To Move or Not to Move, To Snowbird or Not to Snowbird, To Save Taxes or Not to Save Taxes… these are the questions.
By Bryant Andrus
As the world is more connected, people’s desire to live where they want, irrespective of national borders, has become more desirable. There are many reasons for this desire; a non-comprehensive list could include: weather, cost of living, taxes, job opportunities, and lifestyle. No matter what the motivating factor is, there are things to consider. As we move into the several subsequent conversations, I will outline some common questions people have, some of the associated myths, and some solutions to common issues.
Immigration
If you are only thinking about spending 3-5 months in another country, e.g., the United States, you will most likely not need anything to go and spend time in the U.S. However, if you desire to spend more than six months during the calendar year in the U.S., some type of immigration status will be needed. In future blog posts, we will discuss the various options. In short, there are two tracks for immigration status in the U.S. to consider; a nonimmigrant and an immigrant visa. A nonimmigrant visa, simply means that you do not intend to be a permanent resident of the U.S. You only intend to be in the U.S. for a specific purpose, such as work. An immigrant visa implies that you are looking to be in the U.S. for a longer-term; potentially becoming a U.S. person or a green-card holder. Many of our clients desire to have the United States-Canadian border disappear to allow them to come and spend as much time, or as little, in the respective country. This can be achieved through both a nonimmigrant or an immigrant visa. Eventually, if the immigrant visa route is chosen, dual citizenship is possible. As we’ve seen, in times like Covid, having citizenships in both countries is an advantage because neither country can ever deny you access.
The main question at this point is, which country are you paying your primary tax? Or stated another way, which country is your tax home?
The Deemed Deposition on Exit
If you determine that your tax home should be in the U.S., you will face something that is called a Deemed Disposition on Exit. A Deemed Disposition on Exit tax is a similar tax, Deemed Disposition on Death, which occurs upon your death (or second to die if you are married). It is a capital gain on assets you hold personally—as you never know when you will die, planning an exit from Canada gives you opportunities to set yourself up so that your family keeps more of your assets. In many ways, the depressed values of today’s assets are an opportunity to eliminate and or significantly reduce your Deemed Disposition on Death tax 10, 20, 30, or 40 years from now.
In many cases, the U.S. Estate tax is less onerous than the Canadian Deemed Disposition tax. The Canadian Deemed Disposition tax on death affects many more Canadians as a percentage than the U.S. Estate tax does.
By going through the exercise of a Deemed Disposition on Exit, there are planning techniques and tools available that can reduce the amount of tax payable. Any taxes that are payable become foreign taxes paid from a U.S. perspective. As discussed in another blog post, foreign taxes paid become a foreign tax credit in the U.S., which carry forward for the next ten years. Foreign tax credits can be recovered from the IRS against future income that you will produce anyway as part of your long-term investment plan. Although the exit tax is essential, there are ways that you can reduce and/or recover the taxes paid; thus making it very economical from a tax perspective to elect to have your tax home in the U.S. But what about the annual income tax rates?
Annual Income Tax
Depending on your personal and corporate structure, you’re currently paying somewhere between 40% and 50% in annual income tax, as a Canadian in the western provinces. If you are in Ontario or further East, add a few percentage points. This is comprised of two taxes: corporate tax and personal tax. As you know, a corporation pays a tax on the net income and pays a dividend after corporate tax is paid. You, as the individual, pays tax on the received dividend. A dividend attracts a personal tax rate somewhere between 36% and 42%. The corporation receives a refundable dividend tax, a refund that integrates the corporate and personal tax system, in order to try and reduce/eliminate the double tax effect of a corporation. It is not a perfect integration, but it is close. Alternatively, you could pay yourself a wage or bonus from the corporation, which in turn would zero out the corporate tax. Still, you’d have to pay all personal tax, 48-53% tax on the amount, which could amount to over a couple of hundred thousand dollars of income.
As a U.S. tax resident, assuming the same income characteristics, you could expect to save anywhere from 1/4 to 1/2 of what you are paying in Canada before any foreign tax credits. There are several reasons for this, including but not limited to wider tax brackets on income, lower personal tax rates, more generous deductions, etc. Additionally, those with private enterprises, holding companies, or ongoing business opportunities in Canada can receive a benefit of lowered dividends from their holding companies or businesses.
Benefits vs. Cost
With all our decisions in life, there are pros and cons. Some definite tax savings can be achieved, in addition to the potentially lower cost of living, depending on the area of the U.S. you choose to settle, but there are some additional costs. Naturally, these costs are both quantitative and qualitative and can include, but are not limited to, the following;
Health Insurance
Increased time away from family (kids, grandkids, etc.)
Acquiring investments in the U.S.
Consulting and legal costs to execute this strategy
Summary
With decades of experience, we have found no family, business, or individual is the same, thus each of our plans are as unique as your fingerprint. Our three-phase approach allows you to know upfront the pros and cons, the costs of each segment, and the pre-defined time frames for each of the phases.
To schedule your initial consultation, please contact us at info@statebirdcorp.com so that we can help you create a plan as unique as your fingerprint.
State Bird Corp is a management and financial consulting firm. State Bird Corp is not an accounting, legal or investment advisory firm. Any recommendation, inferences, or other guidance contained herein is meant for educational or general purposes and should not relayed upon as specific advice for any person or business. Consult your legal, tax, and investment advisor for specific recommendation to your situation. State Bird Corp is the managing member of SBC Investment Finance I, LLC, a special purpose finance company. SBC Investment Finance was created for the purpose of utilizing clients’ foreign taxes paid.