The strong U.S. dollar has created new challenges for those moving to the United States from Canada—but understanding these challenges, and your options, can help you to navigate the financial transition as smoothly as possible.
Here’s the background. The Canadian dollar is currently valued around 0.80 versus the U.S. dollar, a big departure of 0.90 to 0.95 seen in the summer of 2014. With the currencies so closely valued in the past, many individuals elected to convert their bank and non-registered (taxable) investment-account funds to U.S. dollars, and move them to a U.S. bank or custodian.
After all, if you live in the United States and your living expenses are denominated in U.S. dollars, having much of your liquid net-worth in the local currency makes sense. Furthermore, converting and moving Canadian non-registered accounts to the United States simplifies tax and foreign-account reporting requirements. It also provides for better investment opportunities, including those that are more tax efficient. And it helps to simplify your financial and estate planning.
A Canadian dollar at 0.80 complicates things, however, as most clients naturally do not wish to convert funds at a 20% discount. So let’s look at the options available to individuals or families who do not want to convert their non-registered accounts to U.S. dollars.
OPTION 1: Leaving your Canadian investment accounts in Canada
If you work with a Canadian financial advisor, 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 client’s citizenship or the country in which the assets reside. Thus, once you become a resident of the United States and ask your advisor to update your mailing address on file to your new U.S. address (never leave your old Canadian address on file), 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 able to do so;
2) Your advisor will explain that you can keep your accounts on the platform, but that they will be frozen and that no further trading or rebalancing can take place;
3) Your advisor will explain that they are registered in the United States and can continue to oversee all investment-management services in your accounts.
To reiterate, most Canadian advisors are not registered in the United States. So the mostly likely scenarios are numbers one and two. In the event that your advisor fits the third scenario, you will want to make sure that their services and expertise extend beyond just providing investment management.
For example, when moving to, and/or living in the United States, clients face a host of cross-border planning complexities. A true cross-border 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.
Now, if you decide to leave your Canadian non-registered accounts in Canada under one of the first two scenarios, there are number of important points to consider.
- Drawbacks of Canadian funds. Canadian-traded mutual funds and exchange-traded funds (ETFs) are considered “not registered for sale” to U.S. residents. Even more importantly, they are likely to be considered Passive Foreign Investment Companies (PFIC). Earnings and dividends distributed by such vehicles are subject to the highest marginal tax rates on your U.S. income tax return. Download our whitepaper on PFICs for further information.
- Accounting hurdles. Canadian custodians
do a poor job conforming to U.S. tax reporting requirements. For example, many
do not prepare year-end tax reports that show long-term versus short-term
capital gains. These reports are required if you are a U.S. resident. Further,
many of the tax reporting forms Canadian custodians provide are denominated in Canadian
dollars, which means your accountant will have to convert all taxable and
reportable transactions to U.S. dollars when you file your annual U.S. tax
returns. This additional work by your accountant can increase the likelihood of
errors and lead to higher accounting and tax-preparation cost.
- The Conversion Window. If your goal
remains to convert your funds to U.S. dollars once the exchange rate improves,
make sure the investment strategy put in place will accommodate a future
currency conversion. For example, make sure you are not locked into investment
products that must be held for a certain period of time. Also, make sure your
investment accounts are not invested in volatile or speculative securities that
are subject to sharp market swings. It would be unfortunate if, when exchange
rates became attractive, your Canadian-dollar investment holdings were sitting
at a loss due to poor market performance.
- Tax-aware investing. Make sure your
advisor is managing your account under an investment mandate that reflects your
U.S. tax residency. As mentioned earlier, U.S. tax residents are subject 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 is considered a short-term capital
gain, and is taxed at your ordinary income rate (up to 39.6%). If you sell an
asset held longer 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. Canada has just one
capital gains rate, and Canadian portfolio managers are trained to oversee
client accounts under this 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.
- Reporting requirements. You will be subject to extra foreign account reporting requirements by the Internal Revenue Service. Because these accounts are domiciled outside of the United States, 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. Additionally, you might likely have to file IRS Form 8938 – Statement of Specified Foreign Financial Assets as part of your Form 1040 filing as well. These increased reporting requirements are time-consuming and will likely lead to increased tax preparation costs.
Leaving your Canadian-dollar taxable or non-registered accounts in Canada once you become a U.S. resident can be done under limited scenarios. But in light of the considerations above, it certainly is not ideal.
Option 2: Moving your Non-Registered Investment Account to the United States
Moving your Canadian-dollar investment accounts to the United States will simplify financial and estate-planning initiatives, and will streamline U.S. tax reporting. But you still will face challenges. For one, most U.S.-based financial advisors will automatically want you to convert your Canadian-dollar accounts to U.S.-dollar accounts—which, of course, contradicts the goal of maintaining your holdings in Canadian dollars. The main reason U.S.-based advisors will recommend this is that their firm or its custodian does not offer multi-currency accounts. The only currency option they provide for investments is U.S. dollars. It is rare for investment firms to offer Canadian dollar-denominated accounts because there is little demand for them in the United States.
Those investment advisors that do offer multi-currency accounts may not know the Canadian investment market well enough to construct a proper investment portfolio. It is one thing to be able to open a Canadian-dollar-denominated account on behalf of a client. It’s another to be a financial advisor or portfolio manager with the knowledge base and training to build Canadian-based investment portfolios using Canadian-traded securities.
All too often, clients are left holding their Canadian-dollar 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 registered to provide investment management and financial planning services in both Canada and the United States, without any restrictions or limitations. For clients who have investment accounts in both countries (RRSPs, Non-registered, IRAs, 401ks, Trusts etc.), we are able to construct integrated cross-border portfolios customized to the investor’s risk tolerance, needs and goals.
If you are an individual living in and/or moving to the United States and do not want to convert Canadian-dollar, non-registered assets to U.S. dollars, our experienced Canada-U.S. portfolio management team can help. We have the ability to invest your Canadian-dollar accounts on a U.S. custodial platform. Partnering with Cardinal Point to oversee the management of your Canadian-dollar non-registered accounts brings the following benefits:
- Proper and customized U.S. tax reporting on Canadian-dollar investment assets
- Multi-currency investment accounts supported by an investment team that provides Canadian-dollar and U.S. dollar asset management services
- Flexible foreign exchange services
- Understanding of U.S. tax management strategies on Canadian-dollar 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 needs.
Jeff Sheldon is a co-founder and principal at Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada. www.cardinalpointwealth.com