations. There are many loopholes in the tax structure and many are not aware about it. Thus people do not know how to take advantage of the same. The financial consultants from http://atfconsult.com/accounting are well aware with such loopholes and can suggest you with ways by which you can obtain maximum benefits out of the same.

After you decide to hire their services the next thing you have to do is searching out for the right consultant. It is extremely vital to opt for the right consultant as all your tax related work will completely depend upon the consultant you choose. If you don’t know how to search out the best financial consultant then there are two ways that you can follow.

First one is to ask your family and friends if they have worked with any Management Consulting expert before and the second way is to search on the web where you will come across large number of tax consultants. These are the two best ways from which you can make a list of the consultants to appoint. Make certain that the person you are planning to hire has enough experience in the field. He should be familiar with the present scenario of the government tax polices. Also make sure that the person you are planning to hire has the authority to carry out the tax related work otherwise there are chances of you getting deceived by the fraud people.

 

Benefits Of Selecting Specialized Accounting And Tax Services

Accounting and tax services is something that every big and small business firm looks forward for. Almost every organization, irrespective of its business scale has to pay taxes, distribute salaries, prepare p& l accounts along with publishing its annual balance sheet for the inspection of public. In order to execute all such tasks, one has to hire a separate accounting and tax services so as to manage everything in an optimum way.

Managing accounting work is simply impossible for the business owner. It requires one to keep a great deal of patience while analyzing accounts and tallying their accuracy. By handling the accounting work to hired auditor or accounting firm, one ends up getting a major relief along with great accuracy. Some of the main benefits of hiring accounting and tax services are as follows:

  • Accuracy: accuracy can only come if you have mastery upon a specific thing. The hired chartered accountants and auditors of accounting and tax services are certified professionals who have been executing accounting works since decades. These workmen have the caliber to manage the accounting work of more than ten firms at a time. They can be hired on partly basis for the calculation of taxable amount and annual balance sheet of the firms.
  • Quick: too much of time is taken when one sits to calculate the overall monthly profits and loses. Tallying the vouchers and then jotting them down along with calculating them can end up causing a huge loss to your business firm as t=you might have to postpone or cancel various other tasks. However, once you hire the professionals you can sit back and relax. The hired accountants shall do it all within no time. All you need to do id to handle the monthly records and vouchers to them
  • Reliability: the accounts that are analyzed by auditors are considered to be absolutely correct. Such accounts are not cross checked by various authorities because of which one can get saved from a considerable a, accounting and tax services amount of hassles. The legal signature of the accountants is regarded to be a proof of accuracy of the documents. Firms that have to pay taxes can be
  • Economical: the part time basis accounting and tax services helps one to get rid of those heavy expenses of account office maintenance and monthly salary to the accountant. Moreover, it helps the firm to enjoy a greater privacy as the hired accountant has limited interference in the office work.

Appreciable Tax Advantages of Thrift Savings Plan

Usually people don’t understand the benefits of the plans before investing their money in it so first it is important for you to first understand how it works and what are the pros and cons of this investment. There are many kinds of Thrift Savings Plans available which can be diversely useful for various reasons but if you will choose wrong plan then you might invest your money in something that will eventually give you a disappointment.

So, first it is important for you to research about it. TSP or Thrift Savings Plan is considered really very unique and yet profitable source of investing. It is not like any other general investment, when you invest in the TSP correctly with the right strategy then it could be highly advantageous for you that you cannot even imagine.

And of course, when we talk about tax benefits then the TSP stays ahead in it. You can avail greater tax benefits from it. Investment in the Thrift Savings Plan retirement account lets you save lots of tax in your investment.

The TSP retirement account is actually called Tax deferred contributions due to its tax advantageous nature. This is a kind of convenient saving plan because it allows account holder to automatically deduct a certain amount of investment money directly from your paycheck which will make the investment so convenient and easy for you.

There are various kinds of investment options and alternatives in the Thrift Savings Plan so you can always choose one of the most suitable options for you and start saving your money with the higher benefits!

And most important thing that makes this plan advantageous for tax saving is that the amount that you will save in this investment will not be counted in your taxable earnings. It will be saving and will be totally and completely tax free for you! So, what are you waiting for? Go for it and make your future bright and pleasant with some TSP Savings.