Americans living in Canada have to manage different rules for capital gains and gift taxes, as well as different tax instalment periods.DARRYL DYCK
More than one million U.S. citizens reside in Canada, which brings complexity to their tax situations as the end of the year approaches.
U.S. citizens must report their worldwide income and assets to the Internal Revenue Service (IRS) regardless of where they live. Those who reside in Canada also need to file their taxes and report their worldwide income to the Canada Revenue Agency (CRA), says Matt Altro, president and chief executive officer at MCA Cross Border Advisors Inc. in Montreal.
“These clients have the worst of both worlds, from a tax perspective,” he says.
Here are four tax-planning issues cross-border advisors must review with Americans living in Canada before year-end:
1. Avoid short-term capital gains
U.S. citizens must be mindful of when they buy and sell their investments. That’s because capital gains on investments are calculated by how long investments are held, says Carson Hamill, associate portfolio manager with Snowbirds Wealth Management at Raymond James Ltd. in Coquitlam, B.C.
Short-term investments, defined as those bought and sold in less than a year, should be avoided as they’re taxed at the person’s marginal tax rate, Mr. Hamill says, which could be as high as 37 per cent in the U.S.
In comparison, holding investments for longer than a year means being taxed at the preferential capital gain rate of 15 to 20 per cent for most clients. (Low earners who have taxable income of less than $47,025 don’t pay taxes on long-term capital gains, he says.)
2. Manage the adjusted cost base
If an American moves to Canada, Mr. Hamill says the adjusted cost base (ACB) of their investments adjusts to the fair market value on the date they arrive in Canada for Canadian tax purposes. There’s no deemed disposition. The new ACB ensures that gains or losses accrued on the investment before moving to Canada are not included in Canadian taxes.
He notes that some advisors and accountants neglect to calculate and document this information and then need to organize the paperwork much later.
The documentation could include brokerage statements, purchase records or appraisals showing the time of entry into Canada, Mr. Hamill says.
3. Prepare for different tax instalment periods
If the client pays taxes in quarterly instalments, the last CRA payment is due on Dec. 15. On the U.S. side, the instalment is due to the IRS by Jan. 15, 2025, says Kris Rossignoli, cross-border tax and financial planner at Cardinal Point Capital Management ULC in New York.
As U.S. citizens are filing tax returns in both countries, keeping up with instalment payments can help prevent tax surprises, he adds.
Mr. Rossignoli also advises clients to check their CRA My Account regularly once taxes are filed as review letters about foreign tax credit claims tend to go out to taxpayers in the summer.
“If you don’t respond to these letters, the CRA will reassess and deny the foreign tax credit until you respond,” he says.
4. Manage gift and estate taxes
The U.S. lifetime gift tax exemption is currently US$13.61-million for 2024, but it’s set to reset automatically to US$5-million, which will be indexed for inflation, on Jan. 1, 2026. However, President-elect Donald Trump, who brought in the higher threshold in 2017, is likely to extend the higher exemption.
Going over the exemption threshold means paying estate taxes from 18 to 40 per cent, Mr. Altro says.
One way to avoid paying the gift tax is to give every year. A U.S. citizen can provide an annual tax-free gift up to US$18,000 (rising to US$19,000 for 2025) that doesn’t count toward the lifetime gift tax exemption, Mr. Altro says. The amount can’t be carried forward if it isn’t used.
Gifts to spouses who are U.S. citizens are generally unlimited, but he also points to a special annual gift exemption exclusion amount for a non-U.S. citizen spouse. For this year, it’s US$185,000, increasing to US$190,000 in 2025.
“This is an annual amount that someone could leverage to transfer assets out of their estate,” he says. “That could be done because they’re trying to keep the value of their estates as low as possible.”