April 8th 2016
Recently, I spent some time going down the proverbial rabbit-hole of taxation, preparation & reporting requirements needed for US Persons residing in Canada. The need to file taxes, as defined by the Internal Revenue Service (IRS) is based upon Citizenship, unlike Canada (or almost everywhere else), which is based upon country of residence. What this means for our American friends here in Canada (and we all know a few!) is a massive additional tax reporting burden…even for those that never have the intention of working or living a day in the US.
The Foreign Account Tax Compliance Act, or FACTA, forces US Persons to report their income along with information about savings and investments. For the sake of this blog I will spare you the lessons learned, but the take away was our US friends take on an annual hardship to keep the privilege of US Citizenship.
Therefore, it is no co-incidence that renunciation of US Citizenship has been on the rise in recent years, with a record number of 1,426 during the 3rd quarter of 2015. This rising demand sparked an increase in renunciation fees from $450 to $2,350 USD!
We are at the tail end of my first tax season with The Wooding Group. During that time, we have been working through our customized tax packages for our Canadian and US clients. As this has become a growing issue we have worked alongside tax accountants to better understand the reporting needs of US Persons. We saw that small changes can make tax preparation for accountants simpler; potentially reducing the fees our clients pay as a result of IRS filing requirements.
What to Avoid
As a US Person, we need to avoid the following registered investments types: TFSAs & RESPs as the preferred tax treatment in Canada are not yet recognized by the IRS. In the case of RESPs, a Canadian spouse can open the RESP as an individual subscriber.
For your Non-Registered Investments, items that are owned by a Canadian entity such as; mutual funds, Exchange-Traded Funds & some Canadian stocks are deemed to be a ‘Passive Foreign Income Corporation’ and carry special tax treatment. We prefer to avoid them if possible. This reduces the availability of suitable investments to create a diversified portfolio.
Bring Accounting & Investing Together
Our key to bring together our in-house investment philosophy with suitable investments for US Persons was to ‘think’ like an accountant. Beginning with the end in mind we eliminated the least preferred (and most costly) investment options and can build portfolios for clients using several other ‘tools in the toolbox’ to create portfolios with the clients’ outcome in mind.
With this approach, we can bypass several cumbersome steps making the job of the accountant easier and saving on a more complex tax package.
If you would like to learn more or have friends that are affected by this legislation, please call us with any specific questions you may have about how to invest as a US Person.
Peter & The Wooding Group
Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.