Individuals moving to the U.S. from Canada are having to contend with a new transition planning challenge that was not a concern in past years: an 0.80Canadian dollar (CAD). When the CAD was valued above 0.90 or 0.95, many individuals naturally elected to convert their bank and Non-registered (taxable) investment account funds to U.S. dollars (USD) and move them to a U.S. bank or custodian.If you live in the U.S. and your living expenses are denominated in USD, having as much of your liquid net-worth in USDmakes sense. Furthermore, converting and moving Canadian non-registered accounts to the U.S. simplifies tax and foreign account reporting requirements, provides for better investment opportunities, including those that are more tax efficient, and it helps simplify your financial and estate plan.
That said, with an 0.80 CAD, things become more complicated as most clients do not wish to convert funds at a 20% discount. So, what are the options available to individuals or families that do not want to convert their non-registered accounts to USD? And, what are some of the challenges associated with keeping investment accounts in CAD while residing as a U.S. tax resident?
Leaving your Canadian investment accounts in Canada
If you work with a Canadian financial advisor, the chances are they are not registered to provide investment or financial planning advice to a U.S. resident. A financial advisor must always be licensed in the jurisdiction in which a client lives regardless of the clients’ citizenship or the country in which the assets reside. Once you become a resident of the U.S. and you request your advisor update your mailing address on file to your new U.S. address (never leave your old Canadian address on file: see http://cardinalpointwealth.com/moving-to-the-u-s-dont-leave-your-canadian-investments-hanging/article), one of three things will likely happen:
1) Your advisor will inform you that they are no longer able to provide investment advisory services to your non-registered accounts and that you must work with someone who is
2) Your advisor will explain that you can keep your accounts on the platform but that they willfrozen and no further trading or rebalancing can take place
3) Your advisor will explain they are registered in the U.S. and can continue to oversee all investment management services in your accounts.
As mentioned above, scenarios 1) and 2) are by far the most common outcomes as most Canadian advisors are not registered in the U.S.If you do have an advisor that fits scenario 3), make sure their servicesand expertise extends beyond providing investment management. For example, when moving to/and or living in the U.S., clients are faced with a host of cross-border planning complexities. A true cross-border financial advisor will help construct an integrated Canada-U.S. cross-border financial plan that addresses tax and estate planning matters in addition the management of your investment assets.
If you ultimately do decide to leave your Canadian non-registered accounts in Canada under scenario 2) or 3), there are number of important points to consider:
- You should not hold Canadian traded mutual funds or exchange traded funds (ETFs). Not only are they considered “not registered for sale” to U.S. residents but even more importantly, they will likely be considered a Passive Foreign Investment Company (PFIC). In short, this means that earnings and dividends distributed by your Canadian-based mutual funds and ETFs are not taxed the same way in the U.S. as they are in Canada, and this could result in unnecessarily high tax rates.
- Canadian custodians do a poor job conforming to U.S. tax reporting requirements. For example, manyCanadian custodians do not prepare year-end tax reports that show long-term vs. short term capital gains which is a tax reporting requirement if you are a U.S. resident. Further,many of the tax reporting forms Canadian custodians provide are denominated in CAD which means your accountant will have to convert all taxable and reportable transactions to USD when you file your annual U.S. tax returns. This additional work by your accountant can increase the chances of errors occurring and lead to higher accounting and tax preparation cost.
- If your goal remains to ultimately convert these funds to USD when the exchange rate becomes more preferable, make sure the investment strategy put in place is accommodative to a future currency conversion. For example, make sure you are not locked into any investment products that must be held for a certain period of time. Also, make sure yourinvestment accounts are not invested in volatile or speculative securities that are subject to sharp market swings. It would be a missed opportunity if the exchange rate became attractive to convert your funds to USD but your CAD investment holdings were sitting at a loss because of poor market performance.
- Make sure your advisor is managing your account under an investment mandate that reflects your S. tax residency and not under a mandate that is reflective of a Canadian tax resident. As mentioned earlier, as a U.S. tax resident, you are subjected to long term and short term capital gains rates. If you sell an asset that has been held for one year or less, any profit you make is considered a short-term capital gain and taxed at your ordinary income rate (up to 39.6%). If you sell an asset you have held greater than one year, any profit you make is considered a long-term capital gain and is typically taxed at a preferable rate (15% or 20%). In Canada, there is no such thing as long or short term capital gain. You just have one capital gains rate and Canadian portfolio managers are trained to oversee client accounts under this Canadian standard.
Also, there are different types of investment securities, such as Canadian preferred shares, that are attractive investments from a Canadian tax standpoint but not from a U.S. tax standpoint. It is always in your best interest to confirm that the Canadian money manager or advisor can customize the management style of your portfolio to adhere to U.S. tax rules.
- You will be subjected to extra foreign account reporting requirements by the IRS. Because these accounts are domiciled outside of the U.S., the IRS will require you to report specific information about them (account number, year-end value, highest market value in the tax year etc.) on a form called the FinCEN Report 114. This increased reporting requirement is time consuming and will likely lead to increased tax preparation costs.
While leaving your CAD taxable or non-registered accounts in Canada once you become a U.S. resident can be done under limited scenarios it certainly is not ideal for many of the reasons outlined above.
Moving your Non-Registered Investment Account to the U.S.
While moving your CAD investment accounts to the U.S. will simplify financial and estate planning initiatives and streamline U.S. tax reporting, other challenges still exist. For one, most US.-based financial advisors will automatically want you to convert your CAD accounts to USD which of course goes against the goal to maintain your holdings in CAD. The main reason a U.S.-based advisor will recommend you do this is because their firm or their firm’s custodian does not offer multi-currency accounts. The only currency option they provide for investment is USD. It is very common for investment firms to not offer CAD denominated accounts because there is little demand for them in the U.S.
Those investment advisors that do confirm they offer multi-currency accounts that include CADmay not know the Canadian investment market well enough to construct an investment portfolio. It is one thing to be able to open a CAD denominated account on behalf of a client but it’s another to be a financial advisor or portfolio manager with the knowledgebase and training to build Canadian-based investment portfolios using Canadian-traded securities. All too often clients are left holding their CAD investment account in cash because they cannot find a qualified U.S.-based investment manager to invest the assets.
The Cardinal Point Difference: Cross-border investment management
At Cardinal Point, we are a registered to provide investment management and financial planning services in both Canada and the U.S. without any restrictions or limitations. For clients that have investment accounts in both countries (RRSPs, Non-registered, IRAs, 401ks, Trusts etc.), we are able to construct integrated cross-border investment portfolios customized to the clients’ risk tolerance, needs and goals.
If you are an individual living in/and or moving to the U.S., with CAD non-registered assets and you do not want to convert the funds to USD, our experienced Canada-U.S. portfolio management team has the ability to invest your accounts in CAD on a U.S. custodial platform. Partnering with Cardinal Point to oversee the management of your CAD non-registered accounts offers the following benefits:
- Proper and customized U.S. tax reporting on CAD investment assets
- Multi-currency investment accounts supported by an investment team that provides CAD and USD asset management services
- Flexible foreign exchange services
- Understanding of U.S. tax management strategies on CAD investment accounts
- Additional cross-border financial, tax and estate planning expertise
- Please contact Cardinal Point to discuss your cross-border investment management and financial planning complications.